Future of Banking 2017 Special Report

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FUTURE OF BANKING raconteur.net 2 RACONTEUR 22 / 01 / 2017 COMMERCIAL FEATURE C ustomers are going to get control of their data. That's the new reality for banks as they strive to deliver a bet- ter experience, unlock new revenues and resist the e€ orts of new market entrants. As dramatic as this sounds, no one should be surprised. Low interest rates and higher regulatory costs have driv- en f inancial ser vices f irms to the point where a penny is harder to make and more valuable to hold. When competition increases, banks must work harder and smar ter to meet customer expectations. Data holds the key to this approach. "Look at a business such as Google which derives revenues based on a highly accu- rate view of the data associated with con- sumers," says Chris Geldard, managing par tner at Capco. "Likewise, banks can unlock value through a smar ter approach to data. And while these are early days, some challenger banks, such as Monzo in the UK, are star ting to apply this sophis- ticated approach to their customers." What does this mean in terms of cus- tomer ser vices? Offering tools through smar t digital offerings could prove to be a real differentiator. Research f irm Ver- dict Financial's 2015 Retail Banking Insight Survey found the tools most in demand were to help save more money (17.2 per cent), notif ication of insuff icient funds (16.1 per cent) and real-time aler ts on overspending (15.2 per cent). Regulation is also a driver. "A bank's main asset is its data," says Steve Har- greaves, a par tner at Capco. "Having clear lineage, clear ownership and a clear vision of data quality is very impor tant, and the need to repor t that to regulators is helping to drive banks to get on top of data management." DIGITAL-FIRST BUSINESS E-commerce businesses like Amazon, Apple, Facebook and Google prove that smar t data management can create a customer bond like no other. Across re- tail, wholesale and capital markets, banks are keenly aware that the digital-f irst model based on high-per formance data analysis will create a massive advantage. Yet moving from the current situation to one of clarity can be hard. Banks have built technology around products such as mor tgages or current accounts, or teams that trade products such as shares or bonds. Data bases are organised around those products instead of the customers that buy them. Getting a complete picture of a customer that enables the bank to understand what he or she wants requires a re-engineering of their data architecture. DATA: THE KEY THAT UNLOCKS THE BANKING ECOSYSTEM As 2017 dawns, banks must be prepared to make data available as a service to customers and third parties to unlock new revenue streams – and avoid losing business to new market entrants This presents a number of challenges. At a technical level the systems need to star t with the customer and work their way out to the products; a reverse of the current model. These systems, in turn, reflect the way the organisation has built its processes, which will also need to be changed. Getting this transformation right offers enormous potential. "It's the banks' priority to retain an over view of an individual's f inancial ser- vices so they can continue to work with them throughout their lives," says Mr Geldard. "Banks are investing in the user experience and making better use of cus- tomer data to retain those clients with whom they have a primary brand connec- tion. But if this role goes to other pro- viders, such as f intech platforms, those providers will star t to get in-between." OPEN BANKING INITIATIVE In the UK, banks are facing the Open Bank- ing Initiative, an e€ ort by the Competition and Markets Authority to encourage con- sumers to embrace competition in bank- ing by allowing third parties to connect directly to customers' bank accounts via a standardised interface. In Europe, a similar initiative, the Payment Services Directive 2, should also lead to greater competition. Both initiatives will enable fi rms, which comply with these rules, to deliver services that rival those of traditional banks. Customer conf idence is king when exploiting this oppor tunity. The Retail Banking Insight Survey found 18.3 per cent of consumers did not want their f i- nances stored in one place, while 19.2 per cent thought it would be more conven- ient. Impor tantly, if banks were seen to be offering aggregation, 21.6 per cent of respondents said they would feel more conf ident with the ser vice. In addition, Europe's General Data Protection Regulation is due to come into force in 2018. This will give consum- ers more control over their data held by a bank, including data the bank has ac- quired from other sources. WORKING HARDER FOR CUSTOMERS AND THEIR LOYALTY Q&A with Lance Levy, Capco chief executive Do you see a sense of fairness be- ing brought to f inance at last? It is star ting to happen. Custom- ers are demanding the brilliant experi- ences they see with other ser vice provid- ers, in other industries, and this is making f inance more democratic. It's making available what were once high-level ser- vices to all customers, not just institu- tional clients or high-net-wor th clients. Small f inancial technology f irms are tak- L ANCE LEV Y Chief executive, Capco "There will be a constant checking mechanism where, if the consumer does have more control of this data, then the institution can minimise the risk around sharing of that data," says Mr Hargreaves. Within investment banking, regulation is making trading more expensive by raising the cost of holding certain assets for cli- ents. Understanding the cost of trading in assets and the cost of servicing customers has become more important as a result. CHIEF DATA OFFICER For many senior management teams, this change in emphasis has resulted in the cre- ation of a chief data o¤ cer (CDO). The job may be business line-specifi c or compa- ny-wide, but the Senior Managers Regime, driven by the Financial Conduct Authority in the UK, is creating direct accountability. To handle this level of responsibility, fi nance houses often look outside their peer group for expertise, with data o¤ cers drawn from the ranks of digital fi rms such as Google, the military and government departments. A key role for the CDO will be to iden- tify real opportunities and cut through the hype associated with transformation CURRENT ACCOUNT SWITCH SERVICE TOTAL MONTHLY SWITCHES Jan Feb March Total switches 2014 60k 120k April May June July Aug Sept Nov Dec 80k 100k 140k Source: Bacs Payments Schemes Limited Oct A MARKET OPPORTUNITIES CUSTOMER ATTITUDES TOWARDS ACCOUNT AGGREGATION AND DIGITAL FINANCE TOOLS TO MANAGE THEIR FINANCES Retail Banking Insight Survey, 2015 I would feel safer if my bank provided this service* 21.6% A B C D E F I would be worried about the security of my information 15.4% E I don't want to have all my fi nances stored in one place 18.3% C This service* wouldn't be useful to me 8.5% F Aggregating all my fi nance would be convenient 19.2% B I would like my bank to o€ er this type of service* 16.4% D MARKET OPPORTUNITIES DIGITAL FINANCE TOOLS WANTED BY CUSTOMERS Charts that visualise areas of concern in your fi nances Graphs that categorise spending Personalised recommendations to save money Real-time alerts on overspending Notifi cations when you have insu¤ cient funds Tools to help you save more of your money 16.1% 17.2% 15.2% 13.7% 12.4% 12.1% Retail Banking Insight Survey, 2015 Total switches 2016 Now we are seeing banks trying to put their data back into the hands of the customer because that's really where the value will come from ing the lead in some cases, delivering ser- vices direct to the smar tphone or online, either working with banks or potentially disintermediating them. Regulation is driving banks to open up their technology to fintech firms and to other financial institutions. As a result people are becoming less reliant on pro- viders of traditional financial services and having one institution manage all your fi- nancial services or your entire portfolio is no longer the most viable model. Customers will also be given owner- ship of their data by regulators and f i- nancial ser vice providers will need to of fer a compelling ser vice to access it. This includes a nex t generation of bank- ing that will be built around a more mo- bile-friendly inter face which really em- phasises the customer experience and focuses on user friendliness. That's why some f intech f irms have become suc- cessful so quickly; they are able to pro- vide a much faster, less expensive and more cost-ef fective experience. How do you think banks should han- dle customer ownership of data? Who owns the dat a and how cus- tomers will be protec ted when dat a is shared is a big challenge for the f inan- cial ser vices industr y. Take the banks, to begin with. Their val- uable client data could become available to other players, including e-commerce giants such as Amazon and Facebook, that already benefit from other data sets unavailable to banks. In this environment how will the banks continue delivering the greatest value to customers? How will they maintain the bond of trust that exists between them and these individuals? Banks will need to rethink their tradi- tional business models. They must join up the flow of data across their business and work out how to make better use of this data to unlock new revenue streams. They may charge third par ties for the inter faces to the bank's data. They may also ask customers to pay for discrete value-added ser vices, which can be charged for individually. Are the challenger banks at an advan- tage over the incumbents in this scenario? A lot of them have actually cop- ied the big banks' proposition, then tried to market themselves as smaller and more agile. There is a price dif ferential because their cost income is slightly bet ter, but at the same time they lack critical mass. To get over that, challengers will have to leapfrog traditional banking services and o€ er new ways of working that provide a better customer experience and target par- ticular customer groups. This a real challenge to established players. Startups, fintech and e-com- merce giants are already chipping away at the financial services market, such as payments, international money transfers, lending and investments. Therefore, challenger banks will need to compete not just with the tier-ones that currently own the customer relation- ships, but also new entrants that provide new, brilliant experiences for specific customer segments. Even so it's a tough market if you want to win new customers and only a few million in the UK have used the current account switching services. That said, if you look at some of the new organisations, such as Monzo, they really try to position them- selves in a di€ erent way from challenger banks. For these organisations, it's all about innovative technology and providing a much better customer experience. What do you think customers re- ally want among all this competition? People are looking for ser vices delivered around the money moments in their lives. They're prepared to take de- livery from trusted par ties who may not necessarily be banks. Millennial customers put less trust in banks than other generations, having grown up during a period of f inancial cri- sis and sluggish economic recovery. They use technology in every aspect of their lives and frankly most are more excited about a trip to the dentist than a conver- sation with their bank. Successful products and ser vices must add value to peoples' lives and needs. I believe we will see these new proposi- tions expand in use by niche audiences, however whether they are provided by the f intech that originally created them or by acquiring banks remains to be seen. Critically, the operating model and the talent mix should change within banks if they want to get ahead. The high levels of loyalty, or low levels of switching, that have kept banks afloat for many years will star t to vanish. Banks will need to work much harder for the same levels of loyal- ty in the future. For more information please visit www.capco.com or contact enquiries@capco.com initiatives. Nic Parmaksizian, global head of digital and a partner at Capco, says: "Many banks realise that data is critical to business-model success, and turning it into valuable insights will allow them to retain and expand their customer base. Now we are seeing banks trying to put their data back into the hands of the cus- tomer because that's really where the val- ue will come from. Equally, new banking services that leverage machine-learning and artificial intelligence (AI) are starting to emerge." By instigating the gathering and pro- cessing of data for a suf f icient period, a bank can star t to build predictive mod- els that could help it deliver value to its customers, for example in the way of recommendation and advice. Robo-ad- visers are already able to of fer guidance on the probabilit y of investments, which is far simpler than the execution algo- rithms that are used by asset manager trading desks. Mr Parmaksizian says: "With that in mind, having a chief data o¤ cer, who brings the organisation together around this ap- proach and adds real value, is essential." AI REVOLUTION This is not such an unfamiliar land for the e-commerce giants that are already mov- ing into the payments space using their detailed customer information. Given they already have a lot of customer information, they may be able to develop very power- ful value propositions for customers that banks might not be able to compete with. The trading environment has increas- ingly moved away from information that is consumable by humans. For fi nancial ser- vices fi rms to succeed, they must also raise their level of analysis to bring in larger data sets, which typically need automation and machine-learning to be understood. "With the rise of machine-learning and artifi cial intelligence, I think human intel- ligence will increasingly fi nd it di¤ cult to untangle the decisions that we are going to see in the future," says Mr Parmaksizian. At the end of the day, everything de- pends on shifting consumer attitudes. Even today, 37 per cent of UK bank customers have stayed with their bank for 20 years or more. On average 86,300 customers switched accounts each month in the UK to November 2016, down from an average of 98,500 a month in 2014. But banks ig- nore the changing attitudes of di€ erent customer segments at their peril. "Millennials demand different things from f inancial ser vices providers," says Mr Geldard. "In this world where banks f ind it harder to make money, they are highly motivated to innovate in ser vice and product design for these genera- tions. This new segment of customers is not lethargic – far from it, they are ex- tremely dynamic, extremely active, and their brand loyalty is far less rigid than with older customers." *Account aggregation and digital fi nance tools This new segment of customers is not lethargic – far from it, they are extremely dynamic, extremely active, and their brand loyalty is far less rigid

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