Given how new technologies have been revolutionising customer experience across a variety of sectors, proclaiming the importance for banks to embrace digital transformation may sound like old news. Haven’t all banks already created compelling online banking services by now, to satisfy the tech-savvy consumer’s demand for anytime, anywhere banking?
Well, no. The banking and financial services industries have traditionally been digital laggards, partly as a result of the highly regulated industry in which they operate and partly because senior decision makers have been slow to recognise the potential ROI. We are now entering a critical new phase in which intelligent machines are enabling – indeed, compelling – banks to fundamentally see and do everything differently. With the growing threat of FinTech firms increasingly gaining traction with consumers due to the accessibility, flexibility and availability of the financial products which they provide, banks now have a significant incentive to accelerate the move into the digital age.
Embracing the digital age
Digital transformation will affect all working practices and the way banking organisations are structured. New intelligent technologies for augmenting human performance will make it easy to achieve things that seemed impossible before.
Employees will become more speedy and productive – as well as happier and more fulfilled.
Banks will be able to reach incredible new levels of efficiency, accuracy, safety and security, and adopt radical new approaches to the way products and services are constructed.
Banks will soon be able to digitise every conversation they have with customers and then use algorithms to anticipate problems – for example, with contactless cards or credit card misuse. Based on these predictions, glitches can be prevented before they even arise.
Another way that intelligent technology can create a win-win for banks, staff and customers alike is with Robotics Process Automation. Machines can be programmed to do mundane, repetitive tasks, thousands of times faster and more accurately than humans. This frees up employees to do more fulfilling work that needs a personal touch – significantly improving customers’ experience all round.
Reaping the benefits of early adoption
Not all banks have been slow to embrace digital transformation. Here are some examples of how digital innovation is already benefiting organisations whose technology-embracing boldness is paying off:
JPMorgan Chase
The global financial services firm recently introduced a Contract Intelligence (COiN) platform to analyse legal documents and extract relevant insights and data. If their staff manually revised 12,000 annual sales contracts, it would take around 360,000 hours. With Machine Learning technologies, the same task can be done in minutes.
The Bank of America
Meet ERICA, who works for The Bank of America. You can’t shake hands (she doesn’t have any). This is the first time Artificial Intelligence has been used to help customers manage their savings. ERICA does this using AI, Predictive Analytics and Conversational Interfaces.
N26
N26 describes itself as ‘a bank account for your phone’. Using an International Bank Account Number, customers can do everything they could with a traditional bank, except faster and from anywhere. The app is integrated with Pulse26, an analytical virtual assistant that provides personal insights based on each individual consumer’s needs.
CapitalOne
CapitalOne was the first bank to offer a new way for customers to interact through a completely different channel. It integrates online banking with Amazon Echo so that customers can ask Alexa (the virtual assistant in the device) real-time information about their bank account, and perform transactions just by using their voices.
Citibank
Citibank has recently acquired Feedzai, a Data Science company that works in real time to identify and eliminate fraud. By constantly and rapidly evaluating vast amounts of data, Feedzai identifies suspect activity and alerts customers immediately.
Act now or be left behind
As the above examples show, this technology is already revealing some astonishing benefits for financial institutions. And yet, many established banking organisations are still a long way from embracing this next stage of digital transformation. According to a recent PwC study, two banks out of three in the US have not yet adopted any meaningful application of these powerful new tools.
There are various reasons for this, such as operational, regulatory, budgetary and resource constraints. But the fact is, we are at a once-in-a-decade, pivotal moment – similar to the dawning of the internet age, back in the nineties. Leaders must transform how they run their banking organisations and embed these new technologies in their business or risk being left behind by the competition.
For those banking organisations looking to press ahead with their digital transformation journey, here are some important considerations:
Recognise the importance of agility
With the maturing world of powerful intelligent technologies such as AI, organisational agility is more essential than ever before, and many established financial institutions still lack this key requirement to digitally transform their businesses.
Engage the entire organisation
It’s imperative to have engagement from all levels of the organisation, from board level downwards. This is a fundamental transformation programme that will touch every aspect of the business. To truly benefit from these innovations, an entire organisation will need to be engaged in the journey and adopt the mind-set necessary to embrace the new technologies.
Be measured about the potential results
The potential benefits of the new technology are enormous, but it’s safer to be conservative with estimates – they will still be impressive. Organisations should exercise some healthy caution, perhaps born out of previous investments in technology that only delivered marginal improvements.
Demystify the terminology
Machine Learning, Intelligent Machines, Cognitive Platforms, Deep Learning, Intelligent Technology, Artificial Intelligence, Robotics, Robotic Process Automation, Intelligent Products, Virtual Assistants, APIs…. the list goes on and on. These new capabilities are wrapped in a language that to many is impenetrable. Find ways to simplify it. Compile a glossary. Educate everyone so you’re all speaking the same language.
Create powerful practical examples
It’s important to communicate effectively at board level, in a way that demystifies the potential of the technology. The best way to do this is by creating powerful examples that show this intelligent technology in action. Take a look at how IBM is demonstrating what these technologies can do: https://www.ibm.com/thought-leadership/you/uk-en/.
Bring in business areas early
Reinforce the idea that digital transformation is much more than a big IT initiative. Bring in other business areas early to work on proof of concepts.
For the first time, the technologies now exist to radically transform all aspects of a banking organisation. The potential of digital transformation is yet to be fully realised but the warning signs for banks are clear – those that don’t act now to embrace the future will rapidly be left behind.
The United Kingdom, specifically London, has built a position as Europe’s primary financial hub, bridging the gap between the European Union and Asia, the United States and other regions. After Brexit comes into effect in March 2019, this once unassailable position will no longer be certain if it becomes more difficult for banks and other financial enterprises to provide services to EU clients due to a loss of ‘passporting’ rights – if no contingency plans are made.
Many financial institutions are not waiting to see how Brexit plays out and are seriously considering – or already planning – to move at least part of their operations to remaining EU countries in order to be prepared for any fallout from Brexit. Hiring rates in London’s financial sector have already halved, according to LinkedIn – reportedly due to the uncertainty surrounding Brexit and how it will impact the industry. Research from EY shows almost a third of banks and asset managers in the City of London confirmed that they are looking at moving staff to locations such as Dublin, Amsterdam and Frankfurt.
As a result, teams will be scattered across numerous time-zones and locations, with more employees likely to be working from remote locations, including their homes. Connecting a relocated and dispersed workforce is no easy task, and if the process is not well managed, it can cause serious disruption to day-to-day activities. Banking and financial services organisations need to have the right tools in place to ensure far-flung teams can communicate effectively and implement a standardised and coordinated way of working so that employees do not have to flit between numerous applications to complete tasks, collaborate on projects, monitor progress, manage resourcing and track deadlines. Fortunately, disruption can be minimised by utilising tools that nurture joined working environments despite geographical barriers and offer structure that keeps employees at different locations on the same page – in real time.
The challenges of collaborating across borders
Remote working is not new phenomenon – it’s widespread and a hugely popular way of working –
But many businesses are still trying to overcome the barriers it presents to communication and collaboration. Clarizen’s own research has shown that some of the most prevalent issues workers struggle with when working remotely include:
- Struggling to communicate with colleagues;
- Difficulty to remain efficient;
- Limited access to up-to-date documents;
- Finding it difficult to prioritise.
The banking and finance industry needs to ensure that these issues are resolved before Brexit takes place. Otherwise, the serious and negative impact they have on effective collaboration, productivity and business profitability. Having to relocate operations is just one area of business that organisations need to navigate as the UK continues its withdrawal from the EU.
Internal company restructuring, product and services analysis and engagement planning are also elements businesses have to plan and execute, which is why it’s so important that teams have tools that facilitate a coordinated work environment during this tumultuous period.
Equipping employees with the tools to succeed
During Brexit and beyond, banking and financial organisations need to ensure employees are equipped with tools that help promote coordination between dispersed teams, while maximizing efficiency. Recent research from Clarizen found that almost three quarters of respondents said that what they specifically need to boost communication and collaboration among employees is technology, structure and support that enables them to overcome geographical barriers and the gap between time zones to increase productivity, ensure management oversight and foster flexibility.
What can help achieve this is a cloud-based platform that enables real-time collaboration across locations and empowers teams to coordinate workflow, track progress, align goals, allocate budget and meet deadlines from any device and location.
Overcoming communication overload
Ahead of Brexit, businesses need to ensure that they pick the right tool to maximize productive interactions between employees. Some businesses have previously used social media apps to facilitate easy and frequent employee discussion – such as WhatsApp and Facebook – in the belief they would streamline communications between workers and reduce long email chains that cause frustration and confusion. Unfortunately, such applications have often only served to encourage non-work chat and oversharing of irrelevant information that doesn’t bring employees any closer to meeting business objectives.
In a bid to become more focused in their approach, businesses have been turning to business-focussed communication apps. A recent global survey showed that, in the past year, companies deployed one or more of the following apps to improve productivity: Skype (39%), Microsoft Teams (14%), Google Hangouts (8%) and Slack (7%). Yet, even then, efforts to boost productivity proved fruitless as they merely became a place for office banter and overloaded people with numerous notifications and interruptions, which negatively impacts productivity.
It’s a modern workplace malady that has been dubbed ‘communication overload’, which is symptomized by workers struggling under the weight of clusters of unfocused messages, meeting requests and unnecessary interruptions. Clarizen’s research indicates that, in the end, apps that fail to directly link communication to business activities, aims and status updates actually hamper collaboration, effectiveness and efficiency. The survey showed that 81% of respondents said that, despite taking steps to improve communication among employees, they still lack a way to keep projects on track and provide management oversight – and only 16% of the companies surveyed said productivity levels were ‘excellent’ – while a nearly quarter said they were ‘just OK’ or ‘we need help’.
Looking ahead to a post-Brexit world
Brexit presents the banking and finance industry with a number of challenges that could put successful collaboration – and ultimately revenues and profits – at risk. However, by employing tools and methods that encourage an environment that nurtures a truly collaborative environment – where communication is in a business context and reporting in real time – the sector can enhance productivity and business agility, taking some of the sting out of any staff redeployments necessitated by Brexit. Even though it’s not clear what shape Brexit will take, there is no reason businesses in the banking and finance sector cannot minimise disruption and its potential costs by providing their employees with an approach and the tools they need to succeed during Brexit and beyond.
Website: https://www.clarizen.com/
As UK banks continue to report their interim results, the forecast remains positive for banking giants Royal Bank of Scotland (RBS) and Lloyds Banking Group. While the outlook is rosy, traditional lenders still face fierce competition from digital challenger banks, with 61% of smartphone owners opting to bank solely online.
RBS is expected to outperform analyst predictions and Lloyds’ strong financial performance is forecasted to continue. Although confidence is high, traditional institutions remain under pressure to maintain market share in the increasingly digital climate. To do so, many are focusing on securing their long-term future by improving customer-centricity, regardless of the short-term impact on profit.
Many traditional banks are looking for novel ways to raise the standard of their customer services, with features such as chatbots and roboadvisors, says Bhupender Singh, CEO of Intelenet Global Services.
Mr. Singh comments: “Despite 42% of people moving to alternative service providers for personal banking needs, over half are choosing to stick with their traditional bank, making these institutions a force to be reckoned with.
“But this does not mean that traditional lenders should become complacent - in the age of the customer, it is crucial that banks can provide advice and support that is truly in the customers’ best interest. One way that banks are streamlining the customer experience, is by using chatbots and AI technology to carry out customer interactions.
Mr. Singh continues: “For instance, voice recognition software can be paired with customer records and predictive tools to identify a specific customer and confirm which department they require before sending them there directly, without the customer having to explain their problem multiple times. This dramatically improves the customer experience and, for one bank, has reduced the average handling time by 40%.
“But while technology is a key part of the solution, it is important to remember that it is simply that – a part of the puzzle. A human touch is still essential to solve many of the financial issues that people face. Much of the best automation and AI technologies in the banking sector takes away the burden of repetitive tasks for staff, allowing them to focus their efforts on quality in-person service.”
(Source: Intelenet® Global Services)
What’s that saying? You’re more like to get divorced than you are to switch your bank account. Below Matt Shaw, Strategist at RAPP UK, explores why high-street banks need to re-connect with young customers or face losing the next generation to digital first challengers.
For ten years now consumers have been used to getting less from their banks. Lower interest rates, fewer high-street banks and little reward for their “loyalty”.
Against this backdrop a quiet revolution has begun. New digital first challenger banks like Monzo, Atom and Starling are offering something genuinely different and are hoover-ing up younger audiences in the process. What’s more, Open Banking is set to explode consumer choice and making comparing and switching banks easier.
While these challengers pose a threat, established retail banks have a limited window of opportunity. At the moment young consumers are using these challenger bank accounts as “play money”, a supplementary account, allowing them to budget better, rather than a direct rival to the Big Four. However, this “play money” perception is likely to change as customers become more engaged challenger banks’ products and their brands become more established and more trusted.
Traditional retail banks need to sit up and take note if they want to capture the next generation of customers.
Driving preference
Whilst loyalty may be dead, retail banks still have an opportunity to deliver value to their customer base and protect against digital first challengers. Rather than aiming for (and missing) loyalty, retail banks should look to consistently drive preference across the customer lifecycle.
At RAPP we use three key elements to drive preference: Value Perception, Customer Experience, and Generosity.
Good customer data is central to all three of these elements. While new digital first challenger banks have no issues with this, it’s safe to safe that many retail banks will need to get their legacy data and systems in order if they want to deliver these elements.
Value Perception
One of the easiest ways retail banks can drive preference is by reflecting and reminding customers of the value they receive and the relationship they have.
Digital first financial services are currently leading the way in this space. Savings app Chip uses AI to analyze customer data and recommend opportunities for them to squirrel away money into their account in real time. Whilst this is a great new customer experience, the app is also amazing at replaying value back to customers. When money is transferred from your account, their friendly chat bot notifies you with an encouraging message and a humorous gif telling you that you’re #winning. When you ask for your savings balance they not only replay your balance, but your savings to date, your interest rate, the value of this interest and when this interest is due.
Customer Experience
The customer experience gap between digital first challenger banks and established retail banks couldn't be much greater at the moment. Whilst new challenger banks have no high-street stores, they’re beating established banks where it counts, through digital and mobile apps.
Monzo, Starling and Atom offer a stark contrast to the mobile apps of established banks. Their platforms offer spending analytics, integration with third parties and enhanced functionality like bill splitting and money pots; in comparison established banks can offer only the most basic functionality (balance enquiries, payments). Moreover these new challenger banks are constantly evolving their offering, while established banks can only give their apps a UX facelift with no new functionality.
New challenger banks are raising expectations of what a bank should offer consumers, particularly among urban millennials – something established banks should be concerned about as they are the most likely audience to switch provider (32% say they are “very likely” to switch in the next year[1]).
Generosity
Generosity is all about recognizing and rewarding customer engagement through regular value-adds that make customers feel valued.
Retail banks need to get out of the habit of using the transactional rewards based on cash back and increased interest rates. Instead, retail banks should looks to create value through customer data and collaboration with third parties. Both Starling and Monzo have added “marketplace” functionality to their apps allowing third parties to offer customers their services. Starling have two “loyalty” schemes (Flux and Tail) offering customers instant cash back when they make a purchase at restaurants and shops. However, this functionality has the ability to grow exponentially, and into non-financial generosity, with Open Banking making it simple for banks and third parties to interact.
Established retail banks can no longer sit back and let inertia reign supreme. Not only are new banks challenging the status quo and winning younger audiences, their nimble user interfaces and pristine databases mean they are also the most likely to profit from the future innovations of Open Banking. Established retail banks need to wake up to the challenge and rediscover how to drive preference. They can do this by innovating their customer experience to match new heightened expectations, using customer data to replay value and by smattering their base with product and non-product generosity.
Below Dave Orme, SVP, IDEX Biometrics, discusses the challenging landscape of payments and fraud, the fight against scammers and the obstacles the future will find in a cashless society.
Clearing up the mess left behind by fraudsters is a serious challenge and sees financial institutions having to absorb the monetary and logistical damage of card payment fraud daily. Meanwhile, consumers are left with a feeling of dread when they see transactions, that they know they haven’t made, on their payment card accounts. Finding themselves needing to take time away from work or home, to report stolen cards, cancel cards and wait for new ones. Not only is this frustrating for cardholders, it takes a huge amount of time investment by banks to resource this process. Payment card fraud is a serious problem that affects every one of us.
In fact, card fraud is a serious and increasingly urgent problem. Financial Fraud Action UK (FFA UK) reports that in 2016, fraud across payment cards, remote banking and cheques totalled an astonishing £1.38 billion, an increase of 2% on the previous year. The overwhelming majority (80%) of this fraud involved payment cards; there was a particularly large (30%) increase in the proportion of cards lost and stolen, and these alone accounted for losses of £96.3 million.
There is no single reason for these figures; impersonation and deception scams, as well as data breaches, have all played their part. But the UK is becoming an increasingly cashless state — debit card payments overtook cash payments for the first time recently — so we have no real option but to stop the fraudsters. The obvious question is, how?
Fighting back
Financial institutions currently bear much of the impact of card fraud, and in response are investing heavily in machine learning, predictive analytics and other cutting-edge technologies to beat the criminals. These are having some effect; in 2017, fraud losses on payment cards fell somewhat (which contrasts with 2016, as we have seen), but even so there was still £566 million lost to payment card fraud alone and seven pence in every £100 spent was fraudulent — a very worrying statistic in a society that is rapidly increasing its reliance on cards.
In other words, payment card fraud has been a huge problem for a sustained period of time and the steps currently being taken to stop it are not effective enough.
Human nature
In a society that relies more and more on technology, payment cards are the weak link; or rather, the behaviours of the people who own and use payment cards are the weak link. It is human nature to make the mundane administration of life easier — but we all know how dangerous writing down your PIN because you keep forgetting it (and worse, keeping the card and the PIN together) can be. Many people are also guilty of sharing their PIN and card with their friend/partner/relative to enable transactions without the need to be present. Others give out cards and PINs to trusted people because they are elderly or have mobility problems and getting the necessities of life is so much easier that way. All these behaviours are very common, but they are also making card crime very easy.
People fail to keep their PINs or other card details safe not because they are inherently foolish or lazy, but because PINs are simply unfit for purpose. To be effective they demand a far higher standard of discipline and security from human nature than human nature is ever likely to give. The result is a massive headache for individuals, financial institutions and businesses all over the world.
But if not PINs, then what?
Giving the finger to fraudsters
Biometrics, including fingerprint recognition, is a field increasingly recognised as holding the key to card fraud prevention as such fraud becomes a more and more urgent problem. And while financial services may be looking at large-scale use of biometrics now, in other security-conscious sectors this has already happened. For example, many smartphones (which are themselves fast becoming the twenty-first century replacement for the wallet) are protected via fingerprint authentication, usually via a sensor on the lock screen. Passports are also routinely issued with biometric authentication built in, as are government ID cards. Biometrics are used where security is non-negotiable.
Until recently, including biometric authentication in a payment card was very difficult. This is because it required a sensor to be incorporated in the card and for many years those sensors were too large and inflexible to make that viable. However, there have been breakthroughs in this technology recently and we are now able to deliver a very thin, flexible fingerprint sensor that is easy to add to a standard card, so the major barrier to using biometrics with payment cards has now been overcome.
Looking ahead
Biometrics companies are now working in partnership with banks and other financial institutions, smartphone manufacturers and payment processing firms, to make gold standard authentication affordable, practical and available for payment card users and issuers. This is very good news for those in financial and security businesses, because the roll-out of biometrics in those fields will relieve much of the pressure of fighting what is, frankly, now a losing battle. With the arrival of simple, secure and personal authentication for all, hopefully we will see the demise of that twenty-first century pickpocket that is the payment card fraudster.
This week Finance Monthly talks to Daniel Kjellén, CEO and Co-founder of Tink on the democratisation of data and what this means for both financial services businesses and consumers.
Open Banking was designed to open the retail banking market by giving everyone access to the data they needed to deliver banking services. Initially viewed as a massive boon for fintechs, and a worrying threat for banks, the mindset of the latter is shifting.
They may have been slow to start, but today the majority of retail banks are waking up to the opportunities offered by Open Banking. Banks are realising that the new battleground is the level of valuable insights and product offerings, tailored to the individual, that can win over consumers. And the key to unlocking this customer value? Data.
But CIOs and product analysts will be only too aware that data was relatively unmanageable until fairly recently. Historically, legacy systems and fragmented technology stacks have meant that getting the right data-sets in one place has been a huge struggle for banks.
What’s more, being able to use these data-sets to create data-driven insights and support data-driven sales has proved even more of a challenge. This means that, until recently, banks and consumers alike have been unable to make full use of the financial data at hand to make better, more informed decisions.
Out-engineered or the opportunity of a lifetime?
Banks might still be grappling with trying to make the best of their consumer’s financial data. But heel-dragging is not an option.
For several years, banks have been under siege from all sides. The technology that allows consumers to grant third parties access to their financial data has existed for some time, and agile fintechs have out-engineered banks in the field.
There’s no question that the advent of Open Banking has widened the data floodgates now that banks have had to open up their APIs. With data more readily accessible, third party providers in all sectors - from finance to insurance - can begin to compete with the traditional banks by introducing innovative new products and services.
What’s more, these challengers have the advantage of being more agile with their time to market; getting new software off the shelf and into people’s pockets in a fraction of the time previously taken.
Banking on the future
Banks have work to do. They’ve been caught napping by these nimble fintechs who have stolen a march.
Regulation is really only the rubber stamp on a technology-led revolution that was already well underway. Banks are now waking up to the same opportunities by partnering with agile industry players that can leverage the financial data at hand.
They need to act now to keep pace with the new market entrants who have already tapped into a world where the access to financial data is democratised, to build newer and better products for consumers. Instead of inventing the wheel once again, banks can choose to invest in the best technology that will provide them with the right data-sets that will both give them a holistic overview over their customer’s finances, and the ability to deliver data-driven sales and insights, tailored at the individual.
Why does this matter?
Open Banking has changed the way consumers can choose to manage their finances. By democratising the access to financial data, consumers are beginning to understand, and take advantage of, the benefits of sharing their financial information with third parties.
Once faithful to traditional banks, people are becoming increasingly fickle - flirting with other providers to find the best deal, service or experience on the market.
It might be intelligent personal finance technology that can predict consumer spending habits and provide advice and recommendations based on these predictive insights. Or it might be a current account platform that allows people to monitor and change their mortgage and savings in the same place, despite using different providers.
Whatever the specific solution, consumers are feeling the benefit of increased flexibility and choice, and demand for new ways to manage money is growing.
It really is win-win-win
Banks must stop viewing the democratisation of data as a zero-sum game - where their loss is a fintech’s or another bank’s gain. Instead, they should see it as an opportunity to gain an advantage by ensuring that their data analytics capabilities keep them one step ahead of their rivals.
While aggregation is just one part of the puzzle, the democratisation of data opens up a wealth of opportunities for banks. Data-driven banking will allow banks to make better commercial decisions based on their customers behaviour, while PFM (personal finance management platforms) will help banks give their customers a better experience.
There is a huge opportunity for banks to successfully monetise Open Banking through identifying where they can offer customers a better deal to meet their needs and targeting them accordingly with a personalised offer.
In this brave new world of banking, the winners will be those who decide what their unique offer to consumers will be and focus on doing it better than anyone else in the market. This might be providing the smoothest UX, the best predictive personal finance management platform, or the slickest analysis and insights tools. Or it might be offering the best products in one particular area - for example the most competitive rates on mortgages or loans
Unlocking this opportunity might require developing new customer centric platforms in house or buying technology of the shelf by partnering with fintechs to take advantage of their technology solutions.
But one thing’s for certain. Far from sounding the death knell for the banking industry, the democratisation of data will become the smart bank’s secret weapon for winning their segment.
Online research from Equifax, the consumer and business insights expert, reveals over a third (37%) of Brits believe the UK will be a cashless society within the next 10 years. Over half (53%) of 16-34 years olds believe we’ll be reliant on digital and card payments by 2028, compared to just 22% of those aged 55 or above.
However, the research shows that while the use of cash is declining1, it still has its fans. In the survey, conducted with Gorkana, respondents said coins are their top payment choice for vending machines (60%), parking meters (57%), charity donations (53%), and buses (52%), and paying with notes is the preference for taxis (42%).
While 46% of people use cash less often that they did three years ago, more than half (54%) of respondents use cash either as or more often, and almost three in five (59%) think shops, cafes or market stalls that only accept cash are convenient.
The findings also highlight that although the use of digital payments via contactless cards and online transactions is growing rapidly1, some people are still wary about security. Over a quarter (27%) of respondents don’t feel confident payments via websites or contactless cards are secure, and 26% think it’s difficult to track money spent using digital methods.
Sarah Lewis, Head of ID and Fraud at Equifax, said: “We’re in the midst of an exciting smart payments revolution. We can pay for our lunch with our watches and passers-by are now able to donate to buskers via contactless. This growth of new payment technologies is drawing us closer to a cashless society, but long standing preferences for cash remain in certain situations, particularly among older consumers.
“The shift to digital payments in the new economy raises important questions about the role of different payment methods, and highlights the need to balance the convenience people want with security. As digital and online payments continue to grow, so too does the associated fraud. It’s vital that new technology is maximised to give people the reassurance they need as they change the way they spend.”
(Source: Equifax)
Lawyers have claimed the recent ruling between Christopher & Joanne Doran and Paragon Personal Finance is a new precedent that could mean that banks are liable for another £18bn in payouts.
This could mean huge changes to the way firms operate in this sphere, although there are many parts of the puzzle that remain unclear, namely in regard to commission, premiums and compensation. At this point, banks are on high alert for impending changes to the PPI deadline.
This week Finance Monthly reached out to a number of experts in the legal/banking sector to hear Your Thoughts on the potential for further PPI payouts.
Elis Gomer, Commercial Barrister, St John’s Buildings:
There doesn’t appear to be any basis for the FCA’s statement that there is a fixed tipping point at which a particular level of undisclosed commission becomes unfair. According to the FCA, only those people who unwittingly paid over 50 per cent of their total premium in commission are entitled to compensation. The regulator’s argument that the only appropriate remedy in these instances is to repay the excess compensation over and above that notional 50 per cent level is inconsistent with recent court rulings, and the legal principles around mis-sold PPI.”
Mrs Doran gave evidence that she would not have taken out the policy at all had she known about the commission level. Accordingly, the judge ruled she should be awarded the full amount of the premium in damages. This judgment - whilst not binding on other courts - is likely to have far-reaching significance, showing not only that the faulty FCA guidance is not legally binding, but also that it is a castle built on sand. If claimants challenge it, they could be repaid in full – at a potential total cost of up to £18bn to the banks.
Glyn Taylor, Solicitor, Anthony Philip James & Co:
This judgement is extremely important as the Defendant, Paragon Personal Finance, tried to persuade the Court that the unfairness related to matters that took place at the time of entering into the agreement and that the court should hold that the limitation to bring a claim should start to run from when the allegations of unfairness happened.
The Defendant also invited the Court to follow the FCA calculation, and only award relief amounting to the commission paid above 50%.
The judge wasn’t persuaded by these arguments and held that you cannot make a judgement on the fairness of the relationship without looking over the full course of the relationship, and therefore limitation doesn’t start to run until the end of the relationship.
The court also held that appropriate redress that should be awarded is the full amount of the PPI policy and the interest paid.
The current rule states that customers can claim back money if more than 50% of their PPI payments went through as commission and this information was not disclosed upon taking the policy.
The average commission banks were paid was 67%, which means millions of people who were sold PPI are entitled to compensation.
This decision is welcomed and shows the Courts are prepared to reject the tipping point approach that has been expressed by the FCA and also allows individuals access to justice through the Court.
The case opens space for a renewed claims frenzy as it suggests that even if the PPI policy was not mis-sold, customers could still reclaim due to excessively high commissions that were paid out.
Tim Dimond-Brown, VP Sales and Operations at Quadient:
The news that those with mis-sold PPI policies may be able to claim billions of pounds more in compensation, following a court ruling in Manchester, will no doubt alarm banks across the UK.
It is estimated that only 1.2 million claims have been made out of 13 million potential PPI pay-outs. The large number of outstanding claims may seem overwhelming for banks, but they can successfully deal with this huge number of potential claims by ensuring they communicate using the Three P’s: Process, Proactivity and Proof. Specifically, this means placing a firm focus on internal processes, acting proactively when reaching out to customers and being able to prove compliance will make it far easier for the industry to ride out the storm. Failing to follow this process means do this means financial services companies will run the risk of facing the FCA’s wrath, while damaging valuable customer relationships.
The real winners to emerge from this saga will be the ones who realise it is a wake-up call. We live in turbulent political and economic times – every stakeholder within the Financial Services sector must be confident they are laying the groundwork for full compliance and traceability, so they will be able to ride out future storms of a similar nature.
Stuart Murdoch, Partner, Burness Paull LLP:
With the 29 August 2019 deadline for new PPI claims approaching, we have started to see and will continue to see claims management companies try to drum up new complaint angles in the lucrative PPI compensation arena.
Traditionally, PPI claims were made on the basis of mis-selling. However, a new ground for complaint was established with the Supreme Court’s judgment in Plevin v Paragon Personal Finance. The Supreme Court ruled that a failure to disclose to a client a large commission payment on a single premium PPI policy made the relationship between a lender and the borrower unfair, under section 140A of the Consumer Credit Act 1974.
The Supreme Court’s view was that anything above 50% commission was excessive and automatically unfair. The consensus was that anything which was paid above 50% should be returned to the Customer. That threshold was endorsed by the FCA and is now reflected in the FCA rules. It was quite common for a large portion of the sum which a customer paid for in PPI to in fact be paid to the intermediary as commission.
Christopher & Joanne Doran v Paragon Personal Finance follows on from the Plevin case. It seems as though the County Court judge has decided that customers should get back the whole commission value (ie. 75% in this case), as opposed to the residual percentage above the 50% threshold (i.e. 25%).
The impact of this judgment remains to be seen; however, the court’s decision has not yet been made public and it was issued by a County Court (4th tier). The FCA has already confirmed that it will not be changing its guidance. Plevin was a Supreme Court judgement (top tier), before five Supreme Court justices, and is binding on all UK courts and beyond. By comparison, the County Court has no binding authority on any court in the UK. Even if the case is appealed, it will not have the status of Plevin, which remains the leading authority in this area.
The Supreme Court’s judgement, paired with the FCA’s guidance, will continue to be the guiding lights on this issue.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
Few will disagree that the current banking industry is facing a turbulent future, as the incumbents continue to struggle to keep up with the seemingly endless growth of FinTech “disrupters.” Consumers are now inundated with a vast array of choice in the form of new products and services beyond the boundaries of our imagination. The challenge for big banks is to marry the needs of the current generation with new technologies, ensuring that services can still be provided to millions of active customers while new products are both practical and implemented at speed. This is far from trivial, due to current products being nestled in inflexible legacy technologies making it complex and costly for them to be changed. The incumbents’ difficulties in tackling this are highlighted by the rapid rise of FinTechs disrupting such an institutionalised and previously untouchable industry. This FinTech revolution has put big banks in an even more precarious position, as their role as the go to financial mediators is put into question.
Risks for the traditional banks have emerged in many forms, ranging from app-like services, which offer very specific products such as Trussle, to more integrated platforms that offer a wider range of services, many of which have carved out a new niche in the industry as “online banks”. The more specialist FinTechs, while often the most disruptive, may be too radical for their own good and over-engineer solutions to manufactured problems that don’t affect everyday consumers. This puts the longevity of many of these services, which could follow Icarian trajectories, at risk. Alongside the uncertainty of the products available, the vast majority of these FinTechs are young start-ups, with little to no brand recognition or trust, something incredibly important for customers whose money is on the line. Consumers are therefore left in a difficult position, to choose the big banks with frustratingly old fashioned but trusted services, or to go for start-ups with attractive products but the lack of a track record and reputation.
While some FinTechs may be flying too close to the sun, the new generation of online banks may offer the solution to the challenges faced by the consumer banking industry. They often boast the same features consumers love at traditional banks, including easily accessible funds in a current account alongside integrated saving and investment accounts, after all they are able to offer Government-backed deposit protection for up to £85.000. Some, for example Revolut, although currently not a bank and hence unable to provide FSCS guarantee, which started out from a modest background in foreign exchange for holiday money, are now allowing customers to access products traditionally offered by mainstream banks from the comfort of your smartphone. These are posing the biggest risks to the big banks, as while it was a FinTechnologically literate minority of consumers that greeted the more obscure FinTechs, online banks threaten to undermine incumbents’ hold on the mainstream market.
While traditional banks are facing threats from the FinTechs, we are still in Wild West territory. The lack of coordination between banks and FinTechs, which is only recently being addressed, means that consumers who want new products and services offered by the FinTechs, with the trust and security associated with traditional banks, are left with few options. In my view, the future of banking will see the rise of new technologies becoming integrated with traditional systems to heal the wounds left by big banks which today’s FinTechs have tried to mask over rather than address the underlying causes. This square peg in round hole approach will cause the incumbents to struggle to hold on to their customers, even when collaborating with FinTechs. Instead they should look to the seamlessly integrated online banks for guidance and co-operation.
One example that illustrates this issue is the unarranged overdraft problem. Overdrafts were first introduced by the Royal Bank of Scotland in 18th Century, and have changed little since. They are of great benefit to both consumers and banks, and hugely convenient. That is, until your agreed limit with the bank is exceeded. For half of the population the agreed limit is nil, hence going overdrawn means immediately paying unarranged overdraft fees. Last year nearly 25 million personal current accounts went overdrawn. The majority of these consumers often have no choice but to knowingly go overdrawn to unarranged levels as they have been offered no alternatives by the big banks. As a result, some also turn to alternative non-bank lenders, such as consumer credit and payday loans which not only put a black mark on a customer’s credit file for six years but also reduce people’s credit scores by an average of 10% within 12 months. This results in more expensive financial products such as mobile contracts or utility bills. This is a real paradox.
Fiinu is launching next year with an elegant solution to this dilemma. Its current account with overdraft extension prevents consumers from paying unarranged overdraft or failed item fees. This is monitored through Open Banking, and allows users’ other current accounts to pre-emptively subsidise the account low on funds to avoid fees. It also allows access to an outsourced overdraft at a fraction of the unarranged overdraft cost. In doing so, Fiinu also improves customers’ credit scores and allows consumers to access to better deals through improved credit files. These things, while possible for ground-up neobanks, are far more challenging for the established players with outdated protocols entrenched through their use by millions of customers.
The future of banking is both exciting and uncertain, however it is clear that the approach of the incumbents, who now see the use in working with FinTechs to suit the needs of a new generation, must try and rectify the structural issues within banks themselves, rather than try to patch them over with what will ultimately become stop-gap measures. The biggest threats to the banking status quo are the rising online banks, which offer both realistic and evolutionary alternatives for the everyday consumer. Their recent successes and growth in the market suggests it is not unreasonable to imagine that in as little as five years, the brick and mortar bank may well be confined to the financial graveyard.
Website: https://fiinu.com/
Ivan Gowan, CEO at Capital.com, looks at the new regulations and asks whether they are all in the best interests of the consumer.
First the boring bit – or perhaps not. On 3 Jan 2018, the European Securities and Markets Authority (ESMA) received product intervention powers, as the Markets in Financial Instruments Regulation (MiFIR) came into force. This allows ESMA to temporarily dictate regulations across all 28 EU member states, either in support of or overruling the National Regulator – in the UK’s case the Financial Conduct Authority (FCA). On 27 March, ESMA decided to use these new powers to intervene in the market for CFD trading. As with many new regulations, the broad direction is to be welcomed – providing much needed protection for consumers – but flaws in the detail could lead to unintended negative consequences.
The intention is to protect unwary and inappropriate consumers from taking on risks they don’t understand and suffering disproportionate financial losses. This is a laudable intention in anyone’s book and responsible CFD providers will already be compliant with much of the detail in these recommendations. CFD providers already have a responsibility to help retail investors manage their risk and align it to their ability to withstand any financial losses. ESMA’s temporary measures provide a salutary reminder and an improved yardstick for providers to measure themselves against getting this balance right.
The central aspect of a CFD which provides both the main risk and the main benefit is the ability to take a relatively large financial position with a smaller upfront margin payment – what’s called leverage. ESMA measures include putting a leverage limit on the opening of a CFD. This level varies according to the volatility of the underlying instrument, from as little as 2:1 for cryptocurrencies to 30:1 for major currency pairs. They also include a margin closeout rule of 50 per cent of the initial required margin, meaning the position must be closed as it moves against the client. Very sensibly, negative balance protection is mandated, which prevents a client from losing more than their deposit – this is already a common aspect of dealing with most reputable providers. ESMA also recognise the importance of new clients to the industry fully understanding the likelihood of success and are proposing the use of a specific warning that details the win/loss ratio.
This all seems very sensible, doesn’t it? So, where is the issue? Well, there are two interlinked issues here. What makes the CFD a popular way of trading the financial markets and hedging out other risks is the leverage it offers - the ability, as mentioned earlier, to take a relatively large financial position with a smaller amount of upfront margin. Clients enjoy using leverage sensibly. Coupled with the risk mitigation measures already offered by reputable providers in the industry, or now mandated by ESMA going forward, clients should be free to use appropriate levels of leverage commensurate with their knowledge and experience. The industry has a responsibility to help ensure they do not over-expose themselves to risk, which is done by way of thorough questionnaires designed to establish their understanding of the risks and practicalities of CFD trading. Responsible CFD providers are increasingly developing platforms that offer users an experience in line with their ability to manage risk. CFD providers can offer less experienced users lower levels of leverage as those users gain the necessary knowledge and experience to take on larger trades. This approach, though not mandated, could and should form part of the provision of a responsible trading environment.
The corollary to not offering appropriate and desired levels of leverage to more experienced users, and the main unintended consequence is that clients simply go somewhere else – somewhere where the protections are either lower or non-existent. But where? Well, in the world of the internet, unscrupulous trading providers abound – either real platforms, simply unregulated, where behaviours are questionable at best, or sophisticated financial scams, with no underlying trading ever taking place – think Wolf of Wall Street. Since February, the FCA has warned about three firms operating illegally in the UK, but unfortunately the FCA website is not bedtime reading for many. But these providers appear to offer users the levels of leverage they seek, levels which the reputable providers are being forced to withdraw.
So, what is the answer? A mix of the above, with the best outcome for the consumer at the heart of all changes; regulations that allow and encourage compliant CFD providers to offer consumers what they seek, while presenting them with risk mitigation tools and targeted education to allow them to go on enjoying the trading experience in a controlled environment – while understanding the likelihood of ultimate financial success. Good regulations will encourage innovations which benefit the consumer, such as some of those we have seen in the recent past: stop losses and limits, which ensure that a trader’s position will be closed as soon as their losses or profits reach a specific point: alerts to notify them when a market hits a certain price, providing them with either an exit or entry point in a specific market: or the game changing developments in mobile app trading.
So, in summary, the ESMA regulations will help to create a level playing field between responsible CFD providers and mandate a number of measures to protect consumers from irresponsible risks. However, the medicine here could be worse than the ailment if the impact of overly restrictive levels of leverage is to drive consumers offshore to unscrupulous operators, where there are no protections and the likelihood of losing your money is 100%. ESMA should consider the imposition of leverage restrictions not as a standalone, but in the context of the other protections in place. Insisting CFD providers make a responsible assessment of the level of risk that a retail trader can take, alongside negative balance protection and the margin closeout requirement, should enable levels of leverage which will keep traders onshore, protected by a compliant industry with a vested interest in sustainability and longevity.
Finance Monthly speaks to Kristinn Gils Sigtryggsson, the Founder of Bankers Confidence ehf, an Icelandic company that offers small and medium-sized banks a comprehensive backup and added value support services to enhance their reputation and confidence.
Tell us about the inspiration behind Bankers Confidence – is it what you hoped it would be?
On 8 October 2008, my family was due to fly back from a holiday in Crete. On the way to the airport, we were told that there’s the possibility of our aircraft not landing, as the Icelandic banking system had collapsed and there could be problems connected to paying for the flight. Eventually, the plane landed and brought us back home, but soon after this and after I had fully understood what really happened, I kept asking myself what could be done to prevent this from happening again? What could be done to build trust and confidence in the global banking system again?
Bankers Confidence is now in the process of building its recourses team and funding to target full-service operations within the next 12 to 18 months.
What would you say was the primary cause behind the 2008 collapse in the Icelandic banking system crisis? Is there anything, in your opinion, that could have been done differently to prevent it?
The primary cause can be traced to the collapse of the ‘too big to fail banks’ in the United States. Some had to file for Chapter 11 but others were kept alive by pumping a lot of public money into them. This immediately hit all Icelandic banks
Yes, something could have been done to avoid this. The construction of the Icelandic banks balance sheets was wrong in a number of major aspects. They had been lending out long-term mortgage loans to support massive investments in the country and they had been financing this by short-term loans from foreign banks. When Lehman Brothers went bankrupt, not only did the American banking system freeze, but all confidence and trust within the Global banking system was lost. Suddenly, no short-term funding was available anywhere.
Even though it can be argued that the beginning of the Icelandic banks crisis was imported, in my opinion, this would have happened sooner or later anyway - all of our banks had been too greedy, trying to grow too fast and consequently, they had been taking unacceptable risks, involving themselves in business deals that carried tremendous risk.
What lessons should auditors take from how the crisis was handled? Are there any that you now keep in mind in your own work?
Auditors’ work will always have to be based on their professional judgement. This judgement has to be based on a comprehensive knowledge and understanding of the environment the client is operating within. Too many of my colleagues concentrate on following the auditing standards, which is good but not enough. The standards are just a manual to be used as a guide, when questions arise on how to handle certain issues. A tunnel vision is dangerous for auditors; a wider horizon and understanding of the business is vital.
In what ways does Bankers Confidence provide safeguarding against the unforeseeable problems that could arise in the future?
Bankers Confidence’s terms of business agreements with small and medium-sized banks will allow them to use what we call the BC Stamp in their PR materials and inform customers and other stakeholders that they are under our independent scrutiny and protection. This could also mean access to backup funds in case of sudden short-term liquidity requirements and access to high-security data backup. For its own security and to be able to safely offer these services, BC will take over the relevant banks’ internal audit risk reporting function, which will be performed on a daily, live assessment basis.
The members of the Board of Directors of Bankers Confidence are highly skilled professionals that have been carefully selected to ensure a balanced mix of extensive senior management experiences. They have all held very senior positions in both large and small banks and responsibility for risk assessment and management. They have held CEO positions in smaller banks, high-level appointments in the European Commission, within the banking sector and CEO roles in insurance.
Our mission is to become visible within the Global banking sector as the people who introduced a new approach to build trust and confidence in the banking sector. This trust and confidence is still missing, even though it’s been nearly ten years since the 2008 crisis.
What are the next steps in Bankers Confidence’s future development?
We are now in the process of selecting two to three banks to participate in our pilot project. This work will take four to six months and during that period, we should be able to finalise the funding and become fully operational.
Website: http://bankersconfidence.net/
By as early as next year more consumers will use apps on their smartphone than a computer to do their banking, according to forecasts.
It has also been predicted that 35 million people - or 72% of the UK adult population - will bank via a phone app by 2023.
Ian Bradbury, CTO Financial Services at Fujitsu comments: “This is a tipping point for the industry. Mobile is rapidly becoming the channel of choice, and it’s no surprise – it’s easy to use, with an emphasis on customer experience and convenience, and it’s with consumers wherever they go.
“However, the migration of banking onto mobile phones will certainly put more pressure on banks to up their security - more frequent mobile banking use, with devices which can be easily lost or stolen, means criminals can potentially do more damage to more people. This is where we will increasingly see banks use higher-grade biometric based solutions to secure banking apps and transactions, which phones are now beginning to incorporate.
“The experience customers have with their mobile banking app will also be crucial in retaining and attracting customers. With many organisations outside Banking setting a high standard of what good customer experience for mobile apps looks like, banks will have to bear in mind that a smooth customer journey for their app can be the next ‘make or break’ element.
“Looking forward, we can expect to see more and more use of voice to control Banking Apps, enabled by the use of AI enabled robotic assistants. Once again, it will be the customer experience that will be key in supporting the uptake of this channel.”
(Source: Fujitsu)
