In 2008 Central Banks bailed out the financial universe following the collapse of Lehman. They provided unlimited liquidity in the form of Quantitative Easing and Negative Interest Rate Policy to dodge a global recession and enable the longest bull market on record. In 2012 the ECB saved the Euro and Europe by doing “whatever” it took. In 2020 central banks stepped in to stabilise wobbling COVID struck economies with rate cuts and yet more liquidity.
Today? Central Banks are being assaulted on every front. Politicians are questioning their independence – blaming them for the effects of the sudden Ukraine War Energy and Food inflation spike. Markets are watching the bull market unravel and blaming Central Banks. Read any research on the market and it will cite “Central Bank policy mistakes” as the most likely trigger for recession, stagflation, and market collapse.
Financial professionals under the age of 40 have never known normal markets. They’ve learnt their trades in markets where Central Banks are expected to step in a stabilise markets, to prop up too-big-to-fail financial institutions, and keep interest rates artificially low, thus juicing markets ever higher. I reckon over half the market workforce – fund managers, bankers, traders and regulators – will never have encountered market conditions like those we’re about to experience as it all goes horribly and predictably wrong.
Thankfully, there are few old dogs like me still wagging our tails in markets. We’ve seen it all before. Proper market crashes, interest rates in double digits, mortgage rates that will make a millennial’s heart tremble, and inflation the likes of which we are now seeing again. But, even we don’t know what happens next. This time… it is different.
We can’t blame Central Banks for the war in Ukraine – that’s a classic exogenous shock. It’s a crisis the politicians really should have figured out, foreseen and prepared for. One of the prime duties of the state is security, and it’s the insecurity of energy and soon, food supplies, that have triggered the inflation shock.
The reality is exogenous shocks outwith central bank control have precipitated inflation in the real economy. But, let’s not kid ourselves: two factors successfully hid inflation for the last 12 years:
- Most of the liquidity injected by central banks since 2008 flowed into financial assets (stocks and bonds), where price inflation was mistaken for investment genius. (It’s also generated massive wealth inequality between those that own stocks and those that don’t.)
- In the wake of COVID, supply chains have unravelled. The Geopolitical Tensions now apparent between the West and China mean the end of the age of globalisation – and it was cheap Chinese exports that created the deflation that kept inflation artificially low during the twenty-teens.
In retrospect, the whole bull market of the Twenty-Teens looks increasingly false – a Potemkin village boom founded on overly cheap money, government borrowing and undelivered political promises. Abundant liquidity enabled the age of the fantastical – growth stocks worth trillions but profits measured in pennies, crypto-cons, SPACs and NFTs. Booming markets supported by accommodative central banks have spawned a host of consequences – few of which will prove ultimately positive.
Central Banks knew the risks from the get-go. They have been trying to figure out how to undo (or taper) the consequences of their monetary stimulus while maintaining the market stability critical for Western Economies. That has all suddenly unravelled at speed because of the inflation shock.
It’s the decisions taken over the past 14 years by Central Banks have led us to this critical moment in economic history. Since 2008 central banks have been using monetary experimentation to stabilise and control the economy and markets. And, as always happens, suddenly it’s turned chaotic. Its only now becoming apparent just how much these policies created massive market distortions, overturned the traditional investment narrative and caused the most massive misallocations of capital in global financial history at both the Macro and Micro levels.
Oops.
Take a look at markets over the past 14 years and figure it out:
- The most speculative asset bubbles in history?
- Tremendous financial asset inflation on the back of ultra-low interest rates?
- Whole new financial markets like cryptocurrencies and NFTs emerging on the back of the broken monetary model – which will likely prove absolutely hollow scams.
- And the power of FOMO (Fear of Missing Out) dragging in millions of inexperienced retail investors to meme stocks – where they are now likely to be skinned and gutted?
Oops again…
How did it go so wrong? The Global Financial Crisis of 2008 threatened a global depression. The problems were multiple – a dearth of bank lending (caused as much by draconian new capital regulations as risk aversion), economic slowdown, and incipient recession… Central banks were forced to act, and flooded the economy with liquidity in the hope it would stimulate growth.
It didn’t. It created market bubbles. Investors quickly realised the easiest way to generate returns was to follow liquidity. Corporate managements figured out the best way to improve their bonuses was to inflate their companies' stock price – not through carefully considered investment in new plants and products to improve productivity and profits, but by borrowing money in the bond markets to buy back their own stock. And that’s worked well…Not! All that money has now been lost by crashing markets, and they still have to repay the debt.
Again… Oops…
In Europe the 2012 sovereign debt crisis followed the banking crisis, triggering massive fears of imminent country defaults and the Greek debt crisis. The ECB did what it took and used monetary policy to advance billions to banks through Targets Long-Term Repos and other emergency measures… Very quickly banks and the market realised central bank liquidity was an arbitrage opportunity – if the Banks were buying bonds, buy more bonds to sell to them!
As a result, nations like Italy saw the cost of their debt plunge, allowing some of the most heavily indebted nations to continue borrowing… Yet there is no guarantee, and never will be, that German taxpayers will ever agree to pay Italian pensions. As the German terror of hyperinflation is raised, and Europe suffers stagflation, it's highly likely we will see new tensions across European debt arise. That’s why it’s a politician rather than a central banker running the ECB!
Guess what… Oops…
How did the Central Banks intend to undo the consequences of the distortion they created? Taper? Hah. We are passed that stage now. I guess we will never know how they planned to untie the knot they created...
The good news is chaos spells opportunity for smart investors!
The momentum behind the global neobank movement shows no sign of slowing down in its challenge to incumbent banks. Last month, Nordic neobank Lunar raised USD$77M in additional Series D funding, which valued the bank at more than USD$2B. The Aarhus, Denmark-based bank, founded in 2015, also launched a crypto trading platform and B2B payments for small and medium business customers.
On the other side of the world, in February Indian neobank Niyo raised USD$100 million in a new financing round and announced plans to add lending and insurance to its offerings. Niyo was also founded in 2015 and claims to have more than four million customers, with 10,000 new users signing on each day.
The well-known neobank model
After several years, the neobank model is by now familiar. Most operate exclusively online and offer customers digital-first, mobile-friendly products and services, often with lower fees and lower interest rates, and accessible via an easy-to-use smartphone app. Services vary from basic online banking and debit/credit card to loans, investments and savings: up to merchant accounts, insurance - and even equity trading and cryptocurrency.
Neobanks typically start off by specialising in particular products and services. But for many, the ultimate aim is to build a multi-country, full-service digital bank offering multiple products and services - including current accounts, loans, international payments, insurance and investments.
New technology means fewer financial burdens
Unlike incumbent banks, neobanks don’t have the financial burden of staffing and managing traditional physical branches. They also benefit from not having legacy technology assets and overheads to maintain. They can pursue profitability without the cost burdens of infrastructure, physical premises, staff, and - initially, at least - shareholder dividend payouts.
Neobanks’ use of cloud technology means they avoid having to spend heavily up-front on expensive IT infrastructure. And thanks to standardised open banking APIs, neobanks can build and bring to market products and services that enable faster, more frictionless fund transfers between account holders, other financial providers, and transactions with merchants.
With these foundations in place - and sustained by a steady flow of private equity cash - neobanks are free to focus their time and effort on creating and launching easy-to-use current accounts and other products that prioritise a top-notch customer experience.
They also have the freedom and flexibility to come up with other innovative digital-based services for customers to access and use online or on their mobile phones. They can test and then roll out new digital features and products quickly and easily - and then tear them down just as quickly and easily if they don’t work out.
With these foundations in place - and sustained by a steady flow of private equity cash - neobanks are free to focus their time and effort on creating and launching easy-to-use current accounts and other products that prioritise a top-notch customer experience.
Taking on customer frustrations
The rise of neobanks comes at a time when customers have become dissatisfied and frustrated with established incumbent banks for a number of reasons - a lack of transparency, an absence of useful new features, plus hidden or expensive fees for everything from overdrafts to closing your current account and moving to another bank.
Focusing on customer frustration and other pain points is central to neobanks’ ongoing success. As consumer trust in neobanks grows and users become more confident and familiar with technology, incumbent banks are set to lose customers and market share.
Reaching niche and underserved markets
The retail banking market is overcrowded. But neobanks are finding pockets of opportunities with significant but underserved sub-markets - such as millennials, gig economy workers and micro-businesses.
It's an approach that’s paying off. Neobanks are squeezing the market share of older established banks from both ends: at one end, with personal accounts and other consumer-facing services, and more recently at the other end with business-focused offerings such as buy-to-let loans for property investments and bridging loans for small businesses.
Banking after the pandemic
Neobanks were already in a strong position before the Covid-19 pandemic. But the consequences of the pandemic have created new opportunities for them.
Small and medium businesses need access to extra credit to help their recovery from the economic slowdown caused by Covid-19. In addition, people who were stuck at home during national lockdowns are now using online and mobile banking services significantly more than they did so previously. These changes have reportedly accelerated digital banking’s progress by up to ten years.
Neobanks are set to benefit from these developments. But if neobanks can benefit, so too can incumbents. However, to do so, they must abandon their outdated methods, overcome their reluctance to change, and adapt their operations and their mindsets to customers’ changing needs and wants.
Make digital the priority
Wherever possible, incumbents need to emulate their younger, more agile rivals. They must prioritise digital - in particular mobile. Many incumbents currently spend their money in the wrong way, on large, multi-year IT projects that eventually lead to the launch of new services. But this approach takes too long and is too expensive.
It’s a similar story with new apps and features. At the moment, a new app developed by an incumbent gets held up for at least a month in a staging area where Risk and Compliance will test and check it. That’s crazy.
Accelerate time to market for new services
The answer is to implement test-driven development. Here at Buckzy, we want our developers to write code: submit it: and 30 minutes later it’s in production. We’ve automated black-box testing and UAT (user acceptance testing), to ensure that the new features and functions we introduce are secure and don’t interfere with existing systems.
Time to market has to be the priority. At Buckzy, risk and compliance experts are part of our development teams and validate new code as it’s created, which accelerates the entire testing and resolution cycle and so reduces the time to market for new features and services.
Importantly as well, incumbents should take on board the idea, “don’t make perfect the enemy of good”. By this we mean that rather than delay the launch of a new product or service because it’s not complete, banks should not be afraid to launch it anyway, but then be prepared to make small incremental changes, updates, and improvements on an ongoing basis.
Fresh ideas and new approaches
In their ongoing contest with neobanks, the principal challenge for incumbent banks is to be more open to fresh ideas and new approaches. These might initially seem costly with no guarantee of an immediate financial return. But their value is longer-term and lies in restoring trust, retaining existing customers – and even gaining new ones.
Incumbents can ensure they stay trusted service providers to their customers by creating useful and worthwhile services that generate new incremental income, and which also define and drive the future direction of the wider industry.
But there will always be times when turning to conventional banks for support is not the way to go. In fact, mainstream lenders can be surprisingly inflexible when a borrower’s needs cannot be met by any of their standard ‘off-the-shelf’ financial products.
In each of the following instances, in particular, it may be practically impossible to secure the financial support you need from a mainstream bank or lender.
1. When time is a factor
Borrowing significant sums of money from a conventional lender typically means enduring a near-endless application and underwriting process. Average mortgage underwriting times are currently around 12 weeks, rendering time-critical purchases and investments out of the question.
By contrast, a bridging loan for purchasing a property can often be arranged within just a few working days; ideal for taking advantage of property purchase opportunities that will not be around for long.
2. When looking to borrow money short-term
Most of the products and services offered by banks are relatively long-term in nature. This is particularly true when it comes to loans and mortgages, where early repayment paves the way for penalties and other transaction fees.
On the specialist lending market, funds can be raised for any purpose over periods of anything from one week to several years. If you would prefer to repay your debt as quickly as possible to save money, you can do just that.
3. When your credit history is not up to scratch
The overwhelming majority of mainstream lenders turn away applicants with poor credit at the door. Unless you have an excellent credit score, you can forget about qualifying for a mortgage, an unsecured personal loan or any other consumer credit facility.
Bridging lenders adopt a different approach, wherein applications are judged on the basis of their overall merit. Even with poor credit and/or a history of bankruptcy, it is still possible to qualify for affordable bridging finance.
4. When you cannot provide proof of income
Likewise, if you cannot provide formal proof of income and your current employment status, you are highly unlikely to qualify for any conventional financial product available from a mainstream lender. Irrespective of the size or nature of the facility you need, your application will not even be given fair consideration. Elsewhere, secured loans from specialist lenders can often be accessed with no proof of income required, and no evidence of employment status necessary.
5. When you want to buy a non-standard property
The mortgages and property loans issued by mainstream banks are typically restricted to the purchase of habitable properties in a good state of repair. Purchasing rundown properties to be ‘flipped’ for profit is often out of the equation, as they are considered unmortgageable.
Consequently, property developers and investors tend to seek support from development finance specialists and commercial bridging loan providers; both of which are willing to lend against almost any type of property, irrespective of its condition at the time.
Signs Of Increasing Acceptance For Crypto
But, in March this year, Goldman Sachs became the first major US bank to trade crypto over the counter. In a historic move, the bank traded a non-deliverable option with crypto merchant bank Galaxy Digital. Also in March, President Biden signed an Executive Order named Ensuring Responsible Development of Digital Assets. In a surprise move, Senator Elizabeth Warren even told reporter Chuck Todd on Meet the Press that the US should create a central bank digital currency (CBDC), also noting that crypto will need to be regulated - to avoid repeats of events such as the subprime mortgage crisis. These steps followed JP Morgan setting a similar milestone in February, by entering the Metaverse. While up to now most of the crypto activity has been dominated by pure crypto players like Coinbase, Paxos and Grayscale, with the recent flurry of activity many previously cynical financial services decision-makers are sitting up, and wondering if there is more to this crypto thing than they originally thought possible. Some are even playing catch-up as to what crypto even is.
Crypto Caution
Nevertheless, even with Presidential engagement, cryptocurrencies are still viewed as the Wild West and, to some extent, in the current state of play, rightly so. They can certainly be dangerous for rookie investors, with new types of cryptocurrencies or tokens fluctuating wildly, from soaring highs to collapse. Even those that are more established, with Bitcoin as the prime example, are volatile assets, subject to jaw-dropping swings in value. References and preferences by famous people can impact it massively. There are also fears about security and that crypto is used to facilitate terrorism and crime.
The cryptocurrency “movement” and blockchain generally were born of striving for better – a wish for a new way to do things. And it is a technology that has huge potential for decreasing friction, improving transparency, decentralisation and, ironically, for building more trust. The way most banks still operate is no longer fit for purpose.
In the short attention span landscape we now operate in, three to five business days for funds to clear is increasingly perceived as inappropriate and unacceptable by customers and they’re increasingly unwilling to tolerate paying hefty amounts with apparently foggy fee structures for a snail’s pace service in terms of payments, international transfers and so on. It's the consumer who suffers and pays for inefficiencies that seem prehistoric in today’s fast-moving environment.
And then are those that are underbanked or entirely unbanked. Many millions of people across the globe are denied access to financial services entirely. Even in America and Europe, where there’s a bank on every corner, still today we see that without tax returns, a permanent address or access to a physical branch, gaining loans or just opening a bank account, remains difficult or entirely out of reach for many. In developing countries, the problem is far worse - huge. Cryptocurrency has the potential to address this imbalance.
However, and here we come full circle, cryptocurrencies suffer from a reputation problem, in a way that banks don’t. And crypto can’t get the buy-in it would need from the wider population outside its early-adopter fan base that it would need. Older people, in particular, are likely to baulk at using them.
Is Crypto Dangerous?
It’s not actually true that cryptocurrency is fundamentally unsafe. Its underlying technology is, in fact, far more stable and transparent than that of many mainstream banks, which themselves have some fairly unstable, outdated technology. Bitcoin, as an example, has never been hacked, while many mainstream banks have lost the data of millions and suffered breaches that have compromised the privacy of their customers. Decentralised finance holds rich promise - if it works hand in hand with more trusted financial brands and within the established systems.
The Benefits Of Crypto
While some Bitcoin pioneers don’t want banks to have any role in the financial systems of tomorrow and linked the technology to an idealistic ideology, most people just care about transaction speed: how easy that transaction is to make, that it doesn’t cost too much, and that it is safe. Banks working with cryptocurrencies can deliver that. The technology is a game-changer, but to truly deliver, it will have to integrate with mainstream banking systems.
What’s in it for banks is simple. Banks hate losing customers, especially en masse. And lots of customers are looking in the crypto direction. If customers are wealthy and want a fully diversified portfolio for the best returns on investment, they likely aren’t going to want to miss out on the crypto potential. Likewise, if bank customers want to interact in the metaverse, it can’t be done without a crypto wallet, which currently their bank isn’t offering.
If you’re working in America and sending money home to family in another country, you don’t want to be charged 20% and upwards to transfer that money. Likewise, financial institutions are paying through the nose transferring money cross-border. Each transaction can go through several different banks and different gateways using the labyrinthine and only partially-automated and costly SWIFT system. Crypto can make the process faster and exponentially cheaper. Funds can be used to buy Crypto, transferred via a digital wallet and exchanged at the other end for a different currency. It’s like the difference between queuing on the highway for the toll gate or using an electronic pass on a tag in the window - a digital highway.
How Banks Can Keep Up With Crypto
Banks will increasingly need to create and offer infrastructure for cryptocurrency so that they keep hold of clients.. Say an institutional client or wealthy client has 100 million in a bank and wants a 20 million direct exposure to crypto - right now they couldn’t do it through a mainstream bank as no banks offer that service. So that customer now would have to take their 20 million and open an account at Coinbase. Money is walking. Coinbase has a 98 million customer base - larger than that of JP Morgan, which has been in business for over 150 years.
Banks need to at the very least start offering custody, key management and digital wallets. As brands outside of banking look to transact in e-commerce, NFTs and cryptocurrency in a more efficient way, there is an opportunity for banks to enable them to set up their accounts that could also be housed at a bank.
Going forward banks may extend into crypto investment and the areas of staking, liquidity pools and Defi as they grow in size and importance to the marketplace. Crypto mortgages for the metaverse are a big opportunity for banks. Such mortgages are already available elsewhere.
Banking is becoming an ambiguous term, as many new players such as Walmart come on board. There used to be lines drawn around areas of finance. Not so long ago, asset management was doing investments and managing people's money and banks were doing payments. Fast forward to today and the lines are blurred - there's no distinction anymore. Now banks are doing asset management, investment management, and payments. Tech companies are doing payments. And Walmart is doing mortgages. And fintech is doing asset management and old established banks are doing fintech. Banks need to stay relevant.
Final Thoughts
Look at the landscape in the mid-nineties. Some said you’ll be able to make calls via the internet, and they’ll be free. But that seemed decades off. Look at contactless payments, and voice recognition. All these seemed very new one day and shortly after, just the way we do things.
Regulation is on its way and this - along with the rise of the metaverse, with its huge appeal to the mass market - will bring down the final barrier to crypto’s natural place at the heart of an evolving financial ecosystem.
Cryptocurrency will become mainstream, and sooner than many think.
About the author: David Donovan is EVP, Financial Services, Americas at Publicis Sapient.
Almost immediately, the person controlling the bank account begins to disperse these funds in a flurry of payments to the Czech Republic, Hungary, Croatia and Hong Kong.
Suspicious as these transactions were, NatWest did not freeze the account when the Saudi money arrived. It allowed the outward payments to take place, despite the fact they triggered fraud alerts. NatWest temporarily froze the account, then unfroze it, and by the time the bank’s fraud team properly investigated and took decisive action, it was too late. The account had effectively been emptied, and the funds were long gone.
The $5 million was stolen from my client, an Italian engineering multinational called Maire Tecnimont. In a corporate version of push-payment fraud, somebody impersonated a senior manager at the company’s Saudi subsidiary and duped the payment to be sent out to NatWest in Brixton. From there, the money was funnelled to Eastern Europe and Asia and remains missing, effectively untraceable.
All of that took place in 2018, and Maire Tecnimont is currently suing NatWest in the English High Court over the incident. The bank argues it is not responsible, not least since, traditionally, the legal position has been that banks are not held to have a “duty of care” to third-party fraud victims who are not their account holders.
A court will decide where liability lies, and it is not my intention to prejudge the outcome here. What I would strongly suggest, though, is that the bank’s procedures in this episode were not sufficient to prevent a large-scale fraud, nor to prevent the successful laundering of large sums via the UK banking system.
It is beyond doubt that push-payment fraud on businesses represents a very considerable economic, and crime-fighting, problem. Confidence tricks on individual account-holders tend to get more attention in the press. But similar scams perpetrated on businesses - commonly referred to as “CEO Frauds”, since they involve a scammer impersonating a high-ranking official of the victim organisation - cost billions of dollars a year, according to statistics from the Federal Bureau of Investigation.
The FBI has identified Britain as a major through-station for fraudulent transfers. And unlike individual bank customers, businesses who fall victim to push-payment scams in the UK have scant entitlement to compensation.
Having acted on multiple matters involving CEO fraud, I believe the banking industry has to take this problem more seriously. On behalf of clients, I have made a submission to that effect to the House of Commons Treasury Select Committee, which is currently investigating Economic Crime.
Technology is part of the problem. Often, banks’ anti-money laundering (AML) monitoring depends on decades-old tech and does not include speedy fraud detection. Banks keep their AML and fraud detection procedures bifurcated, meaning they cannot cross-reference the account history against live transactions in real-time. It can take banks a month to review some suspicious transactions, by which time laundered funds have long since been dissipated.
But as any FinTech entrepreneur will tell you, the technology exists to ensure near to real-time monitoring of accounts. It is no longer acceptable for banks to refuse to implement this technology whilst allowing their account holders to launder money and facilitate criminal activities.
Often, banks’ anti-money laundering (AML) monitoring depends on decades-old tech and does not include speedy fraud detection.
At the heart of the problem is that the banks are currently not incentivised to invest in AML tech. Compensating fraud victims doesn’t cost them very much. Typically, a bank will indemnify its own customers in respect of sums lost via fraud through the bank’s own negligence, in line with various banking and customer obligations. But it does not offer similar protections to non-customers whose stolen money has been laundered through its systems – even when the criminal perpetrators are account-holders with the bank. It has little financial incentive, therefore, to monitor against fraudsters amongst its customers. And when the losses imposed on outsiders by those fraudster-customers run into the millions, the bank is even less willing to acknowledge liability.
The UK industry’s Voluntary Code is not fit for purpose. It offers protection to small-scale victims of push-payment fraud (individuals, “micro-enterprises” and small charities), but does not cover businesses with ten or more persons as employees, or balance sheets of more than €2 million.
As fraud becomes more sophisticated and pervasive, that position looks unsustainable. Some £3.2 trillion in company turnover in the UK is found in businesses of more than ten employees. All of these organisations are currently at risk of being defrauded without hope of compensation from the payments industry’s “no-blame fund”. Nor does the Voluntary Code cover international payments.
The result is that banks find themselves increasingly in reputational difficulties. In March - in an issue entirely unrelated to my clients – it was announced that NatWest would face prosecution from the Financial Conduct Authority, for allegedly failing to monitor and scrutinise transactions that turned out to be part of a large money-laundering scheme.
Fraudsters are evolving their methods and moving at pace with technology, whilst banks are falling behind, seemingly content just to trudge along. If the persistence of fraudsters continues to outstrip banks’ determination to combat them, it could fundamentally damage confidence in the UK’s all-important banking system.
This is not to say that banks – as opposed to, say, telecoms companies, whose systems might enable fraudsters to access a victim’s bank details – should have to shoulder all the financial responsibility for compensating the victims of push-payment fraud.
But in circumstances where a bank has been negligent in its implementation of AML controls and fraud prevention technology that is readily available, and the victim has suffered loss, the bank should be required to provide appropriate compensation – whether or not the victim is a customer of the bank, and whether or not the victim is a corporate entity. That, I suspect, would finally focus management attention and technology investment on fighting the fraudsters.
It may be a lot to ask, but it’s not unreasonable, or unfeasible. The GDPR has obliged large companies in many sectors to consider data protection in ways that few would have expected even ten years ago. Social media firms are under pressure to tackle misinformation and prejudicial language. These changes require money and computing power. But they are the changes that a big-data economy and society are demanding. Banks would be unwise to ignore those demands.
Deutsche Bank AG closed 2020 with an annual profit for the first time in six years, owed in large part to a bond trading boom and having achieved cost-cutting targets.
For the full year, the bank made a profit of €624 million, up significantly from its net loss of €5.26 billion in 2019 as it underwent a major restructuring project. Analysts had expected to see a loss of €201 million, according to Refinitiv.
Profits were spurred on by Deutsche’s investment banking division, with net revenues rising 32% to €9.8 billion over the course of the year as trading in fixed income securities and currencies jumped 28%. The bank stated that this increase “more than offset a rise in provision for credit losses resulting from COVID-19.”
By contrast, Deutsche’s private banking and corporate banking divisions saw almost flat revenues in 2020, and asset management revenues fell 4%.
"In the most important year of our transformation, we were able to more than offset transformation-related effects and elevated credit provisions - despite the global pandemic,” Deutsche Bank CEO Christian Sewing said in the Q4 report.
"We are confident this overall positive trend will continue in 2021 despite these challenging times.”
Deutsche Bank’s years-long journey back to profitability has not been smooth, having faced allegations of money-laundering and received a $2.5 billion fine for the fixing of LIBOR. It has also recently been caught up in the Wirecard scandal.
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The bank also announced 18,000 job cuts in 2019 as part of a plan to reduce the size of its investment bank, which is now the main driver of its profits.
Nearly €6 billion of EU share dealing was moved away from London on Monday as the effects of Brexit compelled equities trading to shift to EU cities, the Financial Times reported.
Trading in equities for the likes of Deutsche Bank, Santander and Total moved to exchanges in mainland capitals – primarily Madrid, Paris and Frankfurt. London’s Euro-dominated share trading hubs, including Cboe Europe, Aquis Exchange and Turquoise, shifted to newly established venues in the EU. The volume amounted to about a sixth of all equity business on European exchanges on Monday.
The change came abruptly for London investors, who were previously able to trade shares in Europe across borders without restrictions. Now, EU-based banks and asset managers will be required to use a platform inside the bloc for Euro share trading.
The shift in equity trading is far from the only effect that Brexit is set to have on London markets. The Brexit deal agreed before Christmas does not cover financial market access, with EU regulators refusing to recognise the bulk of the UK’s regulatory systems as “equivalent” to its own.
Temporary measures were put in place before the exit to allow UK financial firms to use venues in the EU.
“The FCA continues to view the agreement of mutual equivalence between the UK and EU as the best way to avoid disruption for market participants and avoid fragmentation of liquidity in DTO products,” the FCA said, adding that it will consider by 31 March “whether market or regulatory developments warrant a review of our approach.”
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Also on Monday, EU regulators withdrew the registration of six UK-based credit rating agencies and four UK trade repositories, compelling EU companies to use EU-based entities for information on derivatives and securities financing trades.
US Treasury Secretary Steven Mnuchin said on Thursday that several key pandemic lending programmes at the Federal Reserve would not be renewed, putting the outgoing Trump administration at odds with the central bank.
In a letter to Federal Reserve Chair Jerome Powell, Mnuchin asked the Fed to return $455 billion allocated to the Treasury under the CARES Act in March, much of which was earmarked as funds for pandemic relief lending to businesses, non-profits and local governments. The Fed has deemed these programmes vital to the continued stability of the US economy through the winter.
“I was personally involved in drafting the relevant part of the legislation and believe the Congressional intent as outlined in Section 4029 was to have the authority to originate new loans or purchase new assets (either directly or indirectly) expire on December 31, 2020,” Mnuchin wrote. “As such, I am requesting that the Federal Reserve return the unused funds to the Treasury.”
The move came as a surprise to the Fed, who said in an emailed statement that it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”
S&P 500 futures fell by 0.75% following Mnuchin’s request, and benchmark US Treasury yields also slipped.
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In addition to the request for the money’s return, Mnuchin did extend for 90 days three separate programmes which did not make use of CARES Act Funds, including measures acting as backstops for commercial paper and money markets.
Recent data has shown that an expected early recovery from the historic economic downturn caused by the COVID-19 pandemic has begun to fade. 10 million US citizens who have lost jobs since January remain out of work.
During a webinar held on Sunday, Bank of England governor Andrew Bailey said that interest rates below zero were generally most effective during periods of economic recovery, according to the BBC.
“Our assessment of negative interest rates, from the experience elsewhere, is that they probably appear to work better in a more wholesale financial market context, and probably better in a nascent economic upturn,” Bailey said during the event, adding that it was best for policymakers to act aggressively in the face of uncertainty rather than embracing caution.
Also during the webinar – hosted by the Group of Thirty, an economic and banking panel – Bailey said that he expected Q3 economic output to be 10% lower than at the end of 2019, though he noted that the influence of COVID-19 meant that “the risks remain very heavily skewed towards the downside.”
The governor’s comments added to speculation that the BoE may soon move interest rates below zero. If this were to occur, the UK would be following the example of countries like Denmark, Switzerland and Japan, which have adopted negative interest rates in the past to spur economic activity.
While the BoE has sought to downplay expectations that interest rates might fall below zero, stating that the measure was merely an option was available and that they had “no plans to use it imminently”, the bank’s Monetary Policy Committee has gone on record as having discussed the viability of negative interest rates, and the BoE has more recently sent a letter to UK banks enquiring about their preparedness for sub-zero rates to be adopted.
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In late March, the Bank of England cut interest rates from 0.75% to 0.25%, and finally to 0.1% -- their lowest level in history. Rates have remained unchanged since then as the UK continues to weather the economic impact of the COVID-19 pandemic.
The BoE’s Monetary Policy Committee will next meet on 5 November, where they will decide to either alter current interest rates or leave them unchanged.
According to figures released by StockApps, the combined market cap of the five largest banks in Europe fell to $233.1 billion in August, a decrease of 42% since the start of 2020.
The massive loss in value for European banks can be attributed to the COVID-19 pandemic and its effect on consumer demand. Major European lenders were hit by a wave of financial losses during Q2, sinking their market value.
HSBC, Europe’s largest bank by asset value, saw its market cap plunge 45% to $88.1 billion in August, down from $161.5 at the beginning of the year. This figure began to slip even before the COVID-19 pandemic reached its height, falling to $114 billion in March.
Stark losses plagued Europe’s other major banks as well; PNB Paribas, Banco Santander SA and ING Group – the second, third and fifth largest banks in Europe – saw respective market capitalisation slides of $19.7 billion, $33.27 billion and $15.2 billion respectively.
Lloyds suffered the heaviest losses of the “big five”, its market cap standing at $25.1 billion in August, down from $58 billion at the end of December 2019 – a 56% drop. The fall stems from its £676 million losses in Q2, a drastic fall from the £1.3 billion profit it posted in the same period during 2019.
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“The outlook has clearly become more challenging since our first-quarter results, with the economic impact of lockdown considerably larger than expected at that time,” Lloyds CEO António Horta-Osório commented on the losses at the time of their release, which caused Lloyds to set aside an additional £2.4 billion as debt provision.
Helena Schwenk, Market Intelligence Manager at Exasol, explains how banks can use data and analytics to capture customer loyalty.
Driving customer loyalty has always been an important initiative for financial institutions, but COVID-19’s profound impact on the world has fundamentally changed how financial services companies now view loyalty. As more and more interactions shift online to virtual channels; customer behaviour changes as economic constraints hit home; approaches to risk change; and digital sales and services accelerate – the value of progressive data strategy and culture is all the more crucial.
As McKinsey’s recent report highlights, as revenue growth and customer relationships come under pressure, banks will need to rethink their revenue drivers, looking for new product launch opportunities, as well as reorienting offerings toward an advisory and protection focus. Advanced analytics can help identify those relevant niches of prudent growth.
However, the high prevalence of data silos and the unprecedented growth in data volumes severely impacts financial institutions’ ability to rise to this challenge efficiently. And with IDC conservatively predicting a 26% CAGR data growth in financial services organisations between 2018-2025, there are no signs that managing data is going to get any easier.
The financial services sector was already extremely data-intense due its the large number of customer touchpoints and the lasting legacy of COVID-19 will see this expand even further. Beating this challenge will require financial institutions to focus on turning their quantity and quality of their data into governed and operationalised data. To gain competitive advantage and win the fight in driving customer loyalty, financial services firms need to eradicate their data silos and start benefiting from real-time business decision making.
Beating this challenge will require financial institutions to focus on turning their quantity and quality of their data into governed and operationalised data.
Adopt a robust data analytics strategy
Defining a data analytics strategy is crucial for financial services organisations to increase customer loyalty and deliver a better customer experience. A solid data strategy holds the key to uncovering invaluable insights that can help improve business operations, new products and services and, crucially, customer lifetime value — allowing organisations to understand and measure loyalty.
In addition, a robust data strategy will help organisations keep a sharper eye on customer retention, using data to actively identify clients at risk of attrition, by using behavioural analytics, and then generating individual customer action plans tailored to each client’s specific needs.
In our survey of senior financial sector decision-makers, 80% confirmed that customer loyalty is a key priority, given that consumer-facing aspects of financial services generate revenue and are a critical differentiator. And, according to Bain & Co., increasing customer retention rates by 5% can increase profits by anywhere from 25% to 95%.
Recognise the challenges of customer retention
But increasing customer retention and improving loyalty is not easy. There are ongoing challenges to earn and maintain. For example, 54% of our survey respondents believe that customers have higher expectations of financial services experiences and 42% agree that digital disruptors that support new digital experiences, offerings and alternative business models, are encroaching on their customer base.
At the same time, regulation is a concern too, with 41% saying PSD2 and GDPR are impacting their ability to develop and improve customer loyalty initiatives.
Despite all these challenges, the business impact of poor customer loyalty – such as lost opportunities for customer engagement and advocacy (45%), higher levels of customer churn (45%) and lost revenue-generating opportunities (42%) – is too important to ignore. Given that it costs five times more to acquire a new customer than sell to an existing one — gambling on customer loyalty in today's highly competitive environment is a big risk to take.
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Strive for constant improvement
That said, in a heavily regulated industry with a wave of tech-disruptors, keeping customers happy and loyal is no mean feat. But driving a deeper understanding of customer lifetime value and measuring the loyalty of customers is possible. The good news is that almost all organisations (97%) use predictive analytics as part of their customer insights and loyalty initiatives, with three fifths (62%) using it as a key part. 65% also agree that data analytics enables them to offer personalisation and predict customers’ future behaviour.
Overall use of data analytics is maturing in financial services compared to other industries; 96% of the people we surveyed were very positive about their firm’s data strategy and how it is communicated for the workforce to implement. Although 48% did admit it could be improved.
This consistent need to improve is backed by McKinsey. Its survey of banks saw half saying that while analytics was a strategic theme, it was a struggle to connect the high-level analytics strategy into an orchestrated and targeted selection and prioritisation of use cases.
Revolutionising data analytics
Revolut is one disruptor bank showing the world what a thriving data-driven organisation looks like. By reducing the time it takes to analyse data across its large datasets and several data sources, it has reached incredible levels of granular personalisation for its 13 million global users.
Within a year, the data volumes at Revolut had increased 20-fold and it was an ongoing challenge to maintain approximately 800 dashboards and 100,000 SQL queries across the organisation every day. To suit its demands and its hybrid cloud environment it needed a flexible data analytics platform.
An in-memory data analytics database was the answer. Acting as a central data repository, tasks such as queries and reports can be completed in seconds instead of hours, saving time across multiple business departments. This has meant improved decision-making processes, where query time rates are now 100 times faster than the previous solution according to the company’s data scientists.
Revolut can explore customer demographics, online and mobile transfers, payments data, debit card statements, and transaction and point of sale data. As a result, it’s been able to define tens of thousands of micro-segmentations in its customer base and build ‘next product to purchase’ models that increase sales and customer retention.
The 2 million users of the Revolut app also benefit as the company can now analyse large datasets spanning several sources – driving customer experiences and satisfaction.
Revolut can explore customer demographics, online and mobile transfers, payments data, debit card statements, and transaction and point of sale data.
Every employee has access to the real-time “single source of truth” central repository with an open-source business intelligence (BI) tool and self-service access, not just the data scientists. And critical key performance indicators (KPIs) for every team are based on this data, meaning everyone across the business has an understanding of the company’s goals, industry trends and insights, and are empowered to act upon it.
Predict what your customers want faster
A progressive data strategy that optimises the collection, integration and management of data so that users are empowered to make and take informed actions, is a clear route to creating competitive advantage for financial services organisations.
Whether you’re a longstanding brand or challenger bank, the key to success is the same – you need to provide your services in a timely, simple and satisfying way for customers. Whether you store your data in the cloud, on-premise, or a hybrid, the right analytics database is central to understanding your customers better than ever before. By using data to predict and detect customer trends you will improve their experience and get the payback of increased loyalty, which is even more essential in a post-COVID world.
Bank stocks plummeted internationally on Thursday, as the release of companies’ Q2 earnings have demonstrated the influence that the COVID-19 pandemic still holds over world economies.
Among those banks adversely affected in the second quarter were Lloyds Bank, which reported loss provisions at a rate higher than was forecasted, and BBVA and Standard Chartered, which both saw profits slide.
Combined with a historic contraction in the US economy, these bleak reports triggered a sell-off across the banking sector. The Euro Stoxx Bank index, which tracks the biggest banks in Europe, fell by more than 3%, and the MSCI European Banks index (which includes both British and European banks) fell by 2.6%.
Major stock markets were also dragged lower on Thursday; the FTSE 100 fell by 2% before noon, and the DAX and Spanish IBEX 35 fell by 3% and 2.7% respectively.
In all, the sell-off pointed to increasingly pessimistic investor attitudes in the wake of the COVID-19 pandemic. “We have seen the UK economy deteriorate since the first quarter,” remarked Lloyds CEO António Horta-Osório as the bank’s half-year profits were completely submerged by its setting aside of £2.4 billion as a loss buffer – £1 billion greater than analysts estimated. Shares in Lloyds subsequently fell by 9%, an 8-year low.
Barclays also fell below analysts’ expectations in its Q2 results, and Santander announced a quarterly loss of €11.1 billion, the largest such loss in its 163 years of operation.
