Steve Biggar, Director of Financial Institutions Research, Argus Research, discusses what's driving the recent pullback in US bank stocks and which names Argus has "buy" opinions on.

The number of purchases using debit and credit cards has more than doubled in the past 10 years, as contactless payments and online retail have driven a change in the way consumers pay, a new report from The UK Cards Association shows.

Debit and credit cards were used to make 16.4 billion purchases in 2016, up 146% from 6.7 billion in 2006. It means that 518 card payments were made every second last year by cardholders both in the UK and travelling overseas.

Over the past decade the growth in the number of card transactions has outstripped the rise in the amount spent, showing consumers’ increasing preference for using cards instead of cash for lower value payments. Last year the average value of a card transaction fell to £43.47, its lowest level in 15 years.

The new report, UK Card Payments 2017, highlights the impact of the growth in online spending and contactless payments. By the end of 2016, four in 10 (39%) card transactions were either online or made using a contactless card, compared to a quarter (24%) the previous year.

Graham Peacop, Chief Executive of The UK Cards Association, said: “Card payments play a central role in our economy, with spending equivalent to a third of the UK’s GDP. As consumers continue to make the switch from cash to contactless and with the rise of the app-economy, we forecast that the number of card payments will grow substantially over the next decade too.”

With card payments providing significant benefits to businesses, the number of retailers accepting cards increased to just over 1 million last year. The number of individual outlets accepting cards has jumped by 63% in the last 10 years to 1.3 million in 2016.

A total of £709 billion was spent by UK debit and credit card holders both domestically and overseas last year. Debit cards represented 75% of this total, amounting to £530 billion. This month is the 30th anniversary of the introduction of the debit card to the UK.

Payment cards were used for three-quarters (77%) of all retail spending in the UK last year. Cardholders spent the most on food and drink (£114 billion), followed by other services (£100 billion), financial services (£80 billion) and entertainment (£57 billion). A third of all card purchases in 2016 were made at supermarkets, while every fifth payment was on entertainment.

In 2016, there have been significant developments in the delivery of digital services to consumers, such as in-app purchasing and a new trend of fusing social media formats with payment capabilities.

In the next decade, the increasing use of contactless and mobile payments, particularly by younger people, will be a major source of growth for debit card payments, the report says.

The volume of debit card purchases is forecast to grow by 57% to 18.2 billion in 2026, four times the number made in 2006. In a decade’s time, half of all debit card transactions (51%) will be contactless. Credit card transactions are expected to increase to 3.7 billion by 2026.

(Source: The UK Cards Association)

We’re living in a data rich world. IBM estimates that 90% of the data in the world today has been created in the last two years alone. This means it’s crucial that businesses keep control of their sensitive customer data. Tanmaya Varma,  Global Head of Industry Solutions at SugarCRM, illustrates to Finance Monthly the true potential of data use in the financial services sector.

For banks in particular, the safe and efficient storage of data is not just a ‘nice to have’ but a requirement governed by legislation and industry standards. I believe that whether on-premise or in the cloud, banks should strive to capture all their customers’ data together in one place. Why? Because it will empower employees with the right information to give customers the best experience possible.

Bringing together data streams

Perhaps more than any other industry, financial services firm have a huge number of channels to collect customer data from; in-branch, over the phone, via social media platforms. This means they need to have the right data systems in place which can bind together all of their data to build a complete picture of a customer.

The right system needs to bring together front-office data – calls, meetings, leads, opportunities – and back-office data – accounts, transactions, delivery schedules, fulfilment and so on. There is also a need, particularly for capital markets, to have external data integrated, for example LinkedIn data (where did this prospect use to work?) and trading figures.

In terms of where the data is stored, in my experience banks generally choose to keep their customer data in the cloud. No modern business – bank or otherwise – should keep their customer data in siloes, as this immediately breaks a 360-degree view of the customer.

Meeting customer expectations

Today’s customers expect the best experience possible. The instantaneous pace we now live at doesn’t leave much time for patience – so consumers expect an instant response to their demands.  This means customer-facing employees need to have easy access to their customers’ background as soon as the interaction begins, if they are to stand a chance of delivering the best possible experience.

Customers need to know that, regardless of the channel, they’ll receive the same level of service and understanding of their needs and expectations. This all amounts to the overall customer experience, which is crucial when customers are faced with so much choice. The threat of losing customers because of bad service is very real. According to Accenture’s UK research, 34% of customers who switched financial providers in 2014 did so because of a poor customer service.

All customer-facing teams (sales, marketing, customer service and so on) therefore need to have the right tools in place. Technology should empower employees in their interactions with customers; giving them all the information they need, when they need it. For example, providing clear information on the customers’ previous interactions (when did they last contact us? What other products do they hold with us?) – to enable a seamless experience which proves to the customer they are valued and understood.

Turning to technology

Looking ahead, AI will become increasingly important for banks when it comes to the customer journey. Many banks are already open to the possibilities of machine learning – and it has to be said, the capabilities of chatbots is becoming very impressive. Swedbank’s web assistant Nina, for example, now has an average of 30,000 conversations per month and can handle more than 350 different customer questions.

But the customer experience depends on both the quality of the data, and how well employees can use it to then bring insight to their interactions. In my opinion, customer-facing employees and technology should work side by side to enrich the customer experience. The role of chatbots, virtual reality, NLP and so on should be to bring efficiencies to business operations, particularly when it comes to automating tasks and processes where humans don’t add value. In fact, a recent report by Accenture found 79% of banking professionals agree that AI will revolutionise the way they gain information from and interact with customers.

If banks rise to the challenge to store and manage all their data together, and their employees are supported with the right training and technology to quickly access customer data and understand – and even pre-empt – their needs, they’ll be on the path to success.

Here, Damon Walford, Chief Development Officer at alternative lending industry pioneers ThinCats, shares his thoughts with Finance Monthly on the merits of alternative finance.

According to Altfi’s latest statistics, the alternative finance industry has originated a total of £8.7billion in loans, and there are currently almost 40,000 companies benefitting from the funding offered by this innovative and fast-growing sector. But why should businesses in need of funding approach such a platform rather than going down the traditional route of a bank loan? There are many answers to this question, but the overarching sentiment from the many and varied businesses that ThinCats has helped over the years is that it offered them a more personal, accessible and human service than they would have received through traditional means.

In discussing the benefits of alternative business funding, it’s important to set the context as to why the sector thrived so soon after emerging. Not long after it came to exist in its current form, we were struck by the financial crisis and most banks effectively pulled up the drawbridge and shut the gates on businesses looking for funding. Naturally, this created a major problem for ambitious SMEs looking to grow, but equally presented a huge opportunity for alternative finance. By offering small businesses a much-needed lifeline, the industry began to establish itself as a worthy alternative and a decade later, thousands of UK SMEs are testament to this.

One major point of difference between an alternative finance platform and a traditional funder is flexibility. For example, a bank’s lending criteria can be governed by a number of factors that don’t necessarily reflect an applicant’s deservedness of a loan; some big lenders take into account how much capital they’ve lent in a particular sector and a business can be turned down if it has reached its designated limit. Such a stringent approach inevitably results in worthy businesses being turned down for loans. Alternative finance platforms, however, aren’t limited by such criteria and can judge each applicant on its merits, on a case-by-case basis, taking a more personal, realistic approach to the transaction.

Alternative business lending also fulfils a large range of loan types from MBOs and growth capital to cashflow lending, across all regions and industries across the board, from the motor trade to renewables, IT, social care and everything in between. It therefore opens avenues for growth, development and expansion that are not recognised by some traditional lenders.

ThinCats are unique in using a network of business finance specialists who work as loan sponsors to help review borrower proposals. A loan sponsor can be a single individual, but more typically consists of several advisors with significant experience in finance, who are there not just to say ‘yes’ or ‘no’ to a business, but to help loan applicants make their case and be confident in their application. They take on the vital task of presenting the funding application accurately and specifically, allowing the business owner to continue running their business whilst providing investors with vital details on the investment opportunity. And by acting as the primary point of contact for the business, borrowers are given a personal touch which doesn’t always exist within the framework of bank business lending.

Furthermore, ThinCats has developed an award-winning, multi-layered, risk assessment model to give UK SMEs more than just a number crunching, ‘computer says no’ experience, whilst also protecting the interests of the lenders.  The credit grading model consists of an in-depth, balanced analysis of a company’s financial health and dynamism, and is complimented by the security grading, determined by the asset to loan ratio.  These scores are combined through multivariate analysis, and then professionally qualified by the credit team, giving all applicants a candid and fair opportunity to access funding.

A number of the worthy businesses that have borrowed via the ThinCats platform have been declined by banks, for one reason or another. Take Jack Norgrove, for example. An experienced member of the building and construction industry, Jack identified the promise in a plumbing and drainage supplier in Kidderminster, and put a proposal together to buy it out. When the bank he was talking to declined the deal due to insufficient security, he went looking elsewhere.

He was put in touch with a business consultant, who took the proposal to ESF Capital, major shareholder in ThinCats and sponsor to the platform, to discuss accessing an alternative business loan. The consultant was able to demonstrate that it was a solid business with a good track record and ESF and ThinCats concurred. The loan was listed on the platform and filled on schedule, allowing Norgrove Building Supplies Ltd to officially purchase the business, and immediately start implementing the development strategy, thereby making the most of a profitable situation in a timely manner.

For many business owners who have borrowed through alternative finance, it’s the very different nature of the platforms which offers the benefit and acts as the draw. Alternative lending firms are more independent than high-street lenders and offer more transparency for borrowers and lenders. On such a platform, if your business appeals to investors, you will be able to raise a loan and have it fulfilled. For many borrowing businesses and lenders, this ability to access investors directly is one of the main appealing factors; the social element of being able to witness investors compete on the platform to back your business with a loan, and become an advocate of your brand, and potentially a loyal customer.

A major benefit for businesses looking to borrow is speed. These platforms are generally much smaller organisations than big corporates, so naturally there can be a more hands-on approach from the outset when it comes to dealing with potential borrowers. With a tighter business framework, there are also less hoops for applicants to jump through, and complicated and unnecessary covenants and conditions are reduced. The time taken from a business first contacting ThinCats with an application to drawing down of the loan is a matter of weeks rather than months, enabling company owners to make the most of business opportunities as they arise.

Alongside these benefits, the alternative finance industry is able to offer competitive interest rates as well as flexible terms when it comes to loans, such as a choice of security terms, a range of repayment options or no early repayment charges, which may not be the case with some traditional loan providers.

ThinCats is one of the pioneers of the industry, and has recently had a record month, setting the scene for a record quarter; with an incredibly diverse pipeline of loans in prospect, it shows that the alternative lending industry is incredibly buoyant, and provides opportunities for SMEs and investors across the board.

The developments and investment that have come with strong institutional backing behind the industry has meant that early niggles have been ironed out, and the sheer volume of loans, investors and borrowers demonstrates the strength of the sector. Borrowing businesses can now have peace of mind that the major players offer an alternative funding package that is worth considering, even before approaching a traditional lender.

John Mould, Chief Executive Officer of ThinCats, shares his thoughts with Finance Monthly on the ins and outs of loan grading, also known as loan scoring.

Credit scoring in the wider world is well documented, and loved and hated in equal measure. But when it comes to accurate analysis in the alternative finance industry, there is huge variability across the platforms.

Because the direct lending industry is relatively young within the finance sector, few platforms have had the chance to build up data-rich, seasoned loan books to use for developing risk prediction models. As a result, many rely on scorecards developed using information from the wider UK universe of companies, partner with credit reference agencies, and use a mixture of off-the-shelf credit risk scorecards, their own metrics and human judgement.

Commercial Credit Data Sharing (CCDS) is expected to kick off later this year; a scheme launched in April 2016 that requires nine major banks to share credit information on all their (willing) SME clients, furnishing finance providers, including alternative lenders, with a wealth of current account and credit information not previously available. This is expected to provide a considerable uplift in the accuracy of credit scoring models over time, and hopefully will facilitate the alternative finance industry in serving a host of currently overlooked smaller businesses.

However, it is not as simple as just having access to information; not all grading systems predict the same event. Some are calibrated on publicly-available data, to predict formal insolvency events; others are trained to predict all forms of company closure, insolvency and dissolutions; still others are trained on proprietary (i.e. not publicly available) customer data, including events such as late payments, not necessarily associated with insolvency, as practiced extensively by the main banks. This is the current challenge that data scientists face: building risk models that predict very specific outcomes; accurately reflecting investors’ experience of risk and return, but also affording borrowers fair and objective assessments.

ThinCats has allocated a considerable amount of time and resources to these issues, and the company is in a position to give UK SMEs more than just a number crunching, ‘computer says no’ experience, whilst also protecting the interests of the lenders.

As a secured lending platform, investors’ risk exposure and net returns are driven by both default risk and the ability to recover capital given a default. The ThinCats grading system makes the distinction between these two risk components, providing every loan on the platform with two grades; a number of security ‘padlocks’ and credit ‘stars’.

In order to produce these relative gradings, multi-layered processing models have been developed in-house. The credit grading model consists of an in-depth analysis of the company’s financial health, the ‘Hybrid Financial Score’ and its dynamism, the ‘Dynamic Score’. These scores are combined through multivariate analysis of the observed levels of insolvencies within the calibration data set (approx. 500,000 borrowing companies in the UK) to give a rating of one to five stars for each applicant. Over time, specific information about P2P defaulters as a differentiated segment, will be integrated into the model.

This is complimented by the security grading, represented by a maximum of five padlocks and determined by the asset to loan ratio, based on the value of the borrower’s assets relative to the outstanding loan amount. All loans listed on the ThinCats platform are then professionally qualified by the credit team.

This all combines to produce an award-winning analysis of information, ensuring that businesses looking for loans are given a fair and balanced hearing, and that investors know that each loan has been thoroughly assessed and vetted based on the most accurate information available; a complex system, but one that proves beneficial for borrowers and lenders alike.

With cybercrime and ransom hacks being a common occurrence in today’s newsrooms, Karen Wheeler, VP UK Country Manager at Affinion talks to Finance Monthly about the opportunities that can arise from these kinds of threats, for the banking sector in particular.

We’re living in a world where high profile data hacking scandals and cybercrime attacks dominate our headlines on an almost daily basis. New research by Barclays has revealed that last year alone saw a total of 5.6m cases of cyber fraud reported across the UK; a figure accounting for nearly half of all UK crimes, affecting both companies and consumers alike.

The newest member of the ever-growing club of victims is the NHS, which last week saw a colossal attack in which criminals took control of computers and held hospitals at ransom. But despite the mass media coverage, it’s not just high-profile organisations that are targeted. Cyber criminals are also after sensitive customer information and payment details that can be traded on the dark web.

Clearly, no one is exempt from the threat of digital fraud, and Barclays’ research highlights the need for education on protection methods amongst UK consumers. In fact, almost 40% of people believe they can’t prevent cybercrime, according to a survey by Get Safe Online.

While there’s no doubt that cyber-crime exists, the number of reported cases suggests there could be a lack of clarity around who can be targeted and what constitutes risky cyber behaviour. Furthermore, who is responsible to protect against digital crimes and how customers can protect themselves.

Step 1: Recognise the opportunity

Following its research, Barclays’ has also announced plans to lead a £10million campaign against digital fraud with a primary aim to educate customers. Its campaign, and the current climate in which cybercrime is rife, illustrates a clear opportunity for banks to step up and adopt a role of responsibility in this field; positioning themselves as experts in educating on risk and how customers can protect their identities from digital fraud.

While some financial services institutions may question whether or not this is their job, given the amount of money they lose as a result of fraud, perhaps the question they should be asking is whether or not they can afford not to address this issue?

However, the truth is that banks are actually among the most trusted brands by consumers when it comes to data security. The Symantec State of Privacy Report in 2015 revealed that 66% of banks were the third most trusted by their customers to handle data; only hospitals and medical services ranked above.  Evidently, there’s already a great deal of trust and brand value that exists for financial services institutions when it comes to handling data, meaning customers are likely to value their banks’ advice. This is something that currently, many are failing to utilise.

There’s a lot to learn from Barclays and by recognising this as an opportunity, not a challenge, banks can enable customers to make better fraud prevention choices, enhance loyalty and build deeper, more valuable customer relations in a fiercely competitive market.

Step 2: Educate and empower

By enabling people to make better security and fraud prevention choices that are backed up by relevant and knowledgeable support when things go wrong, banks can enhance their reputation amongst existing and potential customers. For example, Barclays’ upcoming digital-led safety campaign provides free support to SMEs as well as an online quiz for customers to assess their overall digital safety level - equipped with advice and tips for improvement.

Whilst this might sound like simple advice, it is guidance that could empower customers to be a little more careful about who they disclose their personal information to. Other examples might include a helpline to provide customers with peace of mind. Such a service could increase a customer’s bond and loyalty to their bank.

Step 3: Offer additional services

In addition to educating and advising customers about risks and ways to protect their identity, banks can also take further steps to build loyalty by offering additional and exclusive services. Barclays is now giving customers the opportunity to set up daily ATM withdrawal limits on their mobile banking app, to prevent the risk of security breaches. This is just one example of an additional account protection service that a bank could offer its customers on top of advice.

By taking responsibility and offering customers not just advice, but an actual service that will help protect themselves, a bank can its extend the influence into customers’ lives, improving their value and retention. In fact, our recent study looking at customer engagement found that banks that offer ‘protecting the customer’ products have 13 per cent higher customer engagement scores compared to the average, meaning they stay longer and are more likely to recommend to others.

Cyber-security attacks have, and will continue to, present a significant threat because of the connectivity of modern life, unless action is taken. There is an ever-rising level of customer data online, which both businesses and customers need to take responsibility for keeping safe. But amidst the threat and concern, there is an opportunity for financial services institutions to look beyond this and instead see the challenge as a chance to build more loyal and lasting customer relations.

By Ajit Menon from Blacklight Advisory

Whistleblowing was dealt a further blow last month after fresh allegations emerged over the conduct of senior executives in the City of London.

 Barclays CEO Jes Staley was reprimanded after he attempted to uncover the identity of an internal company whistleblower. Staley was reported to the FCA after he tried on several occasions to find out which staff member had raised concerns about the conduct of senior executives. These revelations represent a fresh setback in the City’s mission to improve its chequered record on whistleblowing.

While putting in place formal whistleblowing procedures is hugely important, fostering a healthy company culture is the most effective way of ensuring people feel they can speak out about poor practice. In good cultures, a safe environment for whistleblowers is a no-brainer. Individuals must feel that they can safely raise concerns about suspect behaviour without fear of recrimination. Banks that do not support staff to call out misconduct risk are doing irrevocable damage to their standing with employees, regulators, customers and the public at large.

Why is culture important? Corporate culture is built on a set of values that is understood and shared by everyone in an organisation. As a consultant, I have worked with a number of different organisations in financial services. Many companies explicitly state that they encourage their staff to be open and speak out when necessary. In reality however, firms often fail to put policy into practice.

Whistleblowing can involve emotion-laden moral dilemmas and conflicting loyalties. The most important thing is to create a culture where employees feel connected with the purpose and goals of the organisation. Companies in which staff feel that they have a stake in the future of the business are much more likely to foster healthy culture of calling out bad behaviour than firms which fail to engage with their employees.

It is not enough to ensure that there is a robust process or set of rules, it also requires the appropriate conditions for people to come forward without fear. Leaders play a big role in creating this environment, with bosses driving the culture in an organisation. If leaders act against the values that the organisation stands for, this serves only to undermine the culture.

Business leaders have to walk a tight rope of ensuring commercial success without compromising relationships with staff and customers. In seeking to identify the Barclays whistleblower, Jes Staley probably felt he was trying to protect the interests of the business. By failing to be seen to be doing the right thing, however, Staley has done Barclays considerable harm.

So what can organisations do to promote a healthy corporate culture? Creating the right atmosphere is not easy and it takes a lot of time, commitment and effort on the part of bosses. Most importantly, it needs willingness to engage in the process. This is not for the faint-hearted.

FIVE STEPS TO BUILDING A STRONG CULTURE

1. Build a culture of openness: Invite challenge and ‘wicked questions’ from your staff. Organise leadership dialogues where junior members of staff are encouraged to engage in challenging dialogue with senior staff. Show them that it’s ok to question their superiors when appropriate.

2. Put your policy into practice: Don’t leave your value statements on walls and mousepads. Get your employees engaged in a dialogue around what they mean, what behaviours are acceptable and what is non-negotiable. Embed your values in your people processes – from how you hire, reward and retain your people.

3. Make the formal process safe: Leave the whistleblowing procedure to the experts in compliance. Do not get involved with the official process. Employees must feel secure that the process is absolutely robust.

4. Be a role model: As leaders, show others that it’s ok to question when we think something is not in the interest of the organisation.

5. Focus on behaviour: It’s easy to get bogged down in procedure and paperwork, rather than making a difference in the real world. Focus on changing behaviour, rather than writing new rules.

Business leaders that fail to live their firm’s values through their actions will pay the price in the future. Culture must be a clear priority in UK financial services going forward. 

Blacklight Advisory is change management consultancy that helps financial service companies overhaul their corporate culture.

According to L&G research, the ‘Bank of Mum & Dad’ is the 10^th biggest mortgage lender in the UK as buyers, and many fi5rts timers, rely heavily on their parents for support.

In the UK, the average mortgage deposit is around £26,000, the average age to lend is around 30, and the average borrowed money is at £132,100.

Finance Monthly set out to hear from a number of experts in the property, legal and banking fields, and heard Your Thoughts on the Bank of Mum & Dad.

Luke Somerset, Business Development Director, Contractor Mortgages Made Easy:

Generation Z is about to start working. Born just before the Millenium they are too young to remember 9/11 but have grown up in a world filled with political and financial turmoil. They are keen to look after their money and make the world a better place. Along with Generation Y these young people have an entrepreneurial spirit like no other generation before them and many of them are either shunning university to set up their own businesses or are going freelance when they graduate. Generation Y and Z are now joining the 2 million freelancers already working in the UK and we have already seen a 26% increase in the number of professionals aged 16-29 registering as self-employed over the last eight years. But these young people might think that they can never get on the property ladder and are destined to be forever known as ‘generation rent’.

However, the Bank of Mum and Dad might be an alternative option or even saving for a deposit. Let’s face it, saving a deposit is the single biggest hurdle between you and owning your own home. It’s not easy to save a substantial deposit when you’re establishing yourself, but thankfully help is at hand in the form of specialist savings accounts such as the Help to Buy ISA which will assist you in saving the 5% deposit you need to purchase your first home. And things have got better for the Bank of Mum and Dad too! Traditionally if your parents wanted to help you to get onto the property ladder, they would have had to write you a cheque and accept that they’d probably never see that money again.

But today there are a range of innovative products which allow your parents to lend you the money you need to buy your first home whilst ensuring that they’ll see their hard-earned savings back from the bank after an agreed period of time.

Mark Homer, Founding Partner, Progressive Property:

As government regulations controlling the type of borrowers which banks can lend to, and the size of the loan as a % of their income bites, many now find the simplest route is to take some of the cash/equity which the older generation sit on in their homes and pass it down to allow those onto the first rung of the ladder.

With the pendulum having swung far in favour of increased bank controls, many believe it has moved too far post the 2008 banking crisis as often happens immediately following periods of crisis. Indeed, there does seem to be a growing consensus that perhaps things could be loosened a little which would allow banks to lend more than 15% of their mortgage book at over 4.5 times income.

As buy to let lending reduces due to stamp duty, tightening lender criteria and the reduction of interest relief bite younger, purchasers are spotting the opportunity to marry family cash with some very cheap bank finance. Often able to secure mortgages at sub 2.5%, many residential purchasers are finding a purchase much cheaper in the long run versus renting.

Jonathan Daines, lettingaproperty.com:

We monitor both the housing and rental market closely and have watched the rise of Bank of Mum and Dad (bomad) steadily grow to where it is today – the ninth largest lender, which is set to fork out £6.5bn this year compared to £5bn in 2016.

But for those who aren’t able to tap into or even unlock the funds of bomad, renting remains the only affordable option which offers flexibility and the chance for tenants to move on as personal circumstances change.

A Which? survey has revealed that 49% of 18 to 34-year-olds regard buying a home as a greater concern than social care costs or energy prices, with some admitting to never wanting to have to tap into parental funds in order to own their own home.

Indeed, as a nation we have always strived to become home-owners, but with prices so high and the demand supply-ratio so out of balance, we have certainly noticed that generation rent is here to stay, with longer-term tenancy agreements more popular than ever in a bid to families in particular feel home from home within their rental property.

Gary Davison, Managing Director, QualitySolicitors Davisons:

As a property lawyer and also a deep-pocketed generous co-director of my very own ‘Bank of Mum and Dad’ (5 to support; I deserve some sympathy, as well as a cold flannel on the forehead at times), I feel suitably qualified to give some guidance on the topic in relation to property matters.

We are Birmingham’s leading conveyancer for residential property purchases according to official Land Registry data, and a significant number of these transactions are on behalf of buyers looking to take their first step onto the property ladder. In recent years a number of our younger clients have taken advantage (quite literally) of the Bank of Mum and Dad in order to secure a larger deposit that grants access to more favourable mortgage rates and cheaper monthly repayments.

For those parents looking to contribute to the deposit, it’s important to be clear whether the contribution is intended as a gift or a loan.

For many parents, their contribution to the deposit is meant entirely as a gift with no intention to claim a stake in the property or recoup the money at a later date. If this is the case, all mortgage lenders will require a deed of gift document signed by the persons gifting the money which confirms that they understand they have no interest in the property and no right to get their money back directly from the property. Gifted deposits will be free from inheritance tax if the donor lives for seven years after the payment is made.

For those parents who intend the money as a loan, one possible option is to take out a joint mortgage with your child. This may help increase their chances of a successful mortgage application, though you may also have to pay Capital Gains Tax when you come to sell the property as it is not your primary residence and if your share is over the annual CGT allowance.

Another option is to create a second mortgage against the property. This would be repaid out of the sale proceeds. However, you would need to gain permission from the mortgage lender first, which may be problematic.

The third option is less formal – a Deed of Trust – which is not registered against the property but sets out the proportions in which the property is held. Many of our clients will be buying with a partner, and whilst parents would happily give money to their own child they may not wish their partner to also benefit in the event of a separation or dispute.

Ultimately, if parents are intending to make any contribution towards a deposit then it is important that they take legal advice to agree on the most suitable course of action.

Shelley Chesworth, Partner and head of the family team, SAS Daniels:

We are increasingly seeing Generation Y turn to their parents to help them get a foot on the property ladder. However, we’re also seeing more frequently, situations that arise as a result of both parties not considering the long-term ramifications of gifting a substantial sum of money. Many are entering into this financial arrangement without giving consideration to inheritance tax consequences or the potential liability for beneficiaries.

Navigating this complex minefield can be tricky. Cohabitees in particular, acting as either a gift provider or beneficiary, need to consider putting certain agreements in place to ensure their gift is protected. For example, a Transfer Deed can protect an investment by expressing particular shares in the property while a Declaration of Trust can be used to set out the parties’ intentions at the time of purchase, so a property can be held in joint names but the trust details how the proceeds should be divided in the event of separation. A Cohabitation Agreement should also be considered as it sets out exactly what was intended as a gift or deposit.

Married couples should also take action. Imagine being gifted a substantial sum by your parents to invest in your marital home, only for the marriage to break down. In this situation the matrimonial assets as a whole will be taken into account and generally divided equally. A Declaration of Trust can be used in this situation but it won’t override the court’s ability to divide the couple’s assets in line with Matrimonial Causes Act. In order to protect parental deposits we’re seeing more people entering into pre or post nuptial agreements – they are no longer just for the rich and famous.

Charles Fletcher, Head of Analysis, Cogress:

The bank of mum and dad is now the ninth biggest lender in the UK with nearly one-third of first-time buyers seeking financial support from their parents. As property prices across the country continue to rise and outpace growth in average earnings, there is little reason to believe this trend will slow down anytime soon.

This year, UK parents are estimated to collectively lend £6.5bn to their children to help them buy their first homes. The bank of mum and dad already provided the funds for almost 300,000 mortgages in 2016, which represented 26 per cent of all property transactions.

Unsurprisingly, the London property market has the highest level of support for first-time buyers from their parents. 40% of homeowners in the nation’s capital have relied on parental finance support to buy their property. With an average house price of £610,418, prospective buyers in London are likely to continue depending on the bank of mum and dad to secure property.

Like any form of loan, lending from the bank of mum and dad is not a risk-free option. Not only can parents go bust like a bank, familial loans can also cause tension in the relationship between the lender and their parents. Problems can often arise due to miscommunication between the two parties, regarding any potential “strings attached” to family financial support such as interest rates, confusion over whether the money is a gift or a loan, and parental concerns about their child’s partner benefitting from their mortgage contributions.

The nation’s rising dependence on the older generation to access the property market highlights not just the current inequities in the market, but also opportunities for developers to create more affordable housing that addresses the needs of today’s first-time buyers across the country

Amy Nettleton, Assistant Development Director of sales and marketing, Aster Group:

The UK’s reliance on the bank of Mum and Dad is borne out of a serious affordability crisis. It’s an unsustainable solution that heavily favours those with parents that can afford to gift or loan them money.

The biggest challenge facing first-time buyers is saving for a deposit. The average house price in the UK currently stands at £218,000^[1] and setting aside cash for a £20,000 deposit is proving difficult for the millions of people facing high costs in the private rented sector.

In the absence of a drop in overall values of homes, we need more attainable deposit sizes. The shared ownership tenure has been offering this for over 30 years, with smaller deposits allowing home owners to scale up their equity over time. With affordability affecting a growing cross-section of first time buyers, shared ownership will have to become increasingly mainstream.

At Aster we have pledged to increase the number of homes available under this tenure, but making shared ownership work is about more than just building houses - it needs backing from lenders. Although there has been some progress in recent months, we are still to see many of the big players commit to offering products for the tenure.

While pressure is on the bank of Mum and Dad, we need increased mortgage provision for shared ownership. But there also needs to be a step-change in the way it is viewed – not just as an affordable tenure, but as a viable solution to a problem that affects society as a whole.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

As technology changes, and thereby so does the customer, a banking revolution is at hand. Here Peter Veash, CEO at The BIO Agency discusses with Finance Monthly the sector’s adaption to the internet of things and the constant need to be ready for change.

High street bank brands have remained largely set up to cater to that customer who joins as a teen or young adult, who pops into the branch to pay in a cheque or withdraw some cash and once every few years might nervously make an appointment to plead for a mortgage. That customer doesn’t exist anymore.

That customer has diverse needs. They are used to transacting online and can’t understand why you wouldn’t do it all via smartphone. They also have some very pressing questions about why you won’t give them a credit card if you’ve been trying to sell them the very same credit card all over their social media. That customer knows you have their data and is baffled as to why you’re not using it.

Digital transformation is happening, the customer expects it and they’re not about to wait for you to catch up.

Customers don’t have to wait because there’s too much fun choice among new entrants. So, perhaps the newcomers don’t have bricks and mortar branches or they only offer a limited range of products. That’s not a problem for the consumer. They can just pick and mix their products and their providers and run it all off their phone.

It’s going to be challenging times for traditional banks but quitting isn’t an option.

For a start, legacy brands do have a lot going for them. They remain large, national and even international institutions. They are able to deliver a wide range of products and services that are trusted and competitive. Certainly fewer customers are using branches but the branch network is still vital and most legacy brands already have a physical footprint - it’s just about rationalising its size and purpose. For most legacy brands the building blocks of their response to digital transformation are there, they just have to use them.

Lloyds Bank plans to overhaul hundreds of branches as it attempts to cope with the rise of internet banking, which has seen fewer customers visiting high street sites. The bank is radically shifting its operating model and following the customer – which, in this case, is off the streets and towards the increased convenience, efficiency and improved user experience that online banking brings. The company plans to rollout high-tech micro-branches (these smaller branches will be run by just two employees equipped with tablets).

But this is just one approach which alone isn’t enough to stem the tide of competitive threat from fintech and startups. Online-only banking startup Atom has begun to popularise the ultra-low interest rate flash sale. It’s not necessarily intentionally marketed as a flash sale. The simple fact is that its operating model is lean enough to offer a limited number of very low cost deals. Customers flock to them, ergo, they’re sold out in a flash.

To reengineer decades of legacy process would take too long. Traditional banks need to find ways of bolting on innovations while working on the much longer term process of internal transformation. Whether this is through creating disruption task forces internally to brainstorm and boostrap solutions; buy in consulting, data and tech power or just buy up these entrepreneurial startups to become the fast-response arm of the existing business, each legacy business will have to decide for themselves.

Even if banks choose to retain their core brand behaviour while trying to respond quickly to changes in customer behaviour, they will eventually have to evolve. Creative thinking has to become part of the banker DNA. Too much is said about the agile organisation without taking into account the agile mindset.

It is often asked of agencies, consultants or experts - ‘what will the next big change be?’ No-one can predict the future beyond saying that those companies who fail to adapt to today’s changes will surely become obsolete. And we can say with relative certainty that companies who react to today’s challenges without keeping one eye on tomorrow’s are only putting off their fate.

By maintaining an agile mindset, companies - even traditional retail banks - can become agile and responsive to change. Being an innovator is good but being a fast follower is just as relevant to consumers. Organisations can only follow fast if they are primed and ready for change.

Disruption has always been an inevitability for the banking sector. The financial revolution is happening before our eyes. But what these large heritage institutions do next, however, will determine whether they survive this next wave of innovation by fintech players such as Atom and Monzo, or whether they become relics of an antiquated past.

Recent banking research from Accuity has revealed that between 2009 and 2016, correspondent banking relationships, where one financial institution provides services on behalf of another in a different location to facilitate cross-border payments, have reduced globally by 25%. This comes despite the fact that global GDP per capita grew during the same period, following the 2008 financial crisis.

Commenting on the findings, Henry Balani, Global Head of Strategic Affairs at Accuity, said: "Correspondent banking represents the cornerstone of the global payment system designed to serve the settlement of financial transactions across country borders. Our Research highlights some important trends in de-risking and its impact on international trade and global banking.

"The irony is that regulation designed to protect the global financial system is, in a sense, having an opposite effect and forcing whole regions outside the regulated financial system. This matters because allowing de-risking to continue unfettered is like living in a world where some airports don't have the same levels of security screening - before long, the consequences will be disastrous for everyone."

Measuring the cost of global de-risking

Since the global financial crisis of 2008, regulators have imposed requirements for greater transparency, established higher liquidity thresholds for banks as well as stepping up enforcement actions on institutions that violate anti-money laundering (AML) regulations.

In 2014, AML penalties peaked at $10 billion compounding the challenges banks face in high-risk geographies (Figure1). In this climate, the threat to banks of doing business in these geographies potentially outweighs the benefits of services to their clients, even if there may be good business opportunities to pursue.

The challenges of increased operational costs, competitive and regulatory pressures have driven banks to withdraw from correspondent banking relationships. Historically, these relationships were provided as services to international customers, but this is no longer viable, as banks cannot justify the increased compliance cost associated with offering correspondent banking services to their local customers. As a result, businesses in the regions most affected are struggling to access the global financial systems to finance their operations. Without this access, local banks are forced to use non-regulated, higher cost sources of finance and expose themselves to nefarious actors and shadow banking.

Henry Balani added: "A number of factors have contributed to derisking, the most important being that the risk / reward balance has become unfavourable for large clearing banks and in response they have taken a country / region risk view in deciding who they can do business with. If we want to reverse this trend and begin to 're-risk', then the 'antidote' will require more granular level due diligence and proper risk assessments to provide large clearers with the confidence that they can deal with low risk businesses in high risk jurisdictions."

Decline in USD relationships is either indicative of a concentration in relationships or a reduction in USD dominance

• The number of USD correspondent relationships declined by 15% with Euro relationships showing a steeper decline of 23%
• The number of Chinese Renminbi (RMB) correspondent relationships increased by 8%
• Global bank locations in developing economies increased by 31% since 2014

Findings from this research reflect the number of correspondent banking relationships transacting in particular currencies rather than the volume of currency transactions. Research shows a steady decline in the number of USD correspondent banking relationships globally since 2014. The USD was the currency of choice as the global economy recovered from the global financial crisis in 2008. While USD continues to be the currency of choice, the rate of decline in the number of USD relationships further accelerated with a drop of 13% between 2015 and 2016 from a decline of 2% between 2014 and 2015.

While the 25% drop in global correspondent relationships is greater than the USD correspondents decline, the trend for USD is particularly significant when compared to the contrarian increase in the number of Chinese RMB correspondent banking relationships.  Since 2014, research shows an 8% increase and since 2012, the number of the RMB relationships showed a dramatic increase from 3,600 to 8,800 relationships in 2016 (albeit from a low base). The research further reveals a peak in the number of RMB correspondent banking relationships in 2015 as the USD continued to decline.

There are two explanations for this decline in USD relationships when compared to the RMB. Either there is a concentration in USD relationships, with more transactions settled through fewer relationships, or there is a decline in the dominance of USD.

Global bank locations in developing economies have also increased by 31% since 2014, largely due to growth in China and APAC. This is significant as the number of banks in established global financial centers are in decline.

China prevails as region with highest growth in correspondent banking relationships

Actions from US and European regulators have resulted in banks shunning higher risk economies while missing out on the potentially profitable use of their currencies for correspondent banking, in the process.

Our Research reveals that the areas benefiting from the changes are largely in the East. For instance, China has experienced a 133% increase in the number of banks since 2009 and an astounding 3,355% growth in correspondent banking relationships during the same period.

Balani added: "The decline in USD relationships has several explanations: either we are seeing a concentration in USD relationships among fewer correspondent banks, or we are seeing a decline in USD dominance. The shift can also be attributed to the potential AML penalties associated with using these currencies. Since the financial crash of 2008, we have also seen significant commitment from financial institutions in emerging economies to demonstrate they are not high risk. We see this playing out in the East and the increased number of relationships reflects their commitment."

Balani concluded: "As we see more regulation come into place, global banks can support growth in local businesses by investing in technology that can securely and quickly determine the risk of a transaction in a high-risk geography."

(Source: Accuity)

A few weeks ago, a new government savings bond was introduced, offering a "market leading” rate of 2.2%, higher than any other in the UK. Savers will hopefully be able to invest up to £3000 over the coming 12 months; that would equate to around £202 in interest returned over the year.

Some have however described the Investment Guaranteed Growth Bond (IGGB) rate as underwhelming considering its intention to allow nationals to bulk up savings. Rates at 2% were already in place for other three year bonds advertised elsewhere online.

Today we heard Your Thoughts on the IGGB and received comment from a few reputable sources below.

Jon Hall, Managing Director, Masthaven:

Masthaven welcomes the new Investment Guaranteed Growth Bond onto the savings market. It offers UK savers a glimmer of hope and suggests a subtle sea change may be on the horizon which we hope will give more people the confidence to save.

We know from our research* that many people have good savings intentions - 78% of UK adults plan to save in 2017, but a majority (61%) of people who do save don’t feel confident that they’re getting the best savings rate.

Many people have simply lost faith in savings providers. So, when we launched into the retail banking sector late last year, we made it our business to challenge the stagnating savings market with our award-winning Flexible Term Saver, and competitive rates. The response from savers has been brilliant: since launch, we’ve seen 4809 accounts opened with £195.2 million deposits.

*Opinium Research surveyed 2,009 UK adults from 15-18 November 2016 for Masthaven.

Piers Pollock, Executive Director of Strategy and Planning, The Gate:

A week or so after the Office for National Statistics announced that the Household Savings ratio hit a fifty-year low, Philip Hammond introduced a new initiative claiming to “support savers.” The snappily named NS&I Investment Guaranteed Growth Bond is now available nationwide, and pays what he calls a ‘market leading rate’ of 2.2% per annum over a term of 3 years.

The problem, which Money Saving Expert’s Martin Lewis has been quick to point out, is that many current accounts, including the likes of Tesco, actually offer better rates. In fact, even if you invest the full £3,000 into the Investment Bond for three years, the overall interest you receive will be just £202. And for most people, that’s just not worth switching for.

The thing is, most savers aren’t particularly motivated by interest rate. In fact, a recent study by the Financial Conduct Authority (FCA) found that even when better alternatives were offered to savers with an easy means of switching, only 17% of those tested went through with the switch. Whilst the conclusion drawn was that there was a reluctance to switch because the amounts of money at stake are low, the FCA also noted that “many consumers in our sample with high amounts of money at stake still do not switch.”

So, do these people just not care?

Well, it seems that we are all biased against delayed gratification. Behavioural studies conducted over many years show that our brains ‘discount’ future rewards - we all value £100 now more than £100 in three years. This is why credit cards are so attractive to us; pleasure now, pay later.

So, in today’s world of instant gratification, savings accounts would be more attractive if they gave us interest up front. The NS&I bond could ‘put’ the £202 in my account on the day I deposit £3,000. It would be visible on the app immediately, so I would get the ‘hit’ now of seeing my balance leap to £3,202, and feel smart. Obviously, my money is locked away for three years and there’d be a graduated early withdrawal fee. But the deed would be done.

By giving a greater perceived reward for saving now, ‘up-front interest’ just might encourage greater saving. It might even give your brand an advantage.

Ann-Marie Droughton Hall, Planner, 23red:

British households have fallen out of a savings habit. The current savings ratio at just 3.3% is the lowest level since records began in 1963. Combined with a fall in real disposable income these figures are seen by commentators as a worrying sign for the health of household finances and the true strength of our economy.

Savings are key to our financial stability. This is particularly true for lower income families as they provide a buffer to allow unexpected costs to be managed without them having rely on high interest lending. Last year the Money Advice Service reported the shocking fact that there are around 17 million working age adults with less than £100 set aside.

Against this context we see how vital tackling the declining savings habit is. And any attempt to make the savings market more attractive to a wider range of savers has to be welcomed. The shortcomings of this latest NS&I product have been recognised, the 2.2% interest rate is less than generous and the timeframe and £3,000 maximum balance is limiting. Years of rock bottom interest rates have been felt by those trying to maximise their returns from a sizable lump sum, so for those savers it’s not attractive. But, if you’re currently in a position where your savings are limited to double figures then the idea of working towards a £3,000 nest egg may be aspirational.

However, this is a rational response to the challenge. Everyone knows we should be saving more and spending less but the decisions we make about money are complex: our emotions and motivations play a part but there’s also ingrained behavioural biases to be overcome. When payday comes around it’s always tempting to overspend despite knowing we’ll then have to scrimp through the rest of the month (present bias); we underestimate how long and how easy it will be to save up (planning fallacy); and our old foe procrastination, putting starting saving off until another day (procrastination).

Most mainstream financial products assume rational decision making. In reality the Ts&Cs of this new government offering and similar products across the market have little impact on the ability of individuals to save more. If we’re serious about changing the future savings landscape, it’s time for us to evolve the design of savings offerings to start to tackle these barriers and enable people to take control of their own fortunes.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

According to Ismail Ertürk of the Alliance Manchester Business School at The University of Manchester, banks and regulators are mis-selling the free banking argument, implying that consumers should not have to pay for the outdated technologies of banks and prop up their ill-designed profit models. Here, Ismail introduces Finance Monthly to a history of banking regulation and potential solutions that exist in eliminating this consumer-bank barrier.

Before the global wave of deregulation and liberalisation of banking industry and products since the early 1980s a typical commercial bank would earn its profits mainly from credit intermediation- collecting deposits from public at low cost and lending these to borrowers at a high margin. The name of the game was: 3-6-3 (borrow at 3% lend at 6% and go to play golf at 3pm). The well-meant but badly realised deregulation and liberalisation reduced net interest margins in banking to very low levels forcing banks to search for business models to increase fee income by selling financial products ranging from insurance to asset management. Around this time, a new global bank regulation called Basel Capital Adequacy Accord came into effect too shifting the focus in bank financial performance measurement from net interest margin and return on assets to return on equity. Stock markets started to use return on equity as the key financial performance metric to value banks. Fee generating businesses including securitisation of loans- like sub-prime loans that caused the financial crisis of 2008- do not require capital under Basel risk algorithm and make it easier for banks to achieve high return on equity targets.

Such historical understanding of bank business models and the role of net interest income in bank valuation by investors is very important because today's discussion about free banking being detrimental to bank profitability cannot be sensibly made without understanding how we arrived here. Currently with banks in the UK and Wells Fargo in the US paying substantial amount of fines for mis-selling products to their financially illiterate customers it is absurd to argue that bank retail customers have been enjoying free banking. Banks have been using free deposit products as a bait to charge all sorts of unjustified fees and commissions to their customers from mis-selling borrowing related insurance products to overcharging for overdrafts. Therefore, the argument that banks provide free banking for deposit customers needs to be factually supported. The issue could be that banks are under pressure from stock market investors to achieve unrealistic return on equity targets under the current low interest rate environment and therefore are looking for ways to overcharge their retail customers. Regulators should first fully understand this shareholder value-driven bank business model before supporting banks for the end of so called “free banking”, which really is more like banks asking for a licence to overcharge consumers.

At a time when developments in digital technologies make electronic payments almost costless and globally available 24 hours the demands by banks, regulators and international official institutions like IMF for uncontrolled charges for payments in the name of ending the sol-called free banking look unjustified and not supported by facts.

What we need is not the end of so-called “free-banking” but a new non-bank shared public technological infrastructure fit for purpose for our digital times for payments. The cost of this infrastructure should be met by a public body that recoups its costs from banks and other users. With big data analytics, it should not be difficult to do maths for transparent costing and pricing under such system. Therefore, ending the “free banking” is a false debate that is likely to support outdated bank IT infrastructure and bank business models that promise to the stock market unrealistic return on equity targets. With the developments in payment technologies the regulators should creatively think a payments infrastructure that is run in the interest of consumers of retail financial services. In addition, regulators should scrutinise shareholder value-based bank business models and ask justifications for profitability targets that banks promise to their investors. It is time to reshape banking radically to introduce digital technological developments in payments for fair pricing and economic efficiency. Consumers should not be paying for banks’ ill-designed and not fit for purpose business models.