By Cory Cruser, financial services innovation partner at Lippincott
The idea of nimble, digitally-native companies sprouting from ‘nothing’ to disrupt long-standing industry stalwarts has become a well-worn theme in modern business. It’s true that entire industries are being turned on their head by these innovators, but this kind of commercial Darwinism isn’t just a one-way street – many incumbents are already armed with the tools to fight back, if they only realised it.
Retail banking’s turn in this process has been a long time coming. For decades, a handful of well-established high street names catered to our financial needs with the same core set of services: store, transact, invest money, issue credit. It’s little surprise that mobile connectivity changed all that.
As app-based challenger banks exploded – including Monzo, Starling and Europe’s first digital bank unicorn, Revolut – their models changed fundamental assumptions about when and how we access, transact and use our money. They shifted behaviours to such an extent that the need to visit the once-essential local bank branch is now gone.
This rapid process of reinvention might seem to suggest that the days of high street banks are numbered, but that belief could be premature. Oliver Wyman research from earlier this year showed people’s trust in the big banks to act in their interest is only increasing compared to their trust in tech companies.
Could this mean traditional brands are learning to fight back? And is the popularity of challenger banks beginning to peak?
The real crisis in banking
Contrary to popular wisdom, the crux of retail banks’ problems over the last decade hasn’t been the financial crisis, which was far more damaging for the investment banking world.The real problem has been their failure to keep up with shifting customer expectations because of technological advancement. Specifically, banks failed to adapt to solve customer problems beyond their traditional role. This is the ground on which challenger banks have innovated and so successfully disrupted the legacy institutions.
Leaders in many retail banks have wrongly focussed on digital transformations, spending months and millions to upgrade systems and improve digital activations, only to come out on the other side still leaps behind their start-up competitors.
The Second Payment Services Directive (PSD2), which requires banks to open their payments infrastructure and customer data assets to third parties, has broadened the competitive field even more. Retailers, tech companies, utilities providers, and just about anyone can now compete for the thing we primarily depend on banks for today: viewing and transacting our money.
But are the tables turning?
The increase in trust that high street banks are experiencing is giving them a powerful asset with which to fight back. The mobile-first approach which helped the disruptors to build momentum are territories they can step into themselves. What’s more, they have the trust and the global scale to make them work even better.
For instance, a high-street bank is currently working on innovations in savings and investments. In a blind test of a proposed solution, customers felt that the solutions they were being shown were so interesting, so unique they could only be the product of a neo-bank or fintech start-up. Yet when probed, only 2 in 10 people would likely use the product if it were launched by a neo-bank or fintech start-up, compared with 9 in 10 who would likely use the same product from a high-street bank.
While a smalltest, this demonstrates that even when they innovate, established banks aren’t necessarily managing to get the credit they deserve.It also shows that the greatest assets high street banks bring to bear are not simply their size and balance sheet, but their brand and the trust they have worked to cultivate.
The trust factor is why banking customers still desire human interaction, despite a lessening need to visit bank branches thanks to mobile banking. Seventy percent of respondents to a recent poll said they want the ability to raise a complaint with a human adviser and 63 percent want to be able to open an account in person. Personal finance can be challenging, but human interaction goes a long way to make it less so.
App-based banks are now coming under pressure to offer more typical banking services themselves. Now the challengers are acting more and more like traditional banks, the incumbents need to evolve.
Time for a plan b?
Whilst conventional banks should feel more confident over their futures, their inherent strengths will count for nothing if they don’t keep a laser focus on innovation. Yet innovation has become an over-used word, and a superficial sales tool for consultants. In this context, innovation should mean just one thing: the creation of solutions which help people make progress in their lives.
By this definition, if traditional banks want to be innovative they must focus on more than just refining their apps or marketing messaging around new products(which are simply re-bundled existing products). What they need is to focus their innovation efforts on business operations by adopting more of a ‘Track B’ mentality.
Most businesses run what can be called a ‘Track A’ approach to operations: pursuing incremental growth within their day to day business through performance optimisation. While hugely important for keeping the lights on and maintaining today’s profitability, this narrows the scope of opportunities which traditional banks give themselves permission to pursue. Moreover, it leaves the business vulnerable to disruption by entities operating on a different plane – those businesses solving a broader range of customer struggles.
A ‘Track B’ mentality, on the other hand, involves a more radical, sector-bending approach. These companies constantly look to discover new areas of their customers’ lives where they could bring value, continually investing and reinvesting in ideas, even at the sake of near-term profits, as they recognise the long-term possibilities.
Examples are Apple moving into healthcare when it could have stuck to laptops and smartphones, and Google developing autonomous vehicles, a long way from its search engine origins. Track B businesses aren’t satisfied with playing in the sector they are in today, and constantly ask and re-evaluate a central question: “What business are we in?” This is the mindset high-street banks must possess to remain relevant.
Finance is so central to our lives that banks could be using a Track B approach to make a positive impact in almost any way. Why couldn’t a bank use its global network to make travel and holidays for its customers more affordable with tips and curation of the best local deals? With the sophisticated contracting capability of a bank, why couldn’t they help an independent gig worker and gig employer have better peace of mind in their agreements between one another?Or, with data becoming almost as important as money now, banks could transform themselves into repositories for our personal data, helping us to both protect it and monetise it as well.
The possibilities a Track B approach would elicit are endless. If the banks embrace this opportunity, then they can come out as winners after all.
Banks weigh up home working – the new normal or an aberration?
By Lawrence White, Iain Withers and Muvija M
LONDON (Reuters) – As the finance industry prepares for life post-pandemic, commercial banks are moving quickly to harness working from home to cut costs, while investment banks are keen to get traders and advisers back to the office.
HSBC and Lloyds are getting rid of as much as 40% of their office space as an easy way to make savings when bank profits have been crunched by the pandemic.
But there are concerns that remote working does not benefit everyone. Junior staff miss out on socialising and learning opportunities and there are also risks home working can entrench gender inequality.
At investment banks, where long hours in the office were the norm pre-pandemic, bosses say they want most people back where they can see them.
HSBC plans to almost halve office space globally, as it aims to squeeze more use out of the remaining space and increase the number of staff per desk from just over one to closer to two.
Britain’s biggest domestic lender Lloyds plans to shrink its office space by a fifth within three years. Standard Chartered will cut a third of its space within four years, while Metro Bank said it would cut some 40% and make more use of branches.
“We’ve had a period where flexible working has been tested in full, with about three quarters of people not based in offices as we used to call them, and the business has performed remarkably well,” Andy Halford, Standard Chartered CFO, said.
But major investment banks take a different view, with Goldman Sachs Chief Executive David Solomon pouring cold water on the potential of remote working.
“It’s not a new normal. It’s an aberration that we’re going to correct as soon as possible,” he told a Credit Suisse conference on Wednesday.
Barclays CEO Jes Staley, who last year said he thought the days of 7,000 employees trudging into its Canary Wharf headquarters were numbered, is also unwilling to commit for now to large office closures.
The Barclays boss has said the bank had “no plan” to make a major real estate move as Britain’s prolonged third lockdown had shown the strains of working from home.
Nick Fahy, CEO of online lender Cynergy Bank, said working over screens often could not compete. “You might have a disagreement on this, that or the other but actually over the coffee machine or over a glass of wine or a bit of lunch, issues can be resolved.”
Some banks have acted quickly because they are used to flexing workforces in line with economic cycles, particularly in investment banks, Oliver Wyman principal Jessica Marlborough said.
But some are waiting on analysis of staff productivity changes before making final decisions, while others were mindful junior staff may still prefer going into offices, she said.
Banks are also concerned women may lose out from the shift to remote working.
“We thought the pandemic would be a big leveller for women. But actually what we’re starting to see is it’s extremely challenging to get women to move jobs in a pandemic,” Marlborough said.
“Banks were making progress in hiring a more balanced workforce in terms of gender and other metrics, but they’re actually struggling now (as banks are finding) they (women) are less likely to seek out a new job.”
Union leaders said part of the reason was that some women are juggling more childcare responsibilities during the pandemic.
Dominic Hook, national officer for UK union Unite, said banks must ensure working from home is voluntary, use of surveillance tools is limited, and employers respect staff hours so work does not spill into evenings and weekends.
“Our concern is that it won’t actually be a choice and that banks will pressure staff to work from home,” Hook said.
There are also concerns hybrid working will favour employees who visit the office more regularly, as they can spend more time in person with colleagues and managers, said Richard Benson, managing director at Accenture Interactive.
The staff most likely to go back to the office are traders, bank executives said, while back-office functions such as finance, risk management and IT will spend more time working remotely.
In Germany, Deutsche Bank said it had been challenging to adapt home office spaces for traders and expected many will want to return, but not all.
“We will pay more attention to the personal circumstances at home. Dealers also have children or parents in need of care. We have become more sensitive,” said Kristian Snellman, Deutsche Bank’s head of investment banking transformation for Germany and EMEA.
The trend to shed offices predated the pandemic as many banks made cuts after the 2007-09 financial crisis. Some have already made moves as a result of the pandemic, such as NatWest, which shut its tech hub in north London last summer.
Retained offices are being remodelled, with desks removed to make way for collaboration and break space such as coffee areas, gardens and libraries, property consultancy Arcadis said.
“It’s not just about adding a ping pong table and table football and hoping it will work, it’s about making sure people get downtime,” said Sarah-Jane Osborne, head of workscape at Arcadis.
David Duffy, CEO of Virgin Money, said the bank is among those planning to strip out office cubicles.
“The world of large-scale populations returning to a tall skyscraper building to come in and do their e-mail in the office doesn’t make any sense,” he said.
(Reporting By Lawrence White and Iain Withers in London and Muvija M in Bengaluru, Additional reporting by Patricia Uhlig in Frankfurt. Editing by Rachel Armstrong and Jane Merriman)
Bank of England’s Haldane warns inflation “tiger” is prowling
By Andy Bruce
LONDON (Reuters) – Bank of England Chief Economist Andy Haldane warned on Friday that an inflationary “tiger” had woken up and could prove difficult to tame as the economy recovers from the COVID-19 pandemic, adding that central banks may need to respond.
In a clear break from other members of the Monetary Policy Committee who are more relaxed about the outlook for inflation, Haldane called inflation a “tiger (that) has been stirred by the extraordinary events and policy actions of the past 12 months”.
“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely,” Haldane said in a speech published online.
“But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”
Haldane’s comments prompted British government bond prices to fall and sterling to rise as he warned that investors may not be adequately positioned for the risk of higher inflation.
“There is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets,” Haldane said.
(Editing by David Milliken)
BOJ to highlight climate risks as key theme of bank tests this year – sources
By Leika Kihara and Takahiko Wada
TOKYO (Reuters) – The Bank of Japan will for the first time highlight climate change risks as among key themes in its bank examinations this year, sources said, joining major peers moving to gain research clout on the effects of global warming.
In guidelines on the examinations due next month, the BOJ will clarify its readiness to coordinate with Japan’s banking regulator in analysing the impact of climate risks on financial institutions, said three sources familiar with the matter.
The central bank will also beef up cooperation with the regulator, the Financial Services Agency (FSA), in studying European examples and specific ways to measure financial risks associated with climate change, they said.
The moves are part of Japan’s efforts to follow in the footsteps of an increasing number of countries working on or considering stress-testing financial institutions on climate risks.
“For the BOJ, green QE is still off the radar. The more approachable and near-term focus is to assess climate change risks on the financial system,” one of the sources said, a view echoed by two other sources.
“Climate change is a key theme for the BOJ this year,” another source said, adding that stress-testing climate risks on financial institutions is “not imminent, but something Japan needs to aim for in the future.”
The BOJ conducts hearing and on-site monitoring in voluntary examinations on financial institutions. But it does not have regulatory authority, which falls under the FSA. Neither the BOJ nor the FSA stress-tests banks on climate risks.
Officials of the two institutions have been discussing climate change as among topics that could affect Japan’s banking system. But progress toward stress-testing financial institutions has been slow because of a lack of data and models.
The BOJ began to gear up efforts on climate change after Prime Minister Yoshihide Suga last year pledged to make “green” investment a key pillar of his growth strategy.
The Biden administration’s focus on battling climate change, and the Federal Reserve’s decision in December to join an international central banks’ group focused on climate risks, also prodded the BOJ to engage more, the sources said.
But actual roll-out of stress tests will take at least another year as policymakers work out guidelines and details, including whether they will ask banks to conduct a “self-assessment,” the sources said.
(Reporting by Leika Kihara and Takahiko Wada. Editing by Gerry Doyle; Editing by Chang-Ran Kim)
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