How can banks regain consumer trust?
In the 2008 financial crash, certain groups of bankers were seen as disconnected and blamed for widespread economic problems which severely impacted the most vulnerable people in society. The crisis sent shockwaves throughout the financial services sector, with the likes of Lehman Brothers and Northern Rock going bust. To this day, the banks are yet to fully recover.
Twelve years later and we’re now in the midst of another global crisis, this time with no credible scapegoat. The economic and societal impacts of COVID-19 will be felt for years to come by society’s most vulnerable, and we’ll soon arrive at a point where banks will need to be making some difficult decisions. The pandemic accentuated the importance of a positive customer experience through automation and simplified business processes, and if banks can help customers navigate their way through this period of turmoil, it won’t be forgotten. So how can the sector repair its damaged image?
The good news is that banks are in a much stronger and sounder position today than they were in 2008. Regulations align better with economic reality, the capital provisions are greater, and the Bank of England intervened quickly to suspend all bonuses and dividends as soon as COVID-19 hit the UK. Customers are better protected too. And with the Financial Services Compensation Scheme (FSCS) effectively guaranteeing all retail deposits up to £85,000 (£170,000 for joint accounts), a bank run of the type that wrecked Northern Rock is very unlikely.
Difficult times ahead
However, there are difficult times ahead. The government’s furlough scheme currently buffers banks. This has helped keep businesses afloat and employees paid. But these funds won’t last forever, and unless there’s an immediate bounce back after the lockdown, the worst of the crisis is surely yet to come. Not so much a “V-shaped recovery” – rather a “long tick.” When the money runs out, banks will have to start making difficult decisions, especially about lending.
What will make these decisions even more difficult is that the crisis has turned a lot of perceived wisdom about creditworthiness on its head. Who would have thought at the start of this year that airline pilots might be a credit risk, for example? In fact, many professions are likely to see significant reductions in business volumes and income over the coming months. And since many professionals are used to leading relatively credit-hungry lifestyles with large outgoings, the strain will soon start to show.
Rethinking risk models
This is a problem because many banks currently take a bare-minimum approach to credit risk modelling. Most banks make day-to-day credit decisions using dated processes and data. They base them on a very broad segmentation of the customer base because when times were good, it didn’t seem worth the trouble to drill down to the individual level. Meanwhile, anomalies and unusually complex cases are referred to senior decision makers who use their experience to make the right calls manually, with expert judgment.
This approach simply won’t work in a situation where many more businesses and individuals are skating on thin ice, and a much larger proportion of decisions require sophisticated analysis. There just won’t be enough expertise to go around.
Until now, this hasn’t been an issue – after all, at high tide, most ships can sail serenely. But when the tide goes out, it’s the boats with the deepest draught that are the first to run aground. In the same way, it’s the banks with the most historical baggage that are in the greatest danger. If their legacy systems, siloed processes, organizational structures and change-resistant cultural norms make them unable or unwilling to adapt, they won’t have the agility to respond to the new reality.
In short, the UK’s largest banks need to act now. They need to put the right decisioning processes and infrastructures in place to support their human experts in making more tough decisions, faster and more accurately. And they also need that technology to guide a new generation of less-experienced decision makers, helping them make the right calls to help customers get back on an even keel.
The only option is for banks to level-up and simplify financial decisioning processes by adopting a more powerful, real-time and comprehensive approach to credit decisioning – one that will satisfy regulators and comply with all internal and external audit standards. An intelligent decisioning fabric enabling banks to assess each individual case on its merits and take the right action to support each customer.
This ability to make responsible decisions and act effectively in real time is vital for banks to support vulnerable customers through the COVID-19 pandemic and to help rebuild “UK plc” in its aftermath. Moreover, in the longer term, intelligent decisioning will help bind banks and their customers closer together and demonstrate that banking is more than just another utility service, like electricity, water or gas. By getting closer to their customers and understanding their lives, needs and desires, banks can shift the perception of the value they offer and assume a role as trusted adviser and business partner. They will become an integral part of the fabric of the networked society.
The people aspect
The pandemic has made it clear that today’s banking landscape is a people business – developing an understanding of customers has never been more important. Banking is now firmly engrained in people’s everyday lives as we live in a networked society, and this is a trend which will only continue as the digital banking ecosystem continues to grow.
Banks are therefore in a unique position to win over consumer trust and recover the reputational damage suffered in the 2008 crash. However, should they fail it could ultimately be the last straw and lead to irreparable damage. Decision-makers must have full visibility around each customer’s unique financial situation, allowing them to offer guidance and support where necessary. Doing so will help to shift the untrustworthy perception of banks in the long-term and underline their role in supporting the population during the pandemic.