By Roger Davies, Principal Consultant, ea Consulting Group
The humble Payment Protection Insurance (PPI) policy may have triggered a revolution in UK retail banking. With total provisions across the industry for PPI sales abuse now estimated at £22.2 billion, we have witnessed the world’s biggest mis-selling scandal. Clearly, bank standards and procedures must change. Many will be baffled at how such a simple insurance policy, providing valuable cover in meeting loan repayments if affected by illness or unemployment, can have led to consumer detriment on such a large scale. Essentially, PPI for banks had become ‘the’ cash cow product, with premiums set arbitrarily high and a labyrinth of often undeclared policy exclusions.
The staggering figures involved confirm that this is a long running saga. Initially, the banks staunchly defended their actions and denied any pandemic mis-selling. The Office of Fair Trading, after years of expressing concern, became involved in 2007 and rapidly escalated the issue to the Competition Commission. The Consumers’ Association immediately raised the stakes stating that one in three PPI customers had been sold a useless policy. The UK regulator eventually agreed and instigated a bank-wide review involving the mass compensation of PPI holders. The latest complaints data published by the UK regulator for July-December 2013 shows that some 56% of the 2.479 million complaints submitted related to PPI. A whole industry, believed to consist of some 1,050 firms, has now sprung up to assist consumers in claiming compensation from their lenders. Although an expensive route, with an estimated £5 billion paid in fees, many bank customers have welcomed such support. The Lloyds Banking Group alone is said to have 6,000 staff working on PPI claims.
To impartial observers it appears that the sales processes which have evolved for personal lending have been fully compliant with the consumer credit regulations. However lenders often ignored the basic requirements of the Insurance Conduct of Business rule books governing the supporting PPI policy. Despite the current scandal, it must be remembered that PPI has been around for over 25 years. Indeed, it still provides very important cover for the appropriate customers. PPI compensation has even provided a welcome boost to a lacklustre economy during times of austerity! However, the heyday of PPI as a mainstream retail banking product providing a key income stream for all the leading banks is undeniably over. The Competition Commission introduced new regulations in 2011. Essentially, the latter de-couple the sale of payment protection products from the personal loan or credit card agreement requiring separate quotations and introducing a 7 day “prohibition” period before PPI can be sold. The revised regulations adopted should ensure that PPI is only sold when suitable to the needs of the customer.
All UK lenders must be mindful that the Financial Conduct Authority (FCA) may well set a deadline for the PPI reviews to be completed and for final compensation payments to be paid. In February 2014, the Lloyds Banking Group was fined £4.3 million for delaying compensation payments to 140,000 customers. UK banks and building societies should, therefore, be well advanced with a detailed review of all relevant PPI sales, and in the process of paying compensation, where appropriate. This is, however, a bigger issue than just PPI. It is essential that all sales processes are reviewed by financial services companies to ensure that in every instance the consumer is being treated fairly. The FCA will expect the TCF principle to have been applied throughout the product design phase, with detailed evidence from a suitable audit trail. All providers must also regularly test to ensure that product sales are entirely appropriate and being achieved in their targeted market. There must be no potential threat of consumer detriment.
It is clear that there had been major deficiencies with bank governance over the sale of PPI for a prolonged period of time. This unsatisfactory situation has been exacerbated by an almost identical set of circumstances leading to another major scare with IRSs (or Interest Rate Swaps), with an ongoing review and the prospect of multi-billion pound compensation. We are, of course, dealing with retail banking products. We cannot blame investment bankers and the complex products labelled by Lord Turner as serving ‘no economic purpose’. Sir Richard Lambert’s new Banking Standards Review Council announced, at the behest of the major banks, hopes to reform banker behaviour. There must, however, be severe doubt that the public will recognise the body as independent when it is funded by the banking industry. It should be recognised that it is a failure of the compliance and risk functions to deliver fair sales processes, which has led to the mis-selling crises. As a short-term and inexpensive solution, it is suggested that the director of compliance in any major bank should be an independent appointment, with an additional reporting line to the FCA. Such a role offers benefits to both consumer and regulator in ensuring that an organisation is acting professionally and always treating its account base appropriately.
Trust in the traditional High Street banks is at an all-time low following both this series of mis-selling scandals and the tax-payer bail outs of RBS and LloydsTSB. Much has been said about the banking industry losing its ‘moral compass’ with PPI and whether this leopard can ever change its spots? M&S has just launched a market leading current account and the Bank of England is currently considering 22 applications for new banking licences.
The threat posed by the challenger banks to the established order is undeniably on the rise, and PPI mis-selling appears to have set this ball rolling. Furthermore, all political parties will feed on anti-bank sentiments in the period leading up to the next General Election. The major banks now have one chance to put the genie back in the bottle and convince a sceptical public, fuelled by social media, that it is capable of reform. The Big Banks must overcome their deeply embedded sales culture and adopt a new service-based ethos, only ever acting in the best interests of their customers. For the existing High Street players, failure is not an option.
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.”
The Coming AI Revolution
By H.P Bunaes, CEO and founder of AI Powered Banking. There is a revolution in AI coming and it’s going...
Q&A with Joe Steele, Head of Workplace Technology at Starling Bank
In just under a year, many businesses had no choice but to go online and with digital transformation on the rise...
How financial services organisations are using data to underpin future growth
By John O’Keeffe, Director of Looker EMEA at Google Cloud In addition to the turmoil caused by the COVID-19 pandemic, a...
Three questions the financial services industry must answer in 2021
Xformative, a Mastercard Start Path recipient, shares what these questions mean for fintech partners and their innovations This year, fintechs...
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 A quarter (27%) of banking customers noted an...
Is Digital Transformation the Key to Business Survival in the New World?
After a turbulent year, enterprises are returning to the prospect of a new world following an unprecedented pandemic. Around the...
Virtual communications: How to handle difficult workplace conversations online
Have potentially difficult conversation at work, like discussing a pay rise, explaining deadline delays or going through performance reviews are...
Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna
Payment processor Mollie reveals the most popular payment methods for Black Friday Mollie, one of the fastest-growing payment service providers,...
Brand guidelines: the antidote to your business’ identity crisis
By Andrew Johnson, Creative Director and Co-Founder. How well do you really know your business? Do you know which derivative of your...
COVID-19 creates long and winding road for startups seeking investment
By Jayne Chan, Head of StartmeupHK, Invest Hong Kong Countless technology and other companies describe themselves as innovators, disruptors or...