By Gael Itier – CEO & Founder at akt.io
The COVID-19 crisis has led us to witness what will be remembered as a historic migration to digital. While we’ve seen an intense period of experimentation and improvement across financial services in the last five years, we’ve yet to see a truly unprecedented period of innovation to reimagine and rewrite the functionality of capital markets, until now. In less than a few years’ time, the wealth management and trading landscape will become unrecognisable to its current form.
The environment we currently operate in has influenced new consumer behavioural trends and increased expectations for a seamless digital experience. Banks who want to survive the storm must move faster than ever to introduce value-adding services that enhance the customer’s experience of modern banking. In the road ahead, banks and fintechs who want to stimulate long-term growth will see the crisis as a chance to create entirely new ways of thinking about how assets can be innovated to deliver more value to the consumers. While many companies will have to preserve funding, others will increase their investments in emerging technologies, such as AI, automation and blockchain, to make this vision a reality.
Alternatives to the traditional banking system will continue to pick up momentum as COVID-19 becomes a consistent presence in our society and economy. Though what will really set fintechs apart will be the ways in which they solve the challenges of tapping into new, secondary capital market structures and unlock real value by inviting mainstream consumers to participate. What is certain is that COVID-19 has highlighted the vulnerabilities of those who live paycheck to paycheck and made even more clear the need to access new services that help customers take better control of their money to stay afloat during the crisis or better yet thrive financially.
A watershed moment for digital banking consumers
Banks across the world will have to accelerate their digital transformation and future banking strategies to meet the rapid shifts in consumer demand for digital banking services and cashless payments. One recent study found that three quarters of European banks ‘weren’t prepared’ for the scale of change that COVID-19 had triggered in customer behavioral trends, with a further 88 per cent stating that they were overwhelmed by the demand for online and mobile banking during and post-lockdown. It is precisely this pattern that will lend to the rise in demand for fintech’s services given that they have operated for some time without a physical presence and as such are perfectly suited to adapt accordingly to this shift.
In a few short years, customer attitudes towards and interaction with banking products and services have evolved dramatically. Consumers today are more attracted to brands that offer more personalised and convenient experiences. This has led to greater preferences to seek out more intuitive modern banking software, which seamlessly responds to consumer needs. The emerging technologies deployed by fintech providers have shown consumers more sophisticated and intelligent user experiences are available, which has meant there has already been a rising permanent switch to digital pre-COVID.
Unfortunately for many heritage banks, the move to digital during COVID-19 has drawn harsher attention to this distinction. For customers who have traditionally managed their finances solely in brick and mortar locations, the inefficiencies are rife. Many scenarios have seen customers unable to shift quickly enough to mobile apps, struggle to get past hold to customer services for what feels like hours, and feel as though they don’t have enough financial control or stability.
Against this backdrop and the impact of COVID-19, other core traits of fintech providers and neo-banks in contrast to heritage banks make it well poised to come out on top when winning consumer trust and loyalty. The fintech industry’s business model has had yet to fully demonstrate its strength to combat economic uncertainty, until now. From adaptability to self-sufficiency, and speed to market and agility, fintech players are in a good position to ensure customers’ experience with banking runs smoothly during this challenging period.
Making money go further
The COVID-19 crisis has in many ways validated the foundational principles of many current and emerging fintech players: consumer control, rich personalisation, accessibility and transparency. Now more than ever, the average consumer will be searching for new and creative ways to sure up their finances. The pandemic continues to threaten job stability, demonstrating the need for fintechs to present greater opportunities for consumers to have more robust financial backup plans, including alternative sources of income, such as owning income producing assets.
The pandemic has proved itself as a wake-up call to everyone and has undoubtedly sparked a rise in motivation to take full control of finances. We are likely to see a steady rise in investment and trading options to seek out better returns than traditional savings accounts. Yet while investment apps will grow in popularity, for those starting out as investors, the barrier to entry is still very high. When it comes to accessing and effectively managing investments, there is a real need for a platform accessible enough for market participants who do not have the same level of capital and knowledge as high-profile investors to get involved.
A new period of innovation is upon us and this time over-hyped products, offering very little in terms of new functionality and customer benefit, won’t cut the mustard if they don’t provide an effective way to truly help people to manage and improve their finances. To truly be set apart from traditional banking infrastructures and even some of the most impressive fintechs when increasing wealth capital, customer expectations will be high. All-in-one digital platforms leveraging AI and other cutting edge technologies when providing customers with the opportunity to grow their wealth will redefine a promising and much needed era for consumers.
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.”
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