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DECISIONING AT SCALE: WHY BANKS NEED TO RADICALLY CHANGE THEIR OPERATING MODELS NOW

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Brian Holden, Global Director, Financial Services at SAS UK & Ireland

 

Twelve years ago, the banking industry suffered deep reputational damage in the wake of the 2008 global financial crisis. Bankers took the blame – in some cases deservedly – for large-scale economic problems that took a severe toll on many of society’s most vulnerable people. The crisis severely shook banks and financial institutions. Some, like Northern Rock, failed altogether. As a result, public trust in the banking sector has never fully recovered.

In 2020, we find ourselves faced with another global crisis – although this time, there’s no credible scapegoat for politicians or the media to blame. COVID-19 is nobody’s fault, but its impact on both society and the economy will be unprecedented. We will need to take tough decisions. But if banks succeed in supporting their customers through this difficult period, those customers will remember. This may, in fact, be the last and best hope for the banking sector to recover the trust and confidence that it lost in the last decade.

 

Reserves of strength

The good news is that banks are in a much stronger and sounder position today than they were in 2008. Regulations align better with economic reality, the capital provisions are greater, and the Bank of England intervened quickly to suspend all bonuses and dividends as soon as COVID-19 hit the UK. Customers are better protected too. And with the Financial Services Compensation Scheme (FSCS) effectively guaranteeing all retail deposits up to £85,000 (£170,000 for joint accounts), a bank run of the type that wrecked Northern Rock is very unlikely.

 

The worst is yet to come

However, there are difficult times ahead.  The government’s furlough scheme currently buffers banks. This has helped keep businesses afloat and employees paid. But these funds won’t last forever, and unless there’s an immediate bounceback after the lockdown, the worst of the crisis is surely yet to come. Not so much a “V-shaped recovery” – rather a “long tick.” When the money runs out, banks will have to start making difficult decisions, especially about lending.

What will make these decisions even more difficult is that the crisis has turned a lot of received wisdom about creditworthiness on its head. Who would have thought at the start of this year that airline pilots might be a credit risk, for example? In fact, many professions are likely to see significant reductions in business volumes and income over the coming months. And since many professionals are used to leading relatively credit-hungry lifestyles with large outgoings, the strain will soon start to show.

 

Struggling to scale

This is a problem because many banks currently take a bare-minimum approach to credit risk modelling. Most banks make day-to-day credit decisions using dated processes and data. They base them on a very broad segmentation of the customer base because when times were good, it didn’t seem worth the trouble to drill down to the individual level. Meanwhile, anomalies and unusually complex cases are referred to senior decision makers who use their experience to make the right calls manually, with expert judgment.

This approach simply won’t work in a situation where many more businesses and individuals are skating on thin ice, and a much larger proportion of decisions require sophisticated analysis. There just won’t be enough expertise to go around.

Until now, this hasn’t been an issue – after all, at high tide, most ships can sail serenely. But when the tide goes out, it’s the boats with the deepest draught that are the first to run aground. In the same way, it’s the banks with the most historical baggage that are in the greatest danger. If their legacy systems, siloed processes, organizational structures and change-resistant cultural norms make them unable or unwilling to adapt, they won’t have the agility to respond to the new reality.

In short, the UK’s largest banks need to act now. They need to put the right decisioning processes and infrastructures in place to support their human experts in making more tough decisions, faster and more accurately. And they also need that technology to guide a new generation of less-experienced decision makers, helping them make the right calls to help customers get back on an even keel.

 

Intelligent decisioning

The only option is for banks to level-up and simplify financial decisioning processes by adopting a more powerful, real-time and comprehensive approach to credit decisioning – one that will satisfy regulators and comply with all internal and external audit standards. A decisioning fabric.

At SAS, we’re helping banks around the world do just that. Our approach, which we call “intelligent decisioning,” enables decision makers to assess each individual case on its merits and take the right action to support each customer.

This ability to make responsible decisions and act effectively in real time is vital for banks to support vulnerable customers through the COVID-19 pandemic and to help rebuild “UK plc” in its aftermath. Moreover, in the longer term, intelligent decisioning will help bind banks and their customers closer together and demonstrate that banking is more than just another utility service, like electricity, water or gas. By getting closer to their customers and understanding their lives, needs and desires, banks can shift the perception of the value they offer and assume a role as trusted adviser and business partner. They will become an integral part of the fabric of the networked society.

 

A people business

This is important because one of the clearest lessons of the COVID-19 crisis is that banking is a people business. It isn’t just a matter of impersonal financial transactions; it’s central to people’s lives. There is an emotive power to financial decision making, especially when it can make or break a small business, save someone’s home from repossession, or just tide them over for a few months when money is tight.

That is a great responsibility, and it has serious consequences. Get it right and customers will remember; let them down and they will never forgive you. By empowering decision makers with fine-grained insight into each customer’s unique situation, banks have the potential to rescue cash-strapped businesses and help struggling households find their way back to financial security. By following this path, banks can win back the good reputation they lost in the aftermath of the 2008 financial crisis and play a central role in the UK’s recovery from the COVID-19 pandemic.

Banking

TO ENABLE BETTER LENDING FOR PEOPLE AND BUSINESSES, WE HAVE TO LOOK TO OPEN BANKING

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By Iain McDougall, CCO of Yapily

 

A recent FCA study found over 14 million people were grappling with financial issues at the end of 2020, representing more than a quarter of the UK adult population. The picture is similarly tough for SMEs, too, which have been impacted hugely by lockdowns, loss of earnings and more; it’s estimated the pandemic will cost SMEs an extra £173,000 in debt per year.

This is resulting in a lack of lending options for both consumers and businesses, as well as expensive or high interest loans, or worse, rejection from lenders all together. This in turn is driving unaffordable lending, and penning consumers and businesses in an ongoing and irresolvable debt cycle – at a time when they need the most support.

One of the biggest causes of this lies in lenders relying on credit scores and credit bureau data to inform their decisions, which simply aren’t accurate enough to truly get the full picture of a borrower’s financial situation.

The case for using Open Banking data in lending decisions has never been stronger.

Data accessed through Open Banking permits lenders to retrieve accurate information about the borrower’s financial history. This can provide more accurate assessments, and therefore enable fairer lending decisions.

 

Credit scores aren’t helping consumers

Take NHS workers as an example. Despite working tirelessly throughout the pandemic, NHS workers make up a sizable portion of the UK adult population currently struggling with debt.

Iain McDougall

An independent report from the University of Edinburgh Business School, in partnership with Salad Projects, found NHS workers are heavily reliant on long-term overdrafts and high-cost credit, where APR is as high as 1,333%. Almost all (93%) respondents said they use one or more types of credit or loan, compared with 75% in the wider UK population (according to the Financial Lives Survey). More than half (58%) use up to three loan providers and 68% use up to four loan providers.

This situation is the result of relying solely on credit scores. While these are the near-universally accepted method of determining credit terms, each credit reference agency has a different method for calculating a credit score. They rely solely on financial history, whether they’ve previously defaulted, or failed to get credit, and not a consumer’s actual financial position, whether they’ve recently got a pay rise or new income, to see how likely it is they will pay back any money borrowed. This can mean, no matter if a consumer’s financial position has changed, they can’t get a better loan because of a previous discrepancy.

 

The challenges facing SMEs

These issues are not just limited to consumers. SMEs, particularly those in the hardest hit industries like hospitality and travel, have struggled to access credit throughout the pandemic.

While many may have been thriving pre-pandemic, their lack of ability to turn a profit during lockdowns, meant they needed extra support. In an effort to keep these industries alive, we saw numerous government backed loan schemes launched, such as the Bounce Back Loan Scheme, to help struggling businesses survive. In total, these schemes have provided almost £180 billion worth of lending to date, supporting over a quarter of businesses in the UK.

However, the soaring demand from businesses in need of these vital funds meant lenders were unable to keep up and many businesses did not receive support quickly enough. What’s more, providers may register these types of loans with credit reference agencies, which means companies that previously had strong credit ratings may see their credit scores negatively affected by any delayed or missed repayments.

This is why it’s vital for lenders to get lending limits right the first time round, so SMEs can avoid potentially adding to their already growing list of debt and thrive in a post-pandemic world.

 

Enhancing lending with Open Banking 

Using Open Banking can add a much-needed layer of trust and loan personalisation for businesses and individuals. By basing credit decisioning on real-time financial data, lenders will be able to create a more accurate picture of their financial situation; and so make fairer credit offers.

Through adopting Open Banking principles, lenders will be able to onboard new customers and grant loans more efficiently, providing businesses with the cashflow required to maintain their workforce and support the economy.

With the borrowers’ consent, it will also give lenders oversight into how the economy is recovering, and enable them to monitor the rate at which the individual or business can expect the loan to be repaid. Meaning they can step in and provide extra support if and when required.

Open Banking provides what credit scores alone simply cannot – real-time insight into an individual’s or a businesses financial position right now, not three to six months ago. By leveraging the data that is readily available to them, lenders could achieve far better and more responsible outcomes. This will reduce the risk of loan default – for both businesses and individuals – and lead to more responsible lending decisions that can help people and businesses bounce back after what has been a difficult year.

 

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Banking

BRAND CONFIDENCE: HOW HAS OPEN BANKING EVOLVED AND DO CUSTOMERS TRUST IT?

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By Geoff Boudin, Director at Revive Management

 

The open banking industry is growing by 24% year-on-year, and is expected to be worth more than £31 billion by 2026. The implementation of the 2018 Payment Services Directive known as PSD2, was intended to boost competition in the name of open banking. The directive, which set out to make payments more secure, by requiring banks to share the data of customers who authorise it with third parties. This allows customers to share their financial information with authorised service providers such as budgeting apps and other third-party money management tools. It was initially called for by the Competition and Markets Authority (CMA) to level the financial playing field and empower consumers by giving them more ownership over their financial data.  So, two years on, what impact is open banking having on consumers? Do they trust it? If so, how can brands build on this trust to offer more a more personalised yet non-intrusive experience that delivers the data to further improve their service offering.

 

What difference has open banking made?

Prior to PSD2, which came into force on 13 January 2018, banks had full authority and jurisdiction over their customers’ financial data. The idea of a bank giving up some of that data to a third party for the benefit of their customers was unheard of. This closed ecosystem, however, runs against the drive towards digital openness, connectivity and convenience. Our digital worlds were opening up and data was becoming democratised, and banks were being left behind. Challenger banks such as Monzo and Atom, which embraced innovative new apps and features, had been making headway for years, and there was a sense that third-party customer-focused innovation was rumbling away under the surface. However, that innovation was stifled until PSD2 laid a path for it, requiring banks to open up access to customers’ data at their behest.

It’s thanks to PS2D and open banking that customers are now able to connect their bank account to a third-party app that can help them better manage their money or sign up to a platform that allows them to access all of their accounts and credit facilities in one place. This allows customers to control their finances as never before.

 

Driving innovation

Empowering and improving the customer experience is one great achievement of open banking. Another is the innovation it has prompted across the entire financial sector. Even traditional banks like HSBC prepared for PSD2 by rolling out its own ‘Connected Money’ app, which allowed its customers to view data from all of their bank accounts – as well as mortgages, loans and credit cards – all in one place. This value-add to the customer experience probably wouldn’t have seen the light of day if not for the competition spurred by PSD2 and open banking. Many other banks and financial services providers have followed suit, offering new customer-centric features based around convenience, visibility and control.

Open banking is a huge step forward in the financial world. So why do some still liken it to a sleeping giant? What’s holding it back?

 

Managing trust and data security

More than 2.5 million consumers in the UK are now happy to connect their accounts to trusted third parties in exchange for some value-added benefit. That’s up from 1.5 million in 2020, no doubt driven by the competitive innovation brought about by PS2D. However, open banking adoption across the rest of Europe seems to have been much slower, and even growth here in the UK is beginning to plateau. While some might blame this on Brexit-induced regulatory changes, such as UK firms no longer being able to use the EU’s certification standards to share customer data after June 2021, there is much more at play.

A Europe-wide survey by thinktank ING polled 13 countries – including the UK – and found that only around 30% of consumers were happy for companies to share their data even after they had given consent. What’s more, only 35% of those polled had even heard of open banking capabilities. This points to issues surrounding data security, trust and awareness – all hurdles that can be overcome by banks, financial services providers and fintech innovators.

To make the most of open banking, banks will have to innovate and forge fintech partnerships with companies using their data sets. That will enable them to enhance existing products and leverage new fintech products being created with their data which will, in turn, benefit their customers.

This process of innovation has already largely begun, but if brands are to take full advantage of all that open banking has to offer, they still need to bridge the trust gap with consumers. We see consumer education, especially in the field of security, as having a key role to play in building confidence and consequently optimising uptake of open banking.

 

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