Banking has changed a lot in the last 50 years. In the 1960s going into a physical high street branch was a regular thing; you knew the bank teller; the clerk handled your paperwork and overall you understood enough to trust the institution with your money. Then came the 80’s and digitisation, when the banks were able to cut costs and increase profit. The ability to self-serve created an efficient service for customers but removed the truly ‘personal’ side of banking. From that point on the there was a sense of complacency in big banking, which of course we all paid for in 2008.
The pressure is on for big banks to change and learn from the mistakes that caused the 2008 crash.
They lost people’s trust, but they still dominate the high streets. Post-crisis there were promises of transparency and firmer regulation, but really the same practices linger. Still, this loss has also opened the door for challengers. Most people don’t feel like they owe any loyalty to their bank and now with new legislation they can swap banks in just 48 hours.
We are now at a point where technology can take us back to personal banking, but in a new way. Digital challenger banks seek to serve customers in this new way. The challenge is to combine what has worked for banking in the past with the best that technology can offer customers.
So, what worked? The role of a trusted bank teller who offered services tailored to a customer’s need can now be replicated through banking apps that leverage your financial data. With these apps you have real time advice on how best to spend and save quite literally at your fingertips. You can instantly tap into a marketplace of financial products to find the one that best suits your needs. By using artificial intelligence and open APIs fintech creates a wealth of new possibilities for people who feel like they have very little control over the way they manage their money.
A lot of this comes from the things we can now do with machine learning and financial data, particularly when it’s all aggregated into one place. This data can be used to give customers a new personalised banking experience that is entirely digital. This might sound scary, but by helping you leverage your own financial data a bank like Tandem can help you save a tonne of money. For example, if we see from your data that you have booked a flight and are about to go on holiday, we can help you save or perhaps suggest useful financial products for your travels.
The incumbents and challengers alike understand that this new technology is disrupting banking. The big four are investing millions to keep up with fintech’s evolution. In theory they have the resources to keep dominating the space – the trouble is that their size is actually a disadvantage when it comes to developing great tech. Their cumbersome structures make it difficult to change something quickly, and there are often months or even years, between a product being developed and it seeing the light of day.
Challenger banks are smaller and we get stuff done. At Tandem we detect a problem in our app and get it fixed within a matter of hours. In tech we’re used to constantly testing our code, both through automated systems that check it line by line, and by having our compliance team working closely with our developers. This means everyone is on the same page and we can build out new features quickly and efficiently.
Another advantage is that our systems were built from the ground up with data in mind. Tandem are 15 years ahead of the big banks when it comes to data. We store everything in a single data pool that means our systems can tap into it efficiently. Meanwhile, the big banks are stuck with siloed data, which makes it isolated and inaccessible.
This is new personal banking is going to transform the banking industry. We can disrupt the industry and make it better, more consumer focused and personal – and that doesn’t have to mean going back to the old days of bank managers and clerks. Banking needs a revolution and it’s about combining what customers engage with in high street banks with new technology that gives them control.
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown
This represents some good news for banks in an extremely challenging time, with 59% of customers also saying they’d pay more to buy or use products and services from any company that provided them with a good customer experience over lockdown.
The improvement in customer experience also coincides with a rise in the number of digital customers. Since the pandemic started, the number of banking customers using a digital service or app has grown by 11%, adding to an existing 58% who were already digital customers. Over half (53%) of new users plan to continue using these digital services permanently moving forward.
Brian Holden, Director, Financial Services at SAS UK & Ireland, said:
“It’s notable that in times of need customers value being able to communicate with their bank and place an even higher value on good customer service. A rise in the number of digital customers means banks can now reach a wider audience online, leveraging AI and analytics to offer a more personalised experience.
“There is work to be done, though. Even greater personalisation is needed if banks are to win over the 12% of customers who felt banking services deteriorated over lockdown. And this personalisation will need to get right down to a segment of one to properly reflect the unique circumstances some individuals now find themselves in due to the pandemic.”
While the number of digital users grew over lockdown, there is still a quarter (24%) of the banking customer base that have chosen not to make the switch to digital services.
Meanwhile, failure to offer a consistently satisfactory customer experience could prove costly for banks, with a third (33%) of customers claiming that they would ditch a company after just one poor experience. This number jumps to 90% for between one and five poor examples of customer service, so this just underlines how much retail banks can win or lose in these difficult times.
For more insight into how other industries across EMEA performed during lockdown, download the full report: Experience 2030: Has COVID-19 created a new kind of customer?
Swedish Bank Stress Tests in Line with Recent Rating Actions
The Swedish Financial Supervisory Authority’s (FSA) latest stress test results show major Swedish banks’ robust ability to absorb credit losses. The results support Fitch Ratings’ view that short-term risks have abated in recent months, and are in line with Fitch’s assessment of major Swedish banks’ capitalisation at ‘aa-‘, which was a factor when Fitch removed the ratings of Handelsbanken, Nordea (not covered by the FSA’s stress test) and SEB from Rating Watch Negative in September.
The FSA estimated about SEK130 billion of credit losses over 2020-2022 for the three largest banks (Swedbank, Handelsbanken and SEB) under its stress test. This represents about 220bp of their loans, or about 70bp annually. However, the banks’ pre-impairment profitability in the stress test could absorb credit losses of up to about 110bp of loans annually. Fitch’s baseline expectation is for credit losses below 20bp of loans in 2020 and 8bp-12bp in 2021.
Capital remained strong under the stress test. The average common equity Tier 1 (CET1) ratio fell by only 2.8pp (1.9pp if banks did not pay dividends) from 17.6% at end-June 2020. The capital decline was not driven by credit losses, which could be absorbed by pre-impairment profitability, but by risk-weighted asset inflation.
The three banks’ 3Q20 results showed that capital has been resilient despite the coronavirus crisis. The banks had a CET1 capital surplus over regulatory minimums, including buffers, of almost SEK100 billion (excluding about SEK33 billion earmarked for dividends). SEB had a CET1 ratio of 19.4% at end-September, Handelsbanken’s was 17.8% and Swedbank’s 16.8%.
The SEK130 billion credit losses under the latest stress test are lower than under the FSA’s spring 2020 stress test (SEK145 billion), which also covered a shorter period of two years. However, they are still larger than the actual losses incurred by the three banks during the 2008-2010 crisis. This is despite tightened underwriting standards by the three banks in recent years, including, in the case of SEB and Swedbank, in the Baltics, the source of most of their loan impairment charges in the previous crisis.
In its baseline economic forecasts, the FSA assumes a harsher shock to Sweden’s GDP in 2020 and 2021 (-6.9% and 1%, respectively) than Fitch’s baseline (-4% and 3.4%), although it assumes a similar recovery by end-2022. It also assumes real estate price corrections, which appears particularly conservative in light of a 11% housing property price increase over January to November 2020.
The ratings of Handelsbanken (AA), Nordea (AA-) and SEB (AA-) are on Negative Outlook due to medium-term risks to our baseline scenario. The rating of Swedbank (A+) is on Stable Outlook, reflecting significant headroom at the current rating level following a one-notch downgrade in April due to shortcomings in anti-money laundering risk controls.
Future success for banks will be driven by balancing physical and digital services
Digital acceleration due to COVID-19 has not eliminated the need for bank branches
Faster service (23%), smaller queues (26%) and longer opening hours (31%) are among customers’ biggest asks of their bank branch, new research from Diebold Nixdorf today reveals. But with 41% consumers saying they would be comfortable to engage with all banking services via an app, it is vital that banks respond to the full spectrum of customer needs – balancing and evolving their offerings on multiple fronts.
A third (35%) of customers say they will always want access to physical, in-branch banking services in some capacity and one in ten (10%) consumers will never bank predominantly online in the future. This demonstrates that there remains an important role for the services a branch provides. This role, however, continues to shift away from purely transactional banking:
A quarter (26%) value face-to-face advice when it comes to their banking needs
One in five (18%) seek advice on different products
17% want to speak to the staff or other customers.
Matt Phillips, Diebold Nixdorf vice president, head of financial services UK & Ireland, said: “The majority of banks have spent the last decade focusing on their digital strategies and investing in improving – or establishing – their online customer experience. However, the data shows that there is still an essential role for physical branches. Banks now increasingly face the challenge of continuing to provide customers with access to a range of physical and as well as digital services, giving them the flexibility to choose the best service for them at any given moment in time.”
When looking beyond the impact of COVID-19, planned branch visits by customers are expected to rebound to 28%, following a dip to 11% during lockdown. And when asked about the new services they’d like to see inside their bank, sixteen percent of respondents said more self-service machines would improve their in-branch experience.
Matt Phillips continues: “In a world that is fast evolving and where the future is digital, there’s no doubt that high street banks must, and are, responding to the needs of highly digital customers. But not every customer requirement is digital. There is still a strong need for physical bank branches and the interaction and services they offer, and striking this balance between physical and digital is where the industry must come together to provide solutions. For example, building a strong, leave-behind strategy is something we’re seeing across the board when banks have to close branches, ensuring customers have access to self-service machines to complete all their transactional needs.”
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