Sponsored: Transforming financial services beyond digital
Nucleus Software and AB+F brought together industry participants in the mortgage sector to discuss how the industry is delivering for customers through innovation while also balancing the need for agility.
The speed of change has continued to increase exponentially and for the financial services sector this requires banks to be agile at a pace never experienced before. Indeed, in the most recent earnings season, the now former CEO of Westpac Brian Hartzer argued when presenting the bank’s results that the regulatory burden as well as the costs of doing business was becoming a disincentive to invest in Australia.
A key theme for the majors this year is the challenge to balance regulatory costs with the need to innovate. However, for smaller more customer centric organisations the opportunity to attract disenfranchised customers has only increased and while the banking sector is dominated by large incumbents, the opportunity for agile players is to achieve double digit growth by satisfying customer needs and making banking more accessible.
Nucleus’ O’Byrne set the scene by highlighting the need for “hyper-agility”.
Here, he drew on his experience in implementing core banking system replacements which was all about transforming a business vision for the future. Against the background of tighter regulation and a tougher credit environment, roundtable participants discussed the challenges in the sector, recognising the crucial need for this agility but at the same time balancing competing needs of their business.
According to Kiln of ING, customers have become a lot more aware of the market and how it can best serve their needs.
“Expectations are rightly higher from their banks, both on the deposit and mortgages sides and our industry is responding to that.,” Kiln said.
“Customers are now a lot more aware of the market. They are a lot more switched on around their expectations from their bank both on the deposit side and on the mortgages side and our industry is needing to respond to that. We have been able to do that. While parts of the sector have had it tough, we have had a pretty good year,” Kiln said.
Cautious is the word that comes to mind For Greater Bank’s Brokate. “We don’t know what’s around the corner from a regulatory point of view. There’s still clarification around some of the requirements upon us, around serviceability and living expenses, so I think at this stage there are some aspects that we are just taking day by day whilst trying to have a longer term view and plan more strategically to be able to provide that agility to our customers,” she said.
AMP’s Mauleon is seeing “green shoots” for his business. While issues like serviceability are also a challenge, he sees demand for loans steadily improving. “Regulatory actions have been key in shaping the market and as the market recovers, we will need to be mindful of the speed of the recovery and the potential for renewed regulatory intervention. One of the things we talk a lot in the bank is about being very composed with [sustainable growth] As a second tier layer, you need to keep certain levers carefully matched because if you get them unbalanced you throw your back office out. “We have to be very careful in managing this balance as well as prudentially manage the operation,” Mauleon said.
While you enable partners through APIs, you need to ensure that the policy and regulatory requirements are not compromised, Brajesh Khandelwal, Nucleus Software.
Virgin Money’s Li said it was a great time to be a challenger in the industry. “In the current lending environment, the bank has really stepped up its ability to price and respond to customer demand around price. We have also been able to deliver on speed. That has really improved over the last three to four years. I’m not just saying challenger banks like ours have delivered on price, I am also talking about the major banks,” he said.
Despite the challenging environment, some banks are even implementing new initiatives. Bank of Sydney’s Sitnikoski talked about expanding its presence by fine tuning our branch network and expanding smart branches which are essentially contact centers that will give the bank greater exposure rather than traditional branch network.
“We are also going through a digital transformation of our back office which comes to the point that the back office needs to match the front, because you can bring the loans in but to process them is key. Expectation of the customers is that they are not waiting for two weeks or three weeks for approval anymore; they want it straightaway. It is about keeping up with that expectation to try and meet these needs. We are going through this journey literally at the moment,” Sitnikoski said.
Enter the neos
The entry of the neobanks in the Australian market will no doubt shift the dial on competition. Here the roundtable participants debated the key drivers behind this new competition. AMP’s Mauleon spoke about the difficulty of getting market share in the market even at 1 per cent. “Here in Australia, to you get a 1 per cent market share, it is very difficult,” he said.
“The investment that you are going to have to throw to marketing and creating a brand presence is very significant in addition to capital requirements making entry to the more traditional lending side more difficult,” Mauleon said. He also noted that competition in lending is different to a sector like payments which is more easily disrupted– the buy-now-pay later sector being a case in point.
O’Byrne added that the nuances between the markets are different. “The neo banks in Europe have gained about 15 million customers from effectively none in 2011 and over that same period of time the traditional banks have declined by about two million, so it’s not that they have been growing market share as the market is growing, it’s also not that they have just been stealing the existing banks’ customers; it’s a combination of both,” O’Byrne said.
“Now to be fair, most of that is not really on the lending side; most of that is on at best a current account. It’s all transactional type of products but it’s common,” O’Byrne said. He also touched on the theme of the competition playing out in payments. “If you’re a traditional player in the markets, you have to be careful between the panic caused by businesses like Afterpay not being as regulated as banks and therefore they can grow faster.
It may not be a level playing field, but you’ve got to deal with that dynamic, because the underlying competitive driver in that particular market is what the customers actually really want,” O’Byrne said. ING’s Kiln highlighted transparency as being another competitive driver. “Over the last few years, we’ve found customers’ expectations have changed and external – as well as internal – drivers are helping to determine how the industry uses data.” Kiln said.
“A customer should be able to expect that they won’t have to provide the same information to their bank over and over again. If fintechs are delivering on these types of expectations our customers will follow.” Kiln said. The fluidity of consumer choices will also be another theme that won’t necessarily be a drive to competition but will certainly underpin in.
RFi Group’s Wilson highlighted research which revealed that in 95 per cent of cases, consumers see their main financial institutions [MFI] as the bank that holds their primary transaction account. However, the MFI relationship is now shifting. “Over the last 24 to 18 months, more customers are going outside their MFI for their mortgage which creates some interesting challenges for being able to meet that knowing-your-customer proposition,” Wilson said
The ability to provide a slick process and providing the best mortgage experience has created challenges for incumbents but for Wilson it has meant that mortgages can now be an interesting lever for MFI switching.
According to RFi Group research, one big bank is slowly losing its grip on being the MFI, slipping from 29 per cent to 27 per cent based on a survey of 60,000 Australians over the course of 12 months.
“Now, that’s a big sample and a 2 per cent shift for a big bank is actually a big number and on MFI, that’s an even more important number. There have definitely been new competitive factors at play that has driven this shift,” Wilson said.
So what are these competitive factors. Customers feeling that they are no longer rewarded for loyalty could be key. As Wilson notes, while customers of the big banks may have been with their bank for many years, this has not translated into hard benefits such as mortgage discounting – a conversation which has recently emerged where banks are discounting more aggressively for newer customers while retaining existing customers at uncompetitive rates. In fact, it has now attracted a probe by the competition watchdog.
O’Byrne also drew on his personal experience adding that it is about technology. O’Byrne banks with a neobank (N26) for his day-to-day debit transactions because he does not get charged for daily fees and the application process was virtually smooth. “It’s very much like a mobile-phone type subscription. And while I may not shift all my banking to this bank, it is carving out a competitive space in a certain part of the sector,” he said. Importantly this has led to dialogue between consumers about the value propositions of these new banks. O’Byrne recalls that when he paid at the petrol station using the N26 debit card, the service attendant asked about the bank adding that he was with Revolut.
Customers are now a lot more aware of the market. They are a lot more switched on around their expectations from their bank both on the deposit side and on the mortgages side and our industry is needing to respond to that,” William Kiln, ING"
Brokers will also remain an important part of the competitive landscape. According to Virgin Money’s Li, the industry is firmly in a new competitive environment where brokers are driving a lot of the competition around better interest rates, turnaround times and policies as well. “In fact turnaround times have been a key driver for brokers, and have become a new “base line” for a good a customer experience.
“On top of that, larger banks or larger regional banks are diversifying into arenas like Virgin Money which has got to be placed as a neo bank to compete in the same arena, so you’ve got the larger banks starting to diversify, in the case of Westpac [which announced its decision to launch a digital platform] as well to compete. It’s the type of environment we’re going in,” Li said.
Adapting to competition
Nucleus’ Khandelwal provided an international perspective. “Basically, banks are adapting to competition by opening up channels as well as their APIs. While you enable partners through APIs, you need to ensure that the policy and regulatory requirements are not compromised. The best practice is to achieve this by having a common policy framework which provides single source of truth across channels. It has to be easily maintainable because as you process the loans and learn from previous credit policies, you should be able to modify your credit policies. This approach has to be agile,” Khandelwal said.
“It should not be the case that applying for a loan on a channel is digital experience for customer, but everything is manual post loan submission. The process has to be digital end-to-end. That’s how we are seeing the banks approaching and addressing competition,” Khandelwal said.
Another key competitive driver is comprehensive credit reporting (CCR). For Bank of Sydney’s Sitnikoski, this will be a positive for smaller banks. “It is much better for the smaller players rather than the bigger players because obviously we will be able to have all their data – and to use it properly. Access to this data will definitely speed up turnaround times,” Sitnikoski said.
Greater Bank’s Brokate added that education and trust will play a crucial role in a more open data world. “We are still a bank and there is still an element of trust that customer see as important,” Brokate said. We are still being challenged by CCR on just how we educate staff and customers for that matter,” she said.
Importantly, Brokate added that trust will play a crucial role in a more open data world. “We are still a bank and there is still an element of trust that customers see as important,” Brokate said.
Managing this data will also be a challenge particularly as banks need to coordinate their systems in order to achieve consistent data across their different businesses.
“As open banking rolls through, and with organisations becoming more adapt at digesting that information in a comprehensive way, there will likely to be improvements to customer experience,” Li said.
Bank of Sydney’s Kalpouzanis spoke about the benefit of not having to operate in legacy systems. “We don’t have a legacy system that needs to go and search for this data, we have got one system. It’s not about the money, it is about bringing systems and processes together in order to create great customer experiences,” Kalpouzanis said.
“Our challenges really are about using data in a meaningful way. We are always focused on how we can use our customer data to create services and products that will deliver a better customer experience,” Kiln said.
On the theme of customer experience, Nucleus’ Khandelwal provided the example of a bank in India who can now deliver on a 10 second loan. “If a customer is new to the bank, of course they take a little more time but still it is end-to-end digital. They are able to deliver the service in a few minutes, if not in 10 seconds,” he said. This can be achieved because of the value of the data as well as the ability to use this data across any channel, from an ATM to mobile banking to internet banking.
“At any channel the customer chooses to use, they can get a loan processed in 10 seconds,” Khandelwal said.
The theme of hyper agility emerged and here the discussion focused on what is the core capability a business needs to deliver on when it comes to a personalized service. For Bank of Sydney’s Kalpouzanis, customer experience is not just about providing an app. Here it is important to ensure that systems support the front end of the business which provides the innovation such as apps.
“Customers are becoming more and more savvy, and we always talk about delivering the best customer experience through digital apps and all these sorts of things but fundamentally if your product is not working because your back end is not working properly and it’s not supporting the scale, that’s the worst experience there is for a customer,” Kalpouzanis said.
For Nucleus’ Khandelwal, building the capability at the back end is important and can even allow a business to personalize service for 47 million customers as in the case of the HDFC Bank in India. “The capability at the back end is extremely important.
For example, the customer’s journey does not end with loan sanction or settlement. “If a customer wants to make a prepayment and see how it will change the monthly installment and how much they would save in a few months’ time, if the bank doesn’t provide this information instantly, then you can’t create a good customer experience. It’s not just about having a channel. It’s also about having the capability at the backend to make richer customer engagement on the channel,” Khandelwal said.
Expectation of the customers is that they are not waiting for two weeks or three weeks for approval anymore; they want it straightaway,” Diana Sitnikoski, Bank of Sydney
With the emergence of new innovation, scale is very much debated in the sector particularly as it sometimes argued that technology can help players deliver on scale.
For Greater Bank’s Brokate, it is too an issue of resourcing. “We do want to adopt newer capabilities, but we can only do it with the people that we have in the bank right now. Therefore, it’s a matter of focusing on transforming ourselves from a technology perspective, especially when it comes to our core legacy technology.
This will give us a better idea about what other capabilities we want to introduce to the bank,” Brokate said.
Virgin Money’s Li drew on his experience in both working in a new organisation and in an incumbent. “Significant investment has been made into Virgin Money [from Bank of Queensland] to establish both its brand and core system. Through the diversification of brands or through the diversification of business it may be a possible way forward for larger banks that are looking to minimize the risk of converting its own legacy system” Li said.
For AMP’s Mauleon, there is a balance needed between achieving scale but without adding to the legacy. “Scale is critical. If you look at the industry as a whole, it is a scale game. For payments in particular, you need scale and that is also true on the lending side,” he said. It was important to identify and address bottlenecks throughout the lending process as it is “something you simply can’t scale manually”. Mauleon said it was “critical to address these bottlenecks in
order to scale the business and provide a great customer experience. This is absolutely critical for growth,” he said.
Nucleus’ O’Byrne said it was important that banks don’t get caught up on the rhetoric of needing to fully replace their core banking system. “The core banking system vendors over the last 25 to 30 years have done a fantastic job and they have convinced most of the market that the horizontal footprint is more important than the vertical,” he said. In essence, their belief was that banks need to have a single customer view across all of the various products. “The core banking vendors would say that to fix your legacy issue around lending, what you need is to is replace your core banking system”.
However, as O’Byrne highlights that is not going to solve the problem because lending is becoming more and more sophisticated and the core banking systems can’t handle it”. Rather the approach should be a combination of both, that is running the core banking system as well as ensuring that the sophistication can be addressed.
Here the theme around hyper agility merged and discussion focused on how banks particularly the smaller players can deliver the best technology-driven customer solutions at scale. “We focus on those products that we think enable good financial health of our customers enabling them to better manage their wealth.
To do this, as a bank you really need to understand your consumer’s sentiment and their needs,” Mauleon said.
Bank of Sydney’s Sitnikoski also agreed with that sentiment. “Everyone is going to have to look at a niche that they excel in. You can’t be a bank to everybody,” she said. This could even be true in an open banking world, where consumers could have products with different providers. “It will be a lot more targeted. If a home loan is offered, does the bank necessarily need to also provide the credit card? Currently the answer is yes but in the future your customer will probably get a credit card from another provider. Therefore, you don’t necessarily need the platform to support that when a bank can just specialize in delivering on the home loan.
I don’t think you are going to be able to be a bank that offers everything and still be competitive,” Sitnikoski said. According to Li, there are advantages for being an existing large player or even the medium-sized players in this market through being a recognised brand and by having a solid existing customer base. Here he believes that the Royal Commission has amplified that importance. “The Royal Commission provided an impetus for players in the industry to improve their overall customer service and build their capabilities,” Li said. As most banks are confronted with higher compliance costs while still needing to invest in the technology. “There is a real focus within the industry to ensure customer outcomes are at the forefront of all their decisions.”
O’Byrne highlighted the importance of avoiding the need to build new legacy systems. “As a bank, there is no need to develop software to encapsulate your intellectual property. Even if you do that it, and even if it brings you first mover advantage how will you sustain it?,” he said. “Instead, if you outsource it to a company that is constantly developing their product , they will have the ability to anticipate the needs of your bank,” O’Byrne said.
Australian banking has been the most dominant industry sector in this country for decades. It still employs more people than anyone, much more so than mining. The top four of the large six companies in the Australian ASX are our banks and those six companies still represent 30 per cent of the ASX value, - that’s how dominant this sector has been. It almost has a 24 per cent grip on the economy particularly as the sector includes superannuation and insurance as well. However, this growth may not continue. Trust will underpin the viability of the sector going forward.
“I think trust is still one of the most important components that we can offer our customers,” Brokate said. Indeed, the currency of trust will be key in distinguishing the big banks from the tech players despite the backing of innovative services. “I don’t plan on giving Google or Facebook my salary for safekeeping. I don’t trust them enough for that and I would not trust them if they suddenly decided to become a bank,” O’Byrne quipped. In addition to trust, he also highlighted the need for more education about financial services, referring to the previous example of the buy-now-pay-later segment, highlighted earlier on in the discussions.
For O’Byrne, the consumer may not realise that they are in fact getting a loan when making an Afterpay repayment. It’s just not called a loan. “Maybe the opportunity for banks is to get rid of some of the jargon and potentially stop talking about financial wellbeing and health and instead commit to educating customers about what their financial needs really should be so that they do understand it. There is a real opportunity in educating consumers in order to help them make better choices,” O’Byrne said. For Virgin Money’s Li, it will be about going back to fundamentals. We need to go back to what banking is all about, which is keeping your money safe. As long as the industry recognises that, I think banking will still be relevant in our lifetime,” Li said.