Peter Brown, Head of Funds Banking at RBS International, looks at what the banking community must do to keep up with change
We live in a rapidly changing world, where the use of technology is reshaping traditional business models and consumers are demanding more.
Who would have thought Uber would be the biggest taxi firm in the world, worth over $65bn, but without owning any taxis or employing any drivers? Regardless of this, its customer satisfaction is phenomenally high compared with traditional operators.
The banking industry is also going through a revolution. Traditional banks are trying to balance the need to deliver an increasingly better customer experience, while managing costs and dealing with much more nimble competitors.
Often these competitors aren’t banks and have very different operating models. Some will feel threatened by this, others will see it as an opportunity, but the trends are positive for bank customers.
A number of trends are driving this revolution and most are having an impact in the Channel Islands.
• Customer behaviour is changing Businesses want to deal with banks in a different way. They want to engage digitally, undertaking basic banking online and serving themselves electronically rather than filling in forms and using branches or business centres. Why does it take weeks to get an account opened or secure a loan? Customers want this done in days or hours, with a simple process so they can focus on their businesses.
• Customers want access to value-added expertise Customers want access to bankers who really understand the sector they operate in. People who invest time understanding their business and personal aspirations, and work with them to develop solutions that help them deliver their goals and ambitions. Customers need someone there to support them through their own moments of truth - acquiring a business, investing for expansion, dealing with a supplier problem, or planning for their succession.
• New competitors are disrupting the market Nimble challenger banks, debt funds and fintech businesses are filling the gaps left by traditional banks. These competitors are leveraging technology to deliver slick and fast execution for their customers. For example, peer to peer lenders are connecting individual and institutional lenders with businesses directly, taking banks out of the process.
• Structural reform and regulation is driving up costs and complexity Following the financial crisis, a raft of regulation has been enacted to improve the stability of banks and ensure that customers are protected if things go wrong. This has increased cost and complexity for banks, which have responded by focusing on areas in which they can add most value to their customers, rather than trying to do all things for all businesses.
• Lower for longer We are operating in a low interest rate environment, with rates in Europe in negative territory. Customers with cash to invest are struggling to get a yield, and this is also having an impact on the profitability of banks. According to the latest figures from Jersey Finance and Guernsey Finance, Jersey has £107.6bn on deposit (June 2016) and £81.3bn in Guernsey (March 2016), a downward trend, fuelled by the low interest rate environment affecting the appeal of straightforward deposits.
However, the banking model in both jurisdictions is stable and large numbers of international banks with substantial operations remain in the islands.
A further positive trend is that pension funds and insurance companies are now investing more in alternative asset classes. This is benefiting private equity, real estate, debt and infrastructure funds, a core part of the financial services market in the Channel Islands.
• An uncertain world The UK’s decision to leave the European Union, and the recent US election, have created uncertainty that banks and businesses have to deal with. For banking and financial services, a key sector for the UK and Channel Island economies, this could have far-reaching implications for how we do business. Critical will be some form of passporting or equivalence regime to enable banks, funds and insurers to continue to serve their customers across the EU, which remains a key market for us all.
Banks must reinvent themselves
One certainty is that banks are operating in a rapidly changing environment and this clearly applies in the Channel Islands. However, regardless of the uncertainty in the markets, the fact that the islands remain key jurisdictions for banking and provide an ideal platform for further expansion and diversification, is a crucial factor for the future.
Our own funds sector offering is set to expand in 2017 across a number of jurisdictions, not only in the Channel Islands, illustrating the way banks are adapting and diversifying their offering to meet market demand.
Banks, including those in the Channel Islands, are working to deliver a much better customer experience, focusing their time on really understanding their customers’ needs, organising themselves around sectors to provide valuable insight and supporting their customers with solutions that help them deliver their goals.
Customers are, rightly, demanding more from us and our business models will continue to encounter pressure from agile competitors. While this presents challenges, all banks should see this as an opportunity to simplify their businesses, radically improve core processes such as account opening and lending, and invest in technology to deliver the core services in a cost-efficient way.
Given the pace of technological change, artificial intelligence is also likely to play a key role in the future – just look at how quickly driverless cars have been developed.
There is plenty for us to consider as we look forward into 2017. It promises to be an exciting year.