How will banks respond to a new world?
-Jeremy Edwards is Head of Banking & Financial Services at Firstsource Solutions. The opinions expressed are his own.-
The recent publication of Sir John Vickers’ International Commission on Banking (ICB) finally gave the banking industry a glimpse of the long-promised change in regulatory regimes following the global financial crisis. The report comes at the same time as a torrent of new regulations and legal changes: the recent High Court ruling on the misselling of payment protection insurance (which is estimated to cost the banks £8 billion), the Treasury report on financial regulation, and the Basel III regulations that will force banks to hold greater liquidity. If adopted, many of these recommendations will create unprecedented change for the banking industry.
Though some of Vickers’ recommendations were less dramatic than expected, all of these changes point in one direction: banks will be faced with increased costs to meet new regulations and will have to operate in a much more competitive market.
One key recommendation of the ICB report is that banks such as Barclays, HSBC and Royal Bank of Scotland, that combine investment and retail banking, will have to maintain a “firewall” between these operations. Since they will no longer be able to cross subsidise their operations, banks will face increasing costs. Similarly, the recommendation that banks maintain 10% of their profits as a capital reserve will have an impact on profitability. Efficiency savings will need to be made if banks are to maintain their margins
By forming strategic partnerships with outsourcing companies, banks can help achieve such efficiency savings. It has been estimated by Accenture that in customer service, collections, and the processing of payments, outsourcers can usually cut a bank’s operating costs by 20 percent. According to the World Retail Banking Report, 77 per cent of retail banks now outsource at least one part of their business.
The ICB recommendation that will have the most immediate impact on the high street is that the retail banking market should be opened up to more competition. For years, there have been calls for more diversity in the market, but so far new entrants such as Metro, NBNK, and Bank of London and the Middle East have failed to threaten the dominance of the major banks. Customers are clearly reluctant to change bank accounts, as last year’s Firstsource/YouGov survey found: Only 3 per cent of adults had changed bank accounts within the previous year, while 77 percent of adults had been with the same bank more than five years.
However, Vicker’s proposal that customers should be able to switch banks and retain the same account number at the touch of a button – as easily as they can migrate from one mobile phone company to another – could result in a more competitive retail banking sector. In particular, removing the logistical complexity of transferring all the direct debits and credits from one account to another would considerably free up the market. The introduction of MAC and PAC codes in the UK mobile phone and broadband sector created healthy competition with mobile companies really focusing on customer satisfaction to avoid high rates of customer turnover or ‘churn’.
Outsourcers can help banks retain and win new customers in this potentially more competitive marketplace, just as they have for their clients in other industries, such as communications service providers, by implementing the latest trends in customer service. For example, outsourcers can offer banks a 24-hour customer service operation by locating centres in different time zones, providing the same quality of customer service around the clock.
Helping banks communicate with customers via social network sites is likely to be the next area of customer service development with which outsourcers can help. According to a Firstsource/YouGov survey, fifteen per cent of 18-24 year olds say that they would like to communicate with their bank through Facebook and other social networking sites and this figure is likely to grow.
At the same time as being opened up to more competition, banks could also easily have a huge new burden of processing work to manage. Vickers recommends that banks should enable customers to switch bank accounts more easily, but he also recommends that such a switch should be completed within seven days (whereas currently there is no limit on this process). This comes as many banks have been reducing staff numbers over the last two years – and lack the internal workforce to cope with any significant increase in workload.
On top of these potential changes from the ICB report, the legacy of misselling payment protection insurance (PPI) will create a further administrative burden for banks. They will be required to contact all past PPI customers and invite them to complain if they believe they were missold products. Already it has been reported that some high-street banks are hiring around 6,000 workers and seeking temporary office space to tackle complaints from customers. Some industry commentators have warned that in-house call centres will not have the capacity to tackle the increased workload. In this climate of uncertainty, outsourcers can help banks scale up or scale down their workforce quickly and avoid the need for banks to make heavy capital investments in new facilities that they may not need over the longer-term.
The UK’s National Outsourcing Association’s Confidence Index found last year that there was more positivity about outsourcing in financial services than in any other sector. If Vickers’ recommendations become reality then, together with the other recent developments in the industry, it is clear that banks will need to increase efficiency to cut costs, improve customer relations to retain and win business in a more competitive marketplace, and upscale back office processing to deal with new regulations. All this will only strengthen the strategic partnership between banks and outsourcers.