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Open Banking and Cambridge Analytica: What does the data scandal mean for banks?

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Open Banking and Cambridge Analytica: What does the data scandal mean for banks?

Nick Caley is Vice President – Financial Services and Regulatory at ForgeRock and frequently shares his views on Data Protection, GDPR and Open Banking. 

What do data businesses and banks have in common?

As the impact of the Cambridge Analytica revelations continues to grow, Facebook promises major policy overhauls to address unsavoury data-handling practices, that finally have consumers waking up to realities and risks of online data sharing.

The high level of public attention suggests that the digital economy will feel the long-term effects of these data scandals. A change in consumers’ data-sharing behaviour can be expected. At a time when the UK banking sector is seeking to open up and encourage data sharing as part of the Open Banking initiative, this puts considerable pressure on banks and fintechs to make their data sharing practices more transparent.

As consumers become more cautious about how and where their data is being used, UK banks need to prepare for their data management capabilities to be put under extra scrutiny. Even if banks are already in the process of preparing for the EU General Data Protection Regulation (GDPR) which is coming into effect in next month, they need to be extra vigilant when it comes to handling customer data responsibly. The initial flurry of headlines around the Cambridge Analytica scandal might be over, but media and consumer attention for data protection and privacy practices certainly isn’t.

Of course, the issue of data sharing without consent was well known before the Facebook and Cambridge Analytica revelations put the data protection of companies so firmly on the media agenda: Research we commissioned before the sharing of Facebook user data was even made public, revealed that 57% of consumers in the UK are worried about how much personal data they have shared online. Furthermore, almost two thirds (63%) admitted that they know little or nothing about their rights regarding their own data.

Interestingly, over half (53%) of UK consumers said they would not be comfortable for their personal information to be shared with a third party under any circumstance, and only a third 36% would be happy to share data in order to get a more personalised service. In light of Open Banking, this presents a major challenge for wider adoption of data sharing, especially when the data is financial.

At the same time, banks have a considerable advantage over more agile,  customer-centric companies such as fintechs: the banks already enjoy a high level of consumer trust and can use this trust as an asset.

The same consumer research revealed that UK consumers consider banks and credit card providers among the most trusted holders of personal data with 82% of UK consumers saying that they trusted banks and credit card companies to store and use their personal data responsibly. In comparison, only 63% of Britons say that they trust social networks to treat personal data in a responsible manner.

The significant difference between banks and digitally native companies is that banks have longstanding customer relationships and a track record of storing and managing consumer data safely.This is great news for the banking sector as it prepares for a new wave of competition from fintechs and challenger banks once Open Banking is fully taking effect. When it comes to securing access to customer data via APIs, banks already have years of expertise to show for themselves with well-defined security operations and experienced teams in place who are utilising the latest security technologies combined with established standards.

In addition to having a history of securing customer data, our research found that there is a correlation between how much control consumers feel they have over the personal information they share and how much they trust the companies they share it with. In our survey, banks and credit card companies were ranked among the organisations that gave users most control over their data: 58% of consumers agreed, ranking banks and credit card companies just behind Amazon (60%), and before mobile phone operators (51%).

This is interesting because it shows that investing in systems and processes that enable users to take control of their own data pays off. This is particularly true at a time when data controls and privacy policies are under scrutiny and receive more attention from consumersthan ever before.

For banks, and in fact any company handling consumers’ personal data, making consumer consent a central part of their strategy has never been more important. Together, the regulatory changes of GDPR and Open Banking and the public pressure of the Cambridge Analytica revelations demand a new and more consumer-centric approach to data sharing and management.

By putting consumers in control over how and under what circumstances their information is shared, implementing dynamic consent and taking transparency seriously, organisations will be able to grow consumer trust and build positive long-term relationships with their customers. This will in turn allow them to offer additional services, based on personalisation, and explore new revenue streams.

For banks, there is a real opportunity to make the most of the unique situation they find themselves in: by building on their existing consumer relationships and putting customers firmly in control of their own data to become the leaders of an era of truly personalised digital services. 

Banking

A quarter of banking customers noted an improvement in customer service over lockdown, research shows

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A quarter of banking customers noted an improvement in customer service over lockdown, research shows 1

SAS research reveals that banks offered an improved customer experience during lockdown

A quarter (27%) of banking customers noted an improvement in their customer experience over lockdown, according to research conducted by SAS, the leader in analytics.

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? 

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Banking

Swedish Bank Stress Tests in Line with Recent Rating Actions

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Swedish Bank Stress Tests in Line with Recent Rating Actions 2

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.

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Banking

Future success for banks will be driven by balancing physical and digital services

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Future success for banks will be driven by balancing physical and digital services 3

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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