By Danny Bluestone, founder & CEO, Cyber-Duck.
All banking institutions large and small, new or old understand the need to interact digitally with customers. The process of transformation has been easier for some than for others. These past few weeks, most digital directors will have been surveying the wreckage of the TSB brand wondering where it all went so wrong.
Banks are undeniably complex beasts. Some come with more than a century’s-worth of procedures, transaction histories and customer data. As they moved from abacuses through thumping great ledgers via calculators and into the digital age, they created ever more labyrinthine systems. For the most part, these systems are wholly incompatible with sleek modern apps or web interfaces.
But despite this complexity, it is still no reason to avoid the question of customer-focused digital transformation, nor is it an excuse for the unmitigated disaster of TSB’s IT meltdown.
The simple fact is that cutting corners in transformation cuts no ice. All too often, digital is viewed as the sum of its outputs. A website, an app, an AI bot or a virtual credit card. At Cyber-Duck, we may be responsible for creating these things, but scratch away the surface and you’ll realise that digital transformation is all about what lies beneath.
It’s easy to point at TSB with the benefit of 20/20 hindsight. What any institution migrating its systems or user experience (UX) should understand is that it’s the data – how it’s structured, how it’s catered for, how it’s stored and how it’s funnelled through the digital banking process – that will make or break a programme.
Whether seduced by all-singing, all-dancing software or tied to an impractical deadline, organisations can’t afford to be diverted from the serious business of what they are trying to achieve through digital and why. If you don’t think the process through from start to finish – from how you communicate with customers to data migration – you can’t move without breaking things. Then it will all fall like dominoes.
If I were to pick up on three things TSB should have done in its move to new systems, they would be: testing, testing and more testing.
Moving data from one system to another, especially when the original system has hundreds if not thousands of moving parts, is a herculean task. Even in large-scale organisations, a saner approach is to roll a small number of beta users over and then test, test and test again. If TSB had done this, it might have mitigated some of its problems much earlier.
Digital transformation is about completely changing how organisations work. It’s iterative. You can’t just transform in a day. It’s a process that must have users and a testing mentality at its heart.
The Bank of England has to be the archetypal traditional banking establishment. To say it’s old is an understatement. But it, too, needed to move forwards into the digital age. A fundamental part of this process was about engaging with real customers, especially when we were in the design stage.
A key requirement that we identified early on was the need to segment the audience into personas by using qualitative and quantitative research on what individual personas wanted and the type of content they consumed on the prior website. We created the digital experience around this. We did this for the whole customer journey.Visitors to the Bank’s website could be schoolteachers running a lesson on fiscal policy, students of economics, journalists, independent financial advisers or accountants; the design had to make no assumptions and the result had to have the right functionality.
Data is the lifeblood of the banking system. Whether it’s journalist queries, a small business’s petty cash, a first-time buyer mortgage or the turnover of an FTSE 500 – how banks acquire, manage and process that data is of vital importance.
In this context, it’s easy to see swapping a database or backend system as a trivial matter. But all it takes is a single address field that is incompatible with or contradicts another in an automated process and the whole house of cards will come tumbling down. And now, with GDPR and privacy by design, the imperative for resilience, retrievable data and the integrity of data is stronger than ever before.
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.”
RegTech 2020: The rise of Open Banking
This month on the RegTech 20:20 podcast, host Alex Ford is joined by industry experts Gavin Littlejohn, Chairman of The Financial Data and Technology Association (FDATA) and Jamie Leach, Regional Director of FDATA ANZ and Founder of Open Data Australia, to discuss developments in Open Banking, and the place of RegTech.
Today, the focus is on the digital customer experience and the insight offered indicates that there has been a major shift in the FinTech ecosystem as a source of potential innovation for banks, rather than being a direct competitive challenge.
In the podcast, Alex quizzes Jamie on the concept of sharing data and the impact of the introduction of Open Banking rules under the Consumer Data Right (CDR) in Australia. Jamie shares that it is an exciting time to be involved in the sector:
“…what we really need to consider is that Open Banking in Australia is very different to Open Banking in the UK. Really, what has spurred Open Banking in Australia under the Consumer Data Right is the pursuit of creating greater competition and greater innovation, while allowing consumers to do more with their data.”
Gavin, who has many years of experience in the industry and, as well as his role with FDATA is also a key member of the UK Open Banking Implementation Entity, speaks on the theme of advocating Open Finance in the UK.,’
Delving deeper into Open Banking, he highlights the fact that it has been an interesting journey and states that “the important thing to understand is the difference between the UK’s Open Banking order and the wider payment services directive.”
Not only concentrating on Australia, Jamie also works across the sector in the UK and, also looking at its evolvement here, she suggests that the people creating the rules are now taking notice, adding: “We are just getting started – the UK has been at it for nearly three years and it is still gaining momentum.”
With regards to future predictions, Jamie believes “It’s going to take 12, 18 or 24 months before we see any mainstream major adoption and where the potential of Open Banking can go in this market”
Moving to the differences between Open Finance and Open Banking. Gavin defines the latter as “payment initiation and access to payment data, which enables a third-party provider or fintech with a customer relationship to initiate a payment and get access to the data relating to transactions.”
“…the concept of Open Banking is a bit like electricity – you don’t use it directly; you use an appliance that uses it. This could mean loans, money management apps, or cloud accounting platforms, which all use Open Banking.”
Throughout the episode, both guests provide interesting insights and hint at the significant potential of Open Banking.and the connection to RegTech within this domain.
It is clear that what we see today is only the beginning. Despite the industry still being in the early stages of implementation in almost all cases, there is increasing interest in moving beyond this to include a far broader spread of financial products.
You can listen to the full episode at https://www.encompasscorporation.com/regtech2020-podcast/ or across all major platforms, including Apple Podcasts, Google and Spotify.
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