Mark Grainger, director at data-driven customer engagement solutions company, Engage Hub
With significant regulatory changes coming into force over the next couple of years, it is clear that key governing bodies want to intensify competition in the financial services industry. The Revised Payment Service Directive (PSD2), for example, will completely change banking as we know it. Under the new EU directive, banks will be obliged to allow third-party providers to access their customers’ accounts through open APIs and as such, both consumers and businesses will be able to use third-party providers to manage their finances. In the near future, we could find ourselves using the likes of Facebook or Google to make transfers and analyse spending habits, whilst having our money safely stored in a bank account.
As a result, traditional banks will no longer just be competing against other banks – they will be in competition with any company approved to offer financial services. So as the competition heats up, there is a mounting pressure for banks to differentiate their offerings. More and more are beginning to understand the importance of delivering secure and seamless cross-channel customer communications in order to enhance the customer experience.
But in order to get this right, there are a number of challenges banks will need to overcome.
- Meeting the demands of the 24/7 consumer
Today, customers demand digital services from their banks. During 2015, there were 11 million internet bank logins a day and this number is only set to continue growing as on-the-go consumers increasingly want to check balances, make payments and even apply for a mortgage at the touch of their thumbs. And with a number of fintech start-ups offering a digital-first banking experience, the pressure for the more traditional banks to deliver a seamless digital experience is on.
However, the expectation for banks to serve customers centred on their mobile phones creates a huge challenge: delivering relevant and timely information to each and every customer. And with so much choice now on offer, customers will easily go elsewhere if they do not get the level of service they expect.
Banks, therefore, need to do more in helping customers proactively manage their finances. One of the most effective methods to do so is by automating the delivery of real-time notifications detailing events that impact a customer’s account and the mobile channel is the ideal medium from which to focus communications. While email continues to be the primary delivery channels for notifications, SMS alerts and push notifications from apps are proven to have higher open rates and faster responses from the customer.
- Facing fierce international competition
It’s not just competition on UK soil that banks are increasingly facing – the digitalisation of banking has also brought down geographic boundaries to introduce fierce international competition too. This competition is likely to intensify even further with the introduction of PSD2 as consumers look further a field for the banking solution that best fits their needs. On the back of increased competition, most traditional European financial institutions have invested in developing market-leading mobile banking and app features, as well as cross-channel technology, over the past 12 months.
One international bank championing this cross channel strategy, in particular, is Turkey’s DenizBank. Turkey ranks in the list of the top five highest social media users globally so clearly there is an appetite for banking services via social media. As such, DenizBank created a new channel of communication with its customers, reaching out to them via Facebook Messenger for all matters related to their accounts. It’s quick and it’s convenient – everything the ‘on-the-go’ consumer demands.
So as banks from further afield strengthen their digital offerings, the pressure mounts on traditional UK banks to orchestrate cross-channel communications to deliver contextually relevant and convenient experiences which fit into a fast-paced lifestyle. Those that fail to do so will find themselves falling behind the competition.
- Fighting fraud
Security has become a huge and very costly challenge for banks to tackle in recent years. Figures from Financial Fraud Action UK reveal that financial fraud losses across payment cards, remote banking and cheques totalled £755 million in 2015, an increase of 26% compared to the previous year. Allied to this, there have been an alarming number of data breaches reported by financial institutions. In fact, British financial institutions have been investigated 585 times for data privacy breaches in the past year – almost triple the number of times on the year before.
However, banks can actually to use their data to fight the fraudsters as opposed to just focusing on the security of customer data itself. Banks are in a unique position as they have access to valuable data such as a customer’s spending habits and location information. By analysing this data, banks can develop and record ‘normal’ customer behaviour patterns. This then allows for anything out of the ordinary to be quickly and easily identified- such as potentially fraudulent activity – and send simple, automated communications via SMS, email or push notifications to customers to verify (or not) these unusual transactions.
This two way communication between bank and consumer ensures customers can purchase the goods and services they want quickly, but securely.
Overcome challenges, reap the rewards
The digital banking revolution is more than just launching a new and multifunctional smartphone app – financial institutions need to fundamentally change the way they communicate with their customers in order to deliver an experience that needs their ever evolving demands.
Utilising leading mobile engagement solutions to integrate disparate digital and physical channels into a single, seamless experience has to be a priority. SMS alerts, voice calls, email, push notifications and social media can all be used to automate communications to prevent fraud, improve the customer experience and increase retention rates. The banks that get it right now will be remain ahead of the curve and are likely to come out on top at a time when the competition is more intense 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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