• David Bannister
    David Bannister Editor Banking Technology

    David Bannister is the editor of Banking Technology, one of the leading fintech publications in the industry. He has been covering technology issues for 35 years and specializing in financial technology for the past 24 years, contributing to a range of titles including Dealing with Technology, Waters magazine, Financial Markets IT, Financial News, the Financial Times, and The Times.

    He is a well-known panellist and speaker on the conference circuit and has taken part in many international conferences, including Swift’s Sibos, the International Payments Summit, EBAday and the ISITC Vendor Forum.

Regulation-hindsight or hindrance:

A customer experience story

By: David Bannister
March 2015

The financial services sector, banking in particular, is groaning under the weight of regulation, largely introduced since the financial crisis in 2007-08. From this painful process it is hoped that a safer international financial system will emerge—one that is radically different and which will have a different relationship with its customers and clients.

This is especially true in this new digital world, where transparency—or the lack thereof—becomes extremely evident to customers who have Learned to expect clear communication from all other service providers. So regulation is not only a burden for the banks but also a necessity for the customers.

According to some calculations, by 2020 the regulations passed since the 2009 meeting of G20 countries in Pittsburgh represent a pile of papers three times the height of the Eiffel Tower in Paris: that’s 972 metres, or 17% taller than the Burj Khalifa in Dubai, currently the world’s tallest building.

It would take a dedicated fast reader nearly 650 years to read the 97 million sheets of A4 paper that represents, so fortunately it can be roughly divided into two sets. The first set is intended to reduce the risk in the system, and largely concerns the capital markets and investment banking world, though some newly-toughened rules on anti-money laundering (AML) and Know Your Customer (KYC) have effects across the board.

The second set of new regulations consists largely of legislation aimed at protecting consumers from rapacious charges and the creation of a more competitive environment.

Both sets have had what could best be described as unintended consequences, some of which are the polar opposite of what the regulators intended.

In the case of regulation intended to make the financial system safer, the headline items—forcing all derivatives trading onto regulated exchanges, for instance—have a Long way to go, and suffer greatly from a lack of global consensus among the regulators. The US and European regulators are cooperating as never before, but the wider international scene is more fragmented, though regulators in Singapore, Hong Kong and Tokyo are openly and actively committed to harmonization of regulatory oversight.

What this will all mean for the investment world is hard to say, but whichever direction the capital markets develop in, there are implications for the wider economy and the political Landscape of individual countries.

At the time of writing, the European Commission’s plans for a Capital Markets Union are currently out for public consultation. The purpose of the proposed union is to allow businesses from any EU member state to raise investment from the capital markets in any other. It is clearly intended to drive economic growth through promoting more access to funds for business.

Its detractors say, however, that some of the regulations being brought in alongside the proposal—the Financial Transaction Tax in particular—will have such a negative impact on the markets that there won’t be any more funds flowing to industry; perhaps even the opposite, as investment funds move to less-regulated parts of the world.

This has already been seen to be a problem with the regulations governing the amount of capital that banks must hold. The Capital Adequacy Directive does have the advantage of being a global regulation, to all intents and purposes, but its intention is primarily to prevent the collapse of a financial institution and its mechanism is to demand that they hold more funds.

At the same time, banks are being asked to make Less risky loans—particularly in the small business and home loan or mortgage markets. Inevitably, this has led to a drying up of funds: headlines about banks making more stringent enquiries before granting mortgages, or of adding draconian clauses when renewing lines of credit to business, began to appear.

At the same time, and more fortuitously than some politicians would like people to believe, the gap thus created has combined with dramatic changes in technology to reverse the balance of power between consumers and the financial service providers. Thirty years ago, millions of dollars were needed to afford the kinds of computer that you needed to run a core banking system. It is now possible to rent that as a cloud-provisioned service from providers like Mambu, which uses Amazon Web Services to run systems for new and established banks alike.

This is a highly volatile sector: on the one hand there are many financial technologies—fintech—startups claiming that they are ’disrupting’ the traditional models and offering alternatives, while on the other there is a desperate need for existing institutions to modernize their systems, allowing new entrants to challenge them on their home turf.

And it is leading to changes that will improve the choices for businesses and consumers, but it is also taking Longer than either politicians with their eyes on the next election or technology enthusiasts evangelizing the next big thing would like or expect.

In the UK at Least, several changes are making it much easier for consumers to switch banks. Firstly, a Parliamentary Commission on Banking Standards, which reviewed standards and culture in the country’s banking sector back in 2013, resulted in a new scheme designed to help customers switch current account provider by removing penalty charges. One year after the scheme was introduced; current account switching was increased by 19%, with more than a million customers moving.

Further changes, including the ability to transfer account numbers from one provider to another, are mooted. As it gets easier for customers to switch, customer service and innovation become more important in retaining customers. Orchestrating customer experience by providing the right products at the right price is also critical to keep the customers loyal to the bank.

This year is also starting to see new, technology-empowered entrants to the market offering a range of services—though rarely all at the same time. Such is the importance of customer service that some new entrants’ proposals are concentrating on particular communities, either geographically or by business sector.

But while the attention goes to the startups and the fintech innovations, it is worth taking a look at the case of Swedish bank Handlesbanken, which has broken into the UK market (among others) largely unnoticed, through a decentralized approach that promises consumers that they will deal only with their own branch and a strong presence in the agricultural sector. It currently has 185 branches in the UK.

The UK government—in common, no doubt, with others—wants to encourage this and, to this end, it has relaxed the rules governing the application process for a banking Licence, announcing two years ago that potential new entrants to the UK banking market with “the development backing, capital and infrastructure to allow them to set the bank up at speed”, such as where they are able to use existing IT and other infrastructure, will also be able to take advantage of an improved authorization process that should allow them to be fast-tracked through in as little as just six months.

This streamlined process dramatically reduced the time taken to get Hampden & Co, a new UK private bank, off the starting blocks. According to Ray Entwistle, founder and chairman of the Edinburgh-based bank, the authorities have lived up to this promise. “Behind the scenes, things were happening very quickly,” he says. “The big change was that previously you had to get everything in place first, including the systems, and then apply, which is not a good way to raise capital.”

Under the new approach, the Bank of England, the Financial Conduct Authority and Prudential Regulation Authority effectively issued a provisional licence to the new institution and monitored it for a year. This so-called mobilization process—which Hampden was one of the first to go through—has improved the procedure by allowing the management team to raise capital against a more tangible business plan, according to Entwistle.

Handlesbanken doesn’t claim to be a startup—its history goes back to the1870s and it started in the UK in 1982—but it both gives the Lie to the death of the branch and emphasises the role of customer service in this area.