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TECHNOLOGY ALONE WON’T ACHIEVE DIGITAL TRANSFORMATION. WHY BANKS ALSO NEED TO EMPLOY THE RIGHT TALENT

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TECHNOLOGY ALONE WON’T ACHIEVE DIGITAL TRANSFORMATION. WHY BANKS ALSO NEED TO EMPLOY THE RIGHT TALENT

Nick Cheetham, Managing Director at FINkit 

The City of London has long been established as a leading presence at the top table of global technology hubs. In the first half of 2017, venture capital investment in the capital’s tech sector totalled £1.1 billion according to data published by London & Partners. That’s more than any other European city (including Dublin, Paris and Amsterdam) since the Brexit vote. London’s pre-eminence has been especially pronounced in the burgeoning fintech sector, at least in part because of the fertile conditions provided by the high concentration of financial institutions in the City.

But as digital-first challenger banks and other disruptive startups begin to influence the financial  services industry more profoundly than ever before, those institutions – in particular, traditional retail banks – are scrambling to review their offerings and having to fight harder to recruit leading talent in the face of new competition. Plenty of emphasis has been placed in recent years on efforts to preserve London’s status as a tech hub by addressing apparent STEM (science, technology, engineering, and mathematics) skill deficits, particularly among young people – exemplified by London’s new Mayor Sadiq Khan’s recent announcement of a new “digital talent pipeline” initiative. However, the talent challenge facing banks is not, in fact, a shortage of qualified candidates. Rather, it is convincing potential hires that they can provide an environment in which they can flourish.

We recently carried out a study with the independent research firm LM Research, looking into senior banking executives’ priorities, challenges, and plans. We asked senior figures at 15 major UK banks and other financial institutions about the issues that keep them up at night, their perspective on upcoming regulatory changes, competition in the retail banking sector, and their attitudes towards investment in innovation and talent.

Our research found that 80 per cent of respondents are investing more than £25 million in innovation every year, with more than a quarter (27 per cent) spending in excess of £100 million annually. While the majority (73 per cent) of respondents agreed that digital transformation is critical to the future of the bank, only seven per cent admitted to being worried about hiring the right talent to support that transformation.

For many years, the big banks were often seen almost as a default first-choice destination for many STEM graduates. But those university leavers now increasingly favour roles either within booming global Internet companies such as Facebook, Google or Amazon, or opportunities within dynamic and disruptive technology startups. It would be easy to dismiss this as simply an unavoidable consequence of wider social change – as Millennials naturally gravitate towards companies that appeal to their values and reflect their everyday experiences (as traditional banks and other institutions once did for previous generations). But it would also be a damagingly over-simplistic diagnosis: the trend towards prioritising “cool factor” in an employer over solidity and heritage is not limited to only young recent graduates.

A big part of the attraction of Internet giants and tech startups for STEM talent of all ages is their attitude and approach towards innovation and risk. Traditional banks – in part due to the various regulatory requirements they have to comply with – can tend to be fairly risk-averse and prone to bottling up innovation in labs, accelerators, incubators, or skunkworks, away from the main business. Conversely, the new generation of technology companies competing for the same talent typically offer an environment that is more supportive and inclusive of risk and innovation. Facebook, for instance, may have moved on from Mark Zuckerberg’s famous “Move fast and break things” philosophy as it has matured, but it remains proudly agile and experimental, and many startups have followed its lead.

Many banks have begun to realise the need to innovate in the face of competitive threats from disruptive startups, but several are still only paying lip service to innovation rather than genuinely encouraging constructive risk-taking and making agile part of their everyday culture and long-term business strategies. For the most part, innovation labs and the like represent little more than face-saving “innovation theatre”. There is little prospect of any meaningful output seeing the light of day as long as banks fail to truly adopt the mindset needed to empower innovators.

The top technology talent doesn’t want to work subject to artificial and unproductive restrictions, their ideas consigned to theory or boxed off separately from the rest of the business. They want to be able to create new products and services with the confidence that they will make it into the “wild” and be supported and developed further over time.

But technology alone won’t achieve digital transformation for banks. As well as putting the right systems in place, banks also need to employ the right talent. This will drive revenues and also result in significant cost savings if they are able to recognise the right skills needed to deliver a more ‘current’ change management programme. Employees who were tasked with delivering change 10 to 15 years ago will unlikely have the right skillset to successfully deliver change in the present day. As new technology and regulatory rules have rapidly emerged, banks will not be able to solely rely on a single momentous shift to digital, they’ll need constant iteration and experimentation to successfully deliver change.

With so much investment coming into London, the UK should remain a vibrant and attractive place to work for the global talent vital to the technology sector. Banks should not only take advantage of this, but also change their attitudes and approaches to fully embrace innovation in the new world of agile product development, or risk continuing to fall behind when it comes to attracting the best talent and locking themselves in a vicious cycle of creative stagnation.

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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