The Rehabilitation of Financial Services

By Richard Goold, Partner, Moorhouse

This year’s Barometer on Change (‘Avoid the Zombies, Innovate for Growth’) interviewed Board members and their direct reports in FTSE 250 companies, UK multinationals and major public sector organisations.  As have the three previous surveys, it highlights the ongoing challenge faced by many industries in achieving growth in an ever-changing climate.  Change, it seems, has firmly been established as the ‘new constant’, and this rings true nowhere as much as in the financial services sector.  This year’s report, however, highlights encouraging developments: while 24 per cent of companies still claim that cost reduction is the number one priority, many financial service institutions (FSIs) are no longer cutting costs just to protect the bottom line. Those organisations that are experiencing high growth are using what they are able to save to invest in new products and services, and in accessing new market segments and geographies.  Indeed, 19 per cent of respondents listed each of these as their most important objective over the next three years.

FSIs across the board, and particularly the ‘old guard’ of traditional banks, are pouring effort into transforming the damaged relationships they have with their customers through re-investment in new products, digital capabilities and untangling the issues of legacy infrastructure as they return to growth.  The recent partnership between Royal Bank of Scotland (RBS) and Halifax to create a better offering for small business lending is a case in point: during the height of the recession, there was next to no lending for SMEs.  Today, traditional banks are coming back into the SME marketplace, which is nothing less than a tidal change.

Spurred on in large part by the raft of regulatory changes in recent years, which have opened the market for the first time in decades to a serious competitive threat from new entrants, we can expect to see traditional banks invest in their offering at a personal banking level as well.  Ensuring that their online banking platforms respond to what customers what and need today alongside an urgent need to improve the customer service experience are likely to be high up on the agenda.  There’s a refreshing resurgence of consistent ambition being communicated by most – if not all – traditional banks.  Of course, talk is cheap, and the real question is who will really embrace their own rhetoric and follow it up with decisive action, yet it really does seem that banks have been able to move away from being wholly consumed by legislative change.  More and more boardroom talk is centring on strategic drivers – competitive products and services, listening, engaging, and responding to customers.

This last driver is especially important: traditional banks are still very early in their journey to rebuild goodwill with customers – this continues to disable them.  The competitive landscape has changed, with all new entrants focusing strongly on the relationship with their customers, meaning the big banks must do the same.  And the latter still have poor relationships with mainstream press to overcome; whenever there’s a cheap shot to be had, you can bank on it being made.  Recently, a small number of Barclays’ personal banking customers reportedly lost access to online banking for a grand total of 90 minutes.  Sure, that’s not great, but it was elevated to the level of a leading national story in the UK, which just goes to show the long way we have to go in recalibrating customer relationships.

The strategy seems to be working: the latest sets of results from the UK’s largest FSIs provides evidence that for many who have worked hard to cut costs and change the way they operate, the benefits are beginning to come. HSBC, RBS and Lloyds have all seen growth in underlying profit.  Meanwhile, UBS and Barclays have indicated they are looking to grow their investment banking operations, while RBS is scaling them back to focus on its retail operations.  There is a complication, however: while the Financial Conduct Authority’s (FCA’s) CEO, Tracey McDermott, remains an interim appointment, FSIs do not know if her recent bridge-building messages and actions are a sure sign of what ‘business as usual’ will look like in the coming months and years.  The nervousness this causes among banks makes long-term strategic initiatives difficult.

And with the sector continuing to ride the wave of change caused by upheavals in the global economy, the operating model is under pressure from all directions.  Over the next 12 months, retail banks will have to respond to the Senior Managers Regime and the lingering effects of PPI; mortgage lenders need to comply with the Mortgage Credit Directive (MCD); investment operations will have to adjust to the requirements of ring-fencing, the recovery and resolution directive and MiFID II; and insurers will continue to feel the transformative effects of Solvency II.

The need to respond to regulatory change has become a business-as-usual requirement, and dealing with it has been built into the planning cycle.  With the regulatory bodies actively encouraging competition through the CMA’s retail banking review, the FCA’s innovation hub, and the PSR’s objective to promote competition in payments, the impact is starting to be felt.  Challenger banks are perceived by the public to offer something different; FinTechs and technology giants are using both innovative technology and their untainted relationship with their customers to gain market share.  This means that smart and progressive organisations need to embrace the opportunity that proactive and focused change affords them – prioritising the strategic transformation programmes they need to engage in to restore trust, access new markets, and raise profitability alongside the compulsory.  Making sure there’s a direct line between the launch of a new product or service and the change requirements of new regulations, rather than doing them in isolation, allows for a much more of an agile approach to delivering projects.

Increasing competition, tighter regulation and new technology is fundamentally changing how FSIs interact with customers.  To succeed in this environment, organisations must fight ever harder to attract and retain their customers.  Putting the customer first can help them grow, but it requires a commitment to relook at everything from how they are structured, their internal governance and processes through to their products and services.  Such strategic transformational initiatives need to be looked at as part of an overarching change portfolio (including regulatory change priorities) if financial service organisations genuinely want to thrive as opposed to just survive.  Only in this way can they hope to bring about the complete reversal in public opinion – and, ultimately, their fortunes – for which they are striving.