Disrupting the bankers
A new Reserve Bank governor, an Australian Royal Commission into banking misdemeanours, a raft of new technologies, and regulation opening up the finance sector. All these will combine to make banking far from boring over the next two years. Nikki Mandow talks to three Kiwibank leaders, including CEO Steve Jurkovich, to put together a top 10 of changes to expect in the banking industry in 2019-2020.
Geoff Waller remembers as a child in the 1980s his dad sending him off to school in Twizel with a cheque in his bag. When the bell rang for lunch, Waller, who is now Kiwibank’s general manager of retail distribution, would duck out of the gates, head to the bank and cash the cheque. It was the only way his working solo dad could get money to pay the rent and buy groceries at a time when banks were only open weekdays from 10am to 3pm. Longer opening hours, ATMs, internet and mobile banking have brought big changes to banking in Waller’s lifetime. But more change is coming, and the next couple of years will be critical.
Here are 10 trends to look out for:
New tone from the top
Reserve Bank governor Adrian Orr, who took the top banking regulator job in March last year, has a different outlook from his predecessors, including a more conservative and New Zealand-centric approach. He announced in November moves to make banks hold significantly more capital than they have before - enough to cover a 1 in 200-year banking crisis. This means either shareholders accepting lower returns, or a change in pricing, says Kiwibank CEO Steve Jurkovich. That could be lower rates for savers and/or higher rates for mortgages.
Customer is king - no really this time
Orr and his counterpart at the Financial Markets Authority, Rob Everett, have made it quite clear over the last few months they are going to be looking for clear evidence customers are getting great outcomes from their banks. And that doesn’t mean simply taking the banks’ word for it or accepting as proof the fact customers aren’t complaining. They want banks to be far more proactive in making sure products work for customers, not just for banks. Jurkovich says the Reserve Bank has put a challenge out to banks to put resources into technology and staff to make sure customers are getting the best outcomes. “It’s difficult to do, we have legacy IT systems, we are learning our way. But the tone from the top is ‘that’s your problem’.” Australian-owned New Zealand banks together make more than $5 billion in profits a year. “The Reserve Bank and the FMA are saying ‘you have enough money, you need to fix this, you need to make those investments’.”
Banks are smarter than they were when Waller was a kid running off to cash a cheque at lunchtime. But companies like Amazon or Netflix are way better than banks at using their customers’ preferences or history to help them make good choices. Over the next year or so expect to see banks making better use of their databases to get smarter. It might be flexible accounts, offering you a credit card that better meets your needs, getting you a lower interest rate on your loan, or making digital forms easier by pre-filling them with information they already hold. It also means banks could be more personalised in how they deliver financial services to help make customer better off. However, banks with smarter offerings will also need to earn customer trust, Jurkovich says. Why should we believe that banks aren’t just using our information to make more money?
Take smart banking one step further and you get to open banking. That’s when customers get to own and control their financial data, so they can share it with third parties. For example, you could allow another bank access if you wanted to get a mortgage with a different bank, avoiding a lot of tedious form-filling, or you could open-up your books to a financial technology (fintech) company, who might be offering small business loans or services like budgeting or spending alerts. There’s even the option for tech giants like Amazon or Facebook to get into smart, synched, banking services. The UK, the EU and Australia have already started looking at open banking rules, and a pilot project headed by Payments NZ began here in March last year to test what open banking could look like. Commerce and Consumer Affairs Minister Kris Faafoi has given banks until mid-2019 to get their tech up to speed and create their own security and privacy standards to safely manage open banking.
Imagine hooking up your Xero business financials to a lender and - bingo - a decision in a few seconds.
Small customers will get more power
When banking mostly involved paperwork being done by humans, putting effort into small loans wasn’t worth it for banks. It cost the same to handle a $1000 loan or a $100,000 one. Open banking and new technologies are changing that - and expect more over the next 12-18 months. In the UK and Australia, for example, financial technology companies (known as fintechs) are offering small business loans based on information in the borrower’s accounting software. Imagine hooking up your Xero business financials to a lender and - bingo - a decision in a few seconds. Other fintechs help friends get together to buy a house.
Kiwibank runs the FinTech Accelerator programme and Kiwibank's head of transactions and payments Zoe Wallis sees the bank getting together with local fintechs, rather than setting up in competition.
“Fintechs have agility, banks have a customer base and funding behind them. It’s an opportunity to partner, not a threat.”
Real time payments
For some reason best known to bankers, if you send money from one bank to another in New Zealand, it doesn’t zoom over immediately - it takes a few hours, or days if you happen to send it on a Sunday or public holiday. It seems crazy from the outside - computer systems don’t go to the beach on weekends – but it has something to do with the batch processing used by most banks and the payment rules that all work to. The Reserve Bank supports the settlement process (that’s what banks moving money between themselves to back up the customer payments is called), particularly with the big sums that move between banks throughout the day. The situation is better than it was - payments move between banks on an hourly basis throughout each business day rather than at the end of each day as it used to be. But Zoe Wallis says the banking industry is scoping 365-day-a-year payments and speeding up transfers.
More bank branches will close
While technology has largely been a boon for customers, it’s served a blow to bank branches. Closing outlets, particularly in regional areas, has become a political and social issue, with the state-owned bank often copping more flak than others. It’s a tough balancing act between customer service and running an efficient organisation, says Kiwibank’s Geoff Waller. He says the average customer might go onto their mobile banking app once or twice a day but go into their physical branch once or twice a year. Around 90 percent of banking transactions are now done online. Waller says Kiwibank has around 90 corporate branches and 140 agents and is still trying to work out what the optimum network size is. Where there are multiple branches in close proximity, and as it continues to move to independent sites, hard choices will have to be made.
Alternative service options
As branches close, banks will be looking at alternatives. Overseas, smart ATMs provide range of services, from being able to hand out coins for a store to use as a cash float, to providing paper statements and opening accounts. Singapore has an ATM with a screen which can connect customers with a (human) expert via video link, HSBC in London has similar video cubbyholes in an ATM lobby.
“ATM-makers say there’s not much they can’t do, we just need to say what we want,” Waller says.
Other options could include mobile banks (like library trucks that go to rural areas), although New Zealand’s geography doesn’t necessarily make that ideal, Waller says. More likely in the shorter term will be mobile bankers - specialists who go to a branch on a particular day to meet up with customers. And/or video conferencing with experts from smaller branches.
“We don’t want to leave anywhere, just provide the service differently.”
Artificial intelligence will enhance human intelligence rather than replace it.
Augmented intelligence – think digital bank with human touch. Artificial intelligence will enhance human intelligence rather than replace it. This isn’t new in banking; there are already situations where computers can make credit decisions, and AI is critical for banks in working out better outcomes for customers in terms of fees, or a lower-interest account. But Zoe Wallis says there’s a big opportunity for more. Expect banking chatbots - on-screen robots who answer questions in real time, using set answers, but learning as they go. A bit like an interactive FAQ page. And Wallis says so-called “concierge robots”, who greet customers and can answer basic questions, are already deployed in some overseas banks.
China went from cash to mobile payments in a short step. One moment it seemed people were paying for their vegetables with their paper yuan notes; the next they were using a QR code on their phone. These days Chinese customers use Alipay or WeChat Pay apps to handle a raft of other payments, like their Uber and Airbnb accounts. Alipay has started giving its Chinese customers a credit score, which can be useful if they want to get an apartment. Some stores in New Zealand now offer QR code payments via their Eftpos terminals, largely because an estimated 70 percent of Chinese tourists will buy more if they can pay that way. But Apple Pay hasn’t taken off in Australia and adoption by New Zealanders has been slower than in some other countries. Wallis thinks there is still some way to go before people will leave their wallets at home. She adds digital identity will be a key component in supporting the digital eco-system and an agreed solution is a little way off yet.
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