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How can traditional players close the gap on challenger banks?

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How traditional playerscan close the gap on challenger banks

Mark Jackson, Head of Financial Services at Collinson 

Earlier this year, Starling Bank and Monzo became the top two banks in terms of customer satisfaction in the UK, knocking incumbent

First Direct from the number one spot [1]. Interestingly, this news coincided with a decline in interest in app-only start-up banks, with lack of trust being one of the key deterrents. In fact, trust in banks holding and maintaining privacy and security of personal information has increased from 31% globally in H1 to 42% in H2, while trust in new digital banks and financial service providers has declined, according to RFi Group’s latest half-yearly “Global Digital Banking Report” [2].

This suggests that for early adopters, digital-only banks have a high customer satisfaction. However, these new kids on the block are having a harder time convincing the rest of the public to switch from more traditional established banks brand, which have developed long-standing relationships and trust with their consumers.

TSB’s recent online banking chaos, which was preceded by a failed switch between IT platforms, is a good example of the severe reputational damage that negative customer experience in the digital landscape can have on a bank.[3]

In some cases, it can take years to recover and rebuild trust with customers.

Despite TSB’s recent issue, on the whole traditional banks are starting to close the gap on the digital disruptors. However, in order for these incumbent banks to stay ahead of the game, it’s important to adhere to four key pillars where customers are concerned: trust, digitalisation, collaboration and personalisation.

Leverage the power of trust

In recent years, as more and more challenger banks have entered the market, trust and security has become a vital currency for the traditional banking player due to their perceived reliability with regards to private data protection. This sits against the backdrop of several high-profile attacks within the last few years, most notably HSBC in 2016[4]. Whilst it was targeted, the defences that it had in place were sufficient to guard against a data breach. So, the bank was actually able to use this attack to reinforce trust amongst its customers as it successfully protected their data.

Attacks such as this are only on the rise and the culprits are becoming ever more brazen in targeting high-profile brands. A recent study showed that during the first half of 2017, data breaches across all companies resulted in over 1.9 billion records leaked globally. This is a dramatic increase compared to the 721 million records leaked during the previous six months[5]. Meanwhile, the average data breach cost to a UK organisation, across all sectors, is estimated at £2.48m, equivalent to £98 per impacted individual[6]. The key is for companies to invest in the most robust security, so they are armed and ready should a hacker strike.

So, whilst traditional financial institutions have so far managed to keep things at bay, they can’t afford to be complacent. In today’s competitive banking landscape, it has quickly become a necessity to use trust to differentiate themselves to customers.

Improved digital banking offering 

As digital usage in banking around the globe continues to grow[7], the overall digital banking experience is set to continue to play a more important role in influencing customer’s decision making when choosing a bank. In fact, our global research into the Mass Affluent consumer found that 81 percent used mobile apps to manage their finances, and almost two thirds (63 percent) made digital payments whenever possible.

Traditional players need to cater for the new breed of consumers who expect a seamless, simple and engaging digital experience that’s ‘always on’. HSBC has successfully embraced this shift, with the launch of its Connected Money app7, which allows customers to easily access their account information from multiple providers within one central hub. One of the first of the established banks to market with an ‘Open Bank’ app, it is likely HSBC’s competitors will follow suit. This is one of the first tangible outcomes of the European Commission’s PSD2 legislation that is expected to have a positive impact on customer experience.In the long term, the use of APIs and AI tools such as robo-advisors, more intelligent automation, and advanced analytics will help banks to attract and retain customers. However, unless incumbent banks continue to refine their digital banking experience, they risk being left behind.

Embrace collaboration 

Over the last couple of years, the number of fintech start-ups has increased from a few to a few hundred, covering every aspect of the financial sector. New entrants are using technology to deliver simple processes in new, improved and more efficient ways.

Those financial institutions that are embracing the disruptors by forging partnerships with them will undeniably reap the benefits. This strategy will allow them to sharpen operational efficiency and respond to customer demands for more innovative services. The aforementioned HSBC app was born out of a partnership with ‘Bud’, a UK fintech, demonstrating the benefits to all parties. However, even with collaboration, incumbents still face challenges with legacy IT architecture, operational silos and an outdated leadership culture. To succeed, traditional banks will need to move quickly to embrace a significantly different future.

 Personalisation, flexibility and choice 

In addition to the basics of security, speed and customer experience, many consumers want the entire banking experience to better respond to their individual needs. In an era where customers are increasingly choice-rich and time-poor, an off-target offer is more likely to drive customers away than increase brand loyalty. Ultimately, to appeal to the new breed of customer, traditional banks need to create personal connections with their customers.

The retail landscape is already making some great headway in this space. To get to know its customers better and enhance their relationship with the brand, menswear brand Hackett created an invitation-only experiential programme, offering truly unique Hackett experiences, rewards and benefits. The staff collected minimal personal details, as well as data such as clothing sizes, helping to improve understanding of their customers through the delivery of an enhanced experience.

Banks, unlike retailers however, have always had access to rich customer data. More often than not, they fail to reap the maximum benefit offered from this. Using advanced analytics, they could gain additional insight into the behaviour and preferences of their customers. By deep diving into this data, banks can quickly build up a mind-map of their customers. This concerted awareness puts an end to the guessing game in relation to what financial products customers are interested in or likely to purchase next. This allows banks to tailor marketing collateral, ensuring that the right message is delivered at right time for that particular individual, helping to cement customer loyalty in the long run.

Final thoughts

Trust remains a vital currency between banks and their customers, but recent events surrounding TSB have reminded us how easily it can be shattered and how difficult it can often be to rebuild. However, demonstrating dedication to providing ‘on the go’ services to customers by investing in digital strategy and development of the latest apps can instil confidence in consumers.

With the onslaught of new entrants to the market, which inevitably redefines a bank’s role in a consumer’s life, it is essential for traditional banks to create a strategic partnership roadmap, to ensure banks get the most out of these collaborations, both for themselves and their customers.

These banks need to utilise every resource they can to understand the individual needs of their customer, showing their commitment to remaining relevant and in turn, driving greater satisfaction, paving the way for a long and loyal marriage between bank and customer.

[1] Smart Money People’s ‘Best British Bank’ Awards,1st March

[2] https://www.rfigroup.com/content/media-release-banking-sector-continues-evolve-digital-only-banks-are-losing-appeal-globally

[3] https://www.theguardian.com/business/2018/apr/27/tsb-it-meltdown-banking

[4] https://www.theguardian.com/money/2016/jan/29/hsbc-online-banking-cyber-attack

[5] Gemalto Breach Level Index

[6] Ponemon Institute – 2017 Cost of Data Breach Study

[7] https://www.rfigroup.com/content/media-release-banking-sector-continues-evolve-digital-only-banks-are-losing-appeal-globally

7 https://www.finextra.com/newsarticle/32074/hsbc-launches-connected-money-app

Banking

Mastercard Delivers Greater Transparency in Digital Banking Applications

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Mastercard Delivers Greater Transparency in Digital Banking Applications 1
  • Mastercard collaborates with merchants and financial institutions to include logos in digital banking applications
  • Research shows that ~25% of disputes could be prevented with more details

As more businesses turn to digital payments, and the number of connected devices grows, one thing is becoming increasingly clear: consumers are demanding more clarity around what they bought and who they bought it from.

Most everyone has experienced the frustration of trying to decipher confusing and brief purchase descriptions when reviewing online statements. This confusion forces cardholders to contact their banks unnecessarily to dispute unrecognized transactions, adding extra steps for consumers and generating an array of costs for merchants and banks.

A new initiative from Mastercard and managed by Ethoca, the company’s collaborative fraud and dispute resolution technology, aims to eliminate this confusion and improve the customer experience. All merchants are encouraged to visit www.logo.ethoca.com and upload their logos for inclusion in online banking and payment apps. The merchant logos will be linked to corresponding transactions, adding clear visual cues to help cardholders quickly identify legitimate purchases. Participating merchants are provided an opportunity to simultaneously extend their brand presence as well as eliminate expensive and time-consuming chargebacks. This program is also available to all financial institutions.

Mastercard Delivers Greater Transparency in Digital Banking Applications 2

A recent Ethoca-commissioned Aite Group study of the US market revealed that 96% of consumers want more details that help them easily recognize purchases, and nearly 25% of all transaction disputes could be avoided by delivering these details – including logos. It’s estimated that global chargeback volume will reach 615 million by 2021, fueled in large part by frustrated consumers turning to the dispute process unintentionally.

“With greater digital dependency, having real-time purchase details is critical for consumers, merchants and card issuers alike,” said Johan Gerber, executive vice president, Cyber and Security Products at Mastercard. “We continue to collaborate with industry partners to bring clarity and simplicity before, during, and after transactions. By enriching transaction details, merchants can alleviate friendly fraud, reduce chargebacks and improve the customer experience.”

This endeavour is part of comprehensive efforts to deliver the most efficient, safe, and simple payment experience from the minute a consumer begins browsing to once they’ve made the purchase. This includes Click to Pay, Mastercard’s one-click checkout experience, to the integration of biometrics to secure both digital and physical transactions, and Ethoca’s full suite of consumer digital experience solutions.

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Banking

AML and the FINCEN files: Do banks have the tools to do enough?

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AML and the FINCEN files: Do banks have the tools to do enough? 3

By Gudmundur Kristjansson, CEO of Lucinity and former compliance technology officer

Says AML systems are outdated and compliance teams need better controls and oversight

The FinCEN files have shown that it’s time for a change in AML. We must take a completely new approach in order to catch up with the speed of innovation in financial crime.

Despite what you’ll read in news headlines, we can’t lay all of the blame for anti-money laundering failures at the doors of the banks. The majority of compliance teams are doing what they can, and what they are being asked to do.

Historically, AML has, in large part been a box-checking exercise. Banks have weaved through mountains of false alerts, investigated cases, sent SARs, and then got on with business as usual. In some jurisdictions, banks can‘t even interfere with customers under investigation, in fear of jeopardizing cases.

But the sentiment towards banks’ responsibility in AML is changing. They are increasingly looking at AML as a corporate social responsibility issue and even a competitive advantage. Banks are looking to protect their brands from the horrors of an AML scandal, and as such are taking a more proactive approach.

They are also throwing a lot of money at the problem. Deutsche Bank claims to have invested close to $1 billion in improved AML procedures and increased its anti-financial crime teams to over 1,500 people. Most big-brand banks have a similar story to tell.

With reputation on the line, better AML controls can become good business.

So where does the problem lie?

From the thousands of SARs discovered in the FinCEN files, lack of customer oversight is evident. Banks need to establish a method of knowing their customers through their actions across the organization and beyond the organizational walls. By doing so, banks can better understand AML and compliance risk, which gives them the necessary tools to bar customers from doing business or limiting their activity.

While banks are striving to better enforce regulations by pouring money and resources into CDD and transaction monitoring, forming this type of intelligent customer overview might be the real solution. Proper Customer Due Diligence and customer risk monitoring can only be achieved by continuously tracking customer behaviour and transactional networks. With the latest developments in Artificial Intelligence – that is now possible.

But, the reality for compliance teams is they are hindered by outdated technology in their risk assessment and transaction monitoring systems and because of this, banks are fighting a steep, uphill battle against serious organised crime.

In 2019, the Bank of England issued a statement that claimed: “existing (money laundering) risks may be amplified if governance controls do not keep pace with current advancements in technological innovation.”

I know from my time working as a senior compliance technology officer that many traditional AML systems are inefficient, slow and labour intensive, and often lead to inaccurate outcomes. In fact, most of the systems pre-date the iPhone, so they are using last-generation technology and techniques to detect criminal activity.

In short, legacy AML systems are not fit-for-purpose. Legacy vendors built them for the box-checking world of the past, and they are focused on one suspicious transaction at a time – rather than looking at ‘bad actors’ in the financial system, and patterns in their behaviour.

As launderers constantly evolve their techniques to circumvent rule-based or simple statistical detection, the AML systems market has not kept up. There is a dire need for innovation.

Unless systems are updated, banks can continue to file suspicious activity reports (SAR), but if bad actors can conduct their business ‘as usual’ and shuffle money around the globe to hide its malicious origin, the effectiveness of a SAR is significantly diminished.

What’s the solution?

I believe we need to rethink our entire approach to AML. We need to empower compliance departments with better controls and oversight, and move away from outdated, traditionally rule-based systems and towards a modern, AI-enabled, behavioural approach.

While the bad guys have learnt how to evade rule-based systems, they find it extremely difficult to get around AI algorithms that search for anomalies in behaviour. The advancement of AI algorithms, especially in the field of deep learning, provide an opportunity for banks to detect more complex and evasive money laundering networks.

So the answer is to establish continuous automated risk monitoring and implement a workflow system that provides money laundering risk scores for customers.

The latest AI software could kickstart a new age of customer AML risk-based overview. Instead of relying on static and self-reported KYC data, AI systems can analyse behaviour over a period of time and compare it with peer-groups and past actions. It provides compliance teams with a continuous risk-rating of their customers, actor insights and summaries to facilitate efficient and thorough investigations, and an organizational-wide overview.

Recent advancements in AI have not only made the above possible, but also practical. Our latest Human AI models contextualize and explain the appropriate data, making it easier for banks to spot sophisticated crime.

By looking at AML not simply as a box-ticking exercise, but as a competitive advantage that can increase customers’ trust in their financial institutions, banks have a lot to gain. Moving towards behaviour-based AML systems is a move towards making money good.

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Banking

Local authorities and business networks play a key role in small business success, and must be protected during COVID rebuild

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Local authorities and business networks play a key role in small business success, and must be protected during COVID rebuild 4
  • 23% of UK’s top performing businesses have been supported by local enterprise partnerships and growth hubs
  • Similarly, 30% of Britain’s strongest businesses have obtained external finance in the last 3 years
  • New findings come as part of an independent, holistic study into small business success, commissioned by Allica Bank to support British businesses

A new study, commissioned by business bank, Allica Bank, shows that a high level of engagement and interaction with external institutions and resources, is central to SMEs’ prospects of success.

The study analysed data from over 1,000 companies and ranked their success on a scale that evaluated factors including productivity, growth, consistency and outlook. To measure SMEs’ external engagement, survey respondents were asked whether or not they had engaged with local enterprise partnerships, growth hubs, or external financial advisers, as well as whether they had obtained credit or sought re-financing advice, in the last three years.

The benefit to small businesses in making the most of external resources are clear to see, with a quarter (23%) of the UK’s top performing SMEs – those in the top tenth percentile – actively engaging their local enterprise partnership or growth hub in the last three years. This compares to just 16% of all other small businesses. With such a clear benefit to businesses, these external networks must not only be protected but prioritised by any Government plans to rebuild the economy post-COVID.

Similarly, of the top performing SMEs in the country, 30% have obtained external credit in the past three years, compared to less than a quarter (24%) of all other businesses. This figure drops even further for the weakest performing businesses – those in the ninetieth percentile – where just 12% of businesses have obtained external financial support in recent years.

Chris Weller, Chief Commercial Officer, Allica Bank, said:

“At Allica Bank we understand that no two businesses are the same. We also know that no-one knows a business as well as its owners and managers. But they can’t be expected to be experts on everything.

“In the UK there is a wealth of external advice and support for small businesses and we urge each and every business out there to tap in to the external resources around them. Third-parties, such as business clubs, chambers of commerce, local enterprise partnerships and trade bodies, can be invaluable sources of advice and further resources. And although they have excelled in their given field, business owners may still lack knowledge in many other areas of running and growing a business. Therefore, engaging with third parties can give business owners the kinds of insight – and fresh perspectives – they need to succeed.

“As the economy and the country comes to terms with the impact of the COVID-19 pandemic, it is important these vital SME resources are protected and given the funding they need to continue providing invaluable insight and support to small businesses up and down the country.”

Allica Bank’s SME Guide to Success identified six ‘rules to success’ that were more likely to be displayed by top-performing SMEs compared to their counterparts. The full report contains a wealth of additional data and insight into each of these topics.

As part of its mission to empower small businesses, Allica Bank is making the findings freely available and running a series of free online workshops with relevant partner organisations for businesses to attend.

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