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2019 IN REVIEW AND 2020 PREDICTIONS FOR THE BANKING SECTOR

Jonathan Shawcross, Managing Director of Banking at Gobeyond Partners

 

2019 saw continued pressure on the traditional UK banks. Margins remained squeezed through rates staying lower for longer; regulatory pressure continued; the ‘tail’ of PPI proved extremely painful; political and economic uncertainty around Brexit prevailed; the investment required for digital-led transformation remained high and the continued competitive pressure from new challengers, all made for a difficult operating environment.  Whilst some of these factors will ease in 2020, don’t expect the situation to get too much rosier for the larger incumbents any time soon.

 

Digital of course remains the big story in town in terms of product and service delivery, in both the retail and commercial sectors.  2019 saw the staggering news that over 1/3 of all UK branches (over 3,300) had closed since 2015.  Whilst the rate of closures finally started to slow in 2019 as networks for the biggest players reach ‘right size’, 2020 will continue to see further closures as customer behaviour continues to evolve and latecomers to the closure process, such as TSB, complete their adjustments.

 

In parallel, 2019 signalled a scale up of the new digital challenger banks and their associated impact in the market – Starling Bank reached one million customers during the year and many challengers continued to see ‘triple digit %’ growth in transaction volumes. Scaling in a stable and manageable way, successfully managing a wider variety of customer journeys and driving to sustainable profitability will continue to be the key conundrums for these new players to solve.

 

In the push for the incumbents to be able to compete against the new challengers, a notable strategic step was taken by RBS, who announced their own ‘digital challenger’ in 2019, with the launch of ‘Bo’.  HSBC’s ‘Kinetic’ for Business customers and Lloyds’ investment in ‘Thought Machine’ (the tech platform behind Atom Bank), signals their own intentions. These moves by the large players gives them the option to compete with the new challengers on a more level playing field, experiment with new technologies such as AI and potentially enables them to leave behind their product orientated, higher risk, legacy systems, sooner. Expect to see more launches of this type in 2020.

 

Beyond such strategic moves, investments by traditional banks in 2019 in the UK continued to shift from back-end operational cost reduction and improvement programmes, into front-end, customer-led investment, with organisations far more focussed on transforming both their digital and non-digital ‘journeys’.

 

Throughout this coming year, we expect to see the profitability squeeze continue in an increasingly difficult UK banking market – this will only make such major investments more and more challenging, yet more and more critical.  These will be difficult decisions to make.

 

Recent Gobeyond Partners client research on the topic of ‘customer experience and digital transformation’ in 2020 and beyond, indicated that there was significant nervousness in the banking sector – only 11% of those surveyed in the industry expected their revenues would increase significantly over the next 12 months. Banking was also one of the most concerned sectors when it came to new technology. 61% of respondents expressing that they were concerned with the impact that the current speed of technological change will have on their own ability to grow.

 

Given that we expect to see an increased use of AI across the sector to drive more tailored experiences and more targeted promotions to customers directly, firms will need to work hard to overcome their fears and ensure they are deploying the right technology, through outstanding customer journeys, to best meet their customers needs.

 

Additionally, 65% of banks also expressed concern about how much changing customer expectations will have on their growth. There was however widespread recognition that customer experience is now seen as a fundamentally strategic issue, with 77% banking respondents agreeing that the priorities in this space should be driven at Group Executive/ Board level.

 

With renewed and refreshed challengers such as Virgin Money, TSB & Metro Bank (all under transformed ownership or leadership following difficult periods) and the second major phase of growth coming at Starling and Monzo, there will be even greater competition in the UK and a further need for pace of change, innovation and customer-led thinking across the sector.

 

Technology is only part of the answer though and for organisations to win in the race for customer loyalty and stronger profitability, organisations will need to successfully marry great technology and innovation with a major focus on what this means for people – customers, employees and partners – in the transformation journey.  Taking this ‘human lens’ will differentiate the quality of solutions offered, drive greater efficiency in getting there and will engage their own people more significantly in the change and in delighting customers.  2020 will be a huge year in determining who will ultimately succeed and who may not be able to make the scale of changes required in time.

 

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Banking

THE RISE OF CHALLENGER BANKS AND HOW LEGACY BANKS ARE TRYING TO KEEP UP

banks

Jean Van Vuuren, Regional VP for UK, Middle East and South Africa at Alfresco

 

The finance world has been going through major changes in the last decade and many banks have become technology companies in almost every way. From online banking and apps to track activity, to the closing of high street branches and the rise of online only banks, this is a global trend that has been hard to miss.

Despite the introduction of challenger banks to the industry, many of us still rely on large, traditional banks to keep our hard-earned money safe. So how do these institutions take inspiration from the new emerging banks and put it into practice whilst keeping themselves relevant to a society that is increasingly reliant on technology? And what is next in the wave of digital transformation for financial institutions?

 

Jean Van Vuuren

Using AI as part of the customer experience

Banks prioritising the customer experience has increased by leaps and bounds in the last 5-10 years, but it doesn’t just end with the launch of an app or the re-design of an online experience. The customer experience needs to be revisited regularly and continually play a core role in the adoption of the latest technology available.

For example, the future of AI in the banking world is very exciting and is completely transforming the customer experience. Voice banking, facial recognition and automated tellers can help create a completely personalised experience for each customer. Someone could walk into a high street bank, AI sensors at the door could use facial recognition to let the teller know who has arrived and they could automatically pull up all the information about their account without having to ask for their bank card or details.

As technology gets more sophisticated, this opens up possibilities for banks to focus on advising customers rather than spending time on transactions and processes.

 

Trusting the security of the cloud for confidential documents

The cloud has completely transformed the way in which we store information on our smartphones, computers and within the enterprise. However, as with any technology it comes with potential security risks. Trusting a third party with your data feels risky in most industries because you no longer feel in control of it, but banks are often trusted with our most precious data – not to mention our money. Therefore, maintaining confidentiality is of upmost importance to banks in order to maintain the trust of their customers.

Financial institutions should make sure that they are not relying on security embedded in cloud platforms to do the heavy lifting. Implementing governance services that provide security models, audit trails and regulate access – even internally, and confidently demonstrate that compliance is key for an industry with so much access to personal information. Whilst working in the cloud offers flexibility, it needs to be made secure with intelligent security classifications and automatic safeguarding of files and records as they are created.

This also brings up the issue of legacy platforms from a security and feasibility standpoint. Fund management companies find that legacy platforms are very expensive and not cloud ready. There is very little room for innovation and it is hard to adapt them to meet customer demands. Even if a fund management company has migrated to a Saas or Paas solution, quite often regulatory obligations and the potential dangers posed by hacking and data breaches mean that they sometimes go back to using an on-premises solution. Instead of backtracking, financial institutions should spend time to understand what the best cloud option for them would be and how they would implement it within the confines of governance and compliance.

 

Going paperless

Discussing going paperless in 2020 may seem like going back to the past, but for many financial institutions making the transition to fully paperless operations is still a work in progress. This is also a key area where challenger banks which have never had paper-based processes have an advantage, they don’t have to adapt simply because they were born paperless. There is also a new generation of consumers that embrace and often expect paperless banking.

While the Fintech industry is intrinsically paperless, banks are still adapting to phase out paper support, but this transition should be an integral part of updating the customer experience. The paperless movement involves moving from simply depositing checks via smartphone to a complete digital experience from end-to-end.

Going paperless also provides an added layer of security in accordance with a rising tide of regulations and government mandates. With digital records, automated management processes allow companies to set up rules around metadata to file records, put security procedures around them and also deleting personal information within retention regulations.

 

Keeping pace with challenger banks who are born of today’s technology

 In recent years, the introduction of technological advances such as digital ID verification, e-signature and risk analytics are transforming the way financial service providers interact with their customers. New challenger banks build whole systems in as few as two weeks and  automate as much as possible. By their very nature, challenger banks are pushing their competitors to be more agile and they are growing exponentially, something which the high-street banks had underestimated when they first entered the market. Created for the digital first generation, challenger banks won market share by putting customer-centric products at the heart of their business. They are also able to improve the product and the user experience quickly according to customer feedback.

Mobile banking innovators are completely disrupting the market and are increasingly leveraging these new technologies to fully digitise their processes, enabling them to deliver new and faster mobile services entirely tailored towards the needs of their customers.

 

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Banking

HOW EMBRACING COLLABORATION CAN DRIVE INNOVATION FOR SMALLER BANKS AND BUILDING SOCIETIES

SMALLER BANKS

– Simon Healy

 

Consumer demand for digital banking products is high. As recent Unisys research shows, half of potential customers say the freedom to open and manage accounts online is a key driver of choice – while a third want a mobile app. So, if banks want to keep attracting and retaining customers, digital has to be on the agenda.

Unfortunately, smaller banks and building societies are facing some serious challenges when it comes to delivering the necessary level of digital innovation. At the same time, competition in the banking sector is fierce, increasing the pressure even further. Something has to change.

 

Understanding the competition

Digital-first neobanks have taken the market by storm in recent years, reimagining how current accounts function and offering innovative services through app-only banking. Customer expectation around digital banking has broadly risen as a result, with these capabilities felt to be a ‘standard’, rather than something that sets a bank apart.

Well-established high street banks – most of whom have a significant number of customers, as well as deeper pockets than your average building society – are also investing heavily in digital capabilities. And all the while, non-bank brands are circling the sector, with many big-name retail technology players expecting to enter the market over the next few years.

Combined, this places serious pressure on building societies and smaller banks, many of whom have limited investment budgets, a smaller pool of innovation resource, and a historical reliance on manual processes.

 

The value of trust

But – as Unisys research reveals – it’s not all doom and gloom for these institutions. While smaller banks and building societies might not have the large investment pots or the internal resource to accelerate digital innovation, they do seem to have strong reserves of customer trust to build on. In the building society sector, for example, nine out of 10 current customers still expect to be a building society customer in the next five years, citing trust in the brand as a key driver.

Meanwhile, customers are more likely to want a digital account offering from a building society than a neobank, highlighting a clear opportunity for building societies to seize – if only they can find the digital fuel to drive their innovation forward.

 

Embracing Open Banking to drive innovation

Once upon a time, product innovation in the banking sector was an inward-looking and investment-heavy process. But now, with the introduction of Open Banking, that could change. Over 60% of consumers who know what Open Banking is believe it’s key to attracting new customers. And with its introduction, there’s a real opportunity for smaller players to develop their products in a new way, delivering fresh customer experiences by integrating with other providers and technologies.

The beauty of this approach is that better customer service (and a broader product offering) can be achieved by collaborating and integrating with other providers, rather than developing the technology in house. As such, smaller banks and building societies won’t be restrained by their limited budgets – instead, they can simply focus on delivering the products their customers need, and the high-quality services they expect.

Although we’ve only seen fairly limited account aggregation so far, this could be taken much further in order to drive significant customer revenues. For example, Open Banking can provide the framework and the safe transmission of data for Embedded Banking, in which banking services are an integrated part of a broader customer service journey.

Most consumers already have some experience of this – just think about how payments function seamlessly in a service like Uber. But this functionality could be pushed much further. Applied in the right way, consumers could be granted the ability to take out a car loan as part of their search for the perfect vehicle. They could even secure a mortgage with minimal hassle during an integrated, online house purchase.

The appeal of this is clear. Embedding banking could significantly reduce friction and empower customers to receive the services they want, where they want them, and how they want them. And this could serve as a valuable distribution opportunity for banks and Building Societies struggling to find the investments needed to keep up with the digital innovators.

 

Exploring the possibilities of collaborative harmony

It’s an exciting opportunity that doesn’t only apply to personal finance: Unisys research shows that consumers would like to see building societies offer more business banking products. With an Embedded Banking approach, businesses could benefit from the ability to access an integrated bank account and accountancy solution, for example. It’s an area smaller banks and building societies could seek to develop.

Of course, this requires a degree of collaborative harmony, with different organisations working in tandem. Yet the general sense in the industry does seem to be a move towards this, in recognition of the fact that outcomes can be improved across the industry by taking a collaborative approach. Ultimately, nearly all financial services know that digital transformation is a vital undertaking to remain competitive – and this can be achieved more effectively by working in tandem with one another.

However, this isn’t a one-off assessment – smaller banks and building societies should keep one eye on the horizon, and reflect on how emerging capabilities like Open and Embedded Banking can help to ensure they don’t lose ground in the future. Customer sentiment is clear, and it’s apparent that consumers want smaller banks and societies to do well – it’s simply a case of embracing the right digital drivers to succeed.

 

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