In September, Sweden’s Handelsbanken announced that digitalization among customers has now reached such a point that it must invest SKr1 billion ($114 million) in IT over the next two years to take its digital customer offering to the next level.
The bank also talked about strengthening its presence at branches to deal with the complex needs of corporate and private banking customers. It also wants to grant greater access to specialist expertise.
But there was a catch.
The bank may be beefing up some branches, but there will be far fewer of them. Handelsbanken is closing almost half its branches, going from 380 to roughly 200. This is a cost-cutting exercise designed to trim annual running expenses by roughly 10% to SKr20 billion by the end of 2022.
Handelsbanken’s group chief executive, Carina Åkerström, didn’t get into any details of the technology itself – the apps, the platforms as a service, the application programming interfaces, the transversal tooling and the agile development – she went to the heart of the matter: discussions with trade unions over 1,000 job losses.
Handelsbanken is not alone of course. Banks are desperately seeking self-help measures to pep up their depressed share prices. With revenue hard to grow amid rising bad debts, shrinking loan volumes and compressed net interest margins, many are dressing up their desperate slashing of headcount as bold digital investment programmes.
Consultants at Kearney, a firm that tracks data on 92 retail banks across 22 European countries, suggest that thanks to the increasing adoption of digital banking, which has become even more popular since the pandemic, the role of the bank in its current format is simply less relevant for many customers. Branch numbers will continue to decrease, perhaps at an even faster rate than before the pandemic.
Kearney’s most recent study indicates that as many as 40,000 branches (25% of all branches in Europe today) are likely to close in the next three years.
Starry-eyed talk
Management teams always like to dress up cost cutting with starry-eyed talk of visionary plans for a brighter future. After all, they don’t want those staff who remain and have to pick up the work of their former colleagues to be totally demoralized.
Talk of embracing a digital future allows executives to sound clever – or at least that they might have some clue what they’re doing. However, shareholders are hard to fool.
On the day Åkerström announced redundancies, Handelsbanken’s shares fell 5.5% from SKr83.86 to SKr79.22. One month later, they stood at SKr77.86. That is 30% down from the year-to-date high of SKr 112.30 on February 19.
Is this just part of the general malaise that has struck all bank stock prices across Europe as investors await the true extent of realized loan losses? Or do some investors dare to question the now common vision of the industry after the branch, after the internet, now delivered through apps on smart phones: digital banking 3.0?
Moody’s analysts suggest the decisive strategic shift towards more cost-effective digital banking channels will boost financial performance at Handelsbanken in the medium term. However, it may weaken the bank’s decentralized structure and cautious approach to risk.
“In contrast to its peers, the bank had until now chosen to retain a significantly larger branch network, leaving customer relationship management and many lending decisions to local managers,” says Louise Lundberg, senior credit officer at Moody’s. “Although the changes will help the bank’s financial performance, we do see a risk that it could affect the exemplary long-term stewardship that the bank has demonstrated in the past.”
US market
Euromoney looks for insights in the US banking market.
Most senior bankers in the US, it seems, agree with their European counterparts that this year’s awful events have underlined the urgency of fully embracing digital banking, as many of their own staff and those of their business customers continue to work from home and consumers turn away from cash.
But are they missing something?
Prioritizing high tech over the human touch risks turning banks into mere transaction platforms and threatens to remove the one true advantage that distinguishes them from technology companies.
Businesses, especially now, need bankers that can take the time to understand their individual circumstances and problems, offer appropriate financial expertise and advice, and then provide customized rather than standardized solutions.
Take, for example, dealing with applications from US companies for the Small Business Administration paycheck protection program (PPP). The country’s largest banks, as well as many medium-sized banks and even foreign banks with operations in the US, saw this as an IT challenge of designing systems that could absorb tens of thousands of applications from small and medium-sized enterprises.
They are proud of the tech – and no doubt some of it was pretty good. It had to be. Chase, for example, received 75,000 applications in the first hour the PPP was open.
But was there anyone to talk companies through the application process?
Most customers are happy to use technology until they hit a problem
Edward Barry, Capital Bank
Edward Barry, chief executive of Rockville, Maryland-based Capital Bank, a small local bank that is strong in Washington DC, tells Euromoney: “Most customers are happy to use technology until they hit a problem; then they want to speak with someone.
“The big banks made massive investments in online solutions to deal with high application volumes that were beyond the small banks’ capacities. But when customers needed guidance or assurance on the application process, they had no one to speak to.”
Barry says that Capital Bank funded a year’s worth of small business loans in five weeks through PPP, with half of those being from businesses that were not previously its customers. Far from being overburdened by the process, the local community bank was able to take market share and help customers of other larger institutions.
“Several of our applicants were having quite a traumatic experience applying through the big banks at a time when many small business owners felt that if they weren’t able to access these loans, they would go under,” says Barry. “Some of our PPP customers felt as though they had been dropped by the big banks when their calls weren’t being returned. And when you pull the data, a disproportionate volume of PPP loans were funded by community banks.”
There are clear echoes here of the awful experience many UK SMEs endured with that country’s large banks’ handling of the notorious Coronavirus Business Interruption Loan Scheme (CBILS).
Barry sees this disappointment with big banks as an opportunity for community lenders like his to press home a temporary advantage won at the worst point of the pandemic into a permanent shift of customer business.
“Digitizing processes and transactions leads to an increasing commoditization of financial products,” he says. “The big banks want to use their scale advantage to become low-cost producers; that means customers become units, buying commodity products and services that simply cannot be customized.
“Many businesses are now waking up to the downside of banking with the low-cost provider.”
Being the low-cost provider now seems to be the aim shared by just about every large bank. And they all see digitalization as the way to get there. But how will they distinguish themselves, not just from each other but from technology companies that are masters of the digital user experience?
Big US banks have grown used to boasting about the billions they spend each year on digital. Investors understand the sub-text: this is an investment expense that will boost shareholder returns through lower staff costs.
However, if banks focus too much on tech, they might risk losing customers that value some form of relationship banking. And that does not come from talking to a robot, no matter how smart it may be.
Every bank, it seems, wants to be the Holiday Inn or Travelodge. None aims to be the Ritz-Carlton. The latter charges more, of course, but how often do guests complain that the service they get doesn’t justify the higher price?
‘Premium service’
Barry is no technology Luddite, having previously worked at Capital One and Bank of America. In August, Capital Bank upgraded its own online and mobile platform for SMEs to help them stay on top of cash management and working capital.
He has brought in data scientists and technologists while aiming to offer advice – and almost consultancy – to small businesses. Barry suggests that this kind of community banking is a premium service, but one that more customers may now see as offering good value.
In truth, he has to position his business as a premium offering. Listed as Capital Bancorp, its full year 2019 results show a pre-Covid cost-to-income ratio of 70%, which is far above that of the country’s largest banks, who work around 55%.
Barry likes an analogy.
“Now I happen to enjoy a Big Mac,” he says. “But if I go into my local McDonalds and ask for my burger to come medium rare, perhaps with turkey bacon and maybe with hollandaise sauce instead of mayonnaise, McDonalds cannot provide that.”
Barry says Capital Bank serves up the ingredients each customer requires: “We like dealing with small customers that have complex needs. The big banks don’t do that well. The key question for us is how large that market is.”
[SME] businesses want real-time payments at low cost
Charles McManus, ClearBank
The big banks, of course, won’t accept this.
Talking to Euromoney about JPMorgan Chase’s efforts on behalf of small businesses during the first wave of the pandemic, Brent Reinhard, chief marketing officer for business banking at Chase, was looking ahead to advising the survivors on adapting to a new economic normal.
“This is a company that embraces technology and provides it to businesses that wish to self serve,” Reinhard told us. “But we also have 2,500 business relationship bankers and 10,500 small business specialists in our branches that we can mobilize for those that need advice and guidance.”
The contest between national banks and regional and community banks is a long-established one in the US. The truth is that both need good technology as well good people.
“In our internal training,” says Barry, “we focus less now on technical skills, which can be automated, even including credit underwriting, and more on leadership and coping with change.”
And he has one last analogy up his sleeve.
“One of my favourite cartoons has the local, traditional barber in a small town watching the manager of a new chain shop opening across the street putting up a sign offering $10 haircuts. The new chap comes across and tells the local barber he is going to take all his business.
“The next day, the local barber puts up his own new sign. ‘We fix $10 haircuts.’”
Trumpet call
Whether to divert attention away from job cuts or to highlight provision of basic services they should have been able to deliver but couldn’t through legacy IT, banks will continue to trumpet their digital offering.
Credit Suisse is the latest traditional bank to launch a new digital brand. At the end of October, it was due to offer CSX, a digital service for new clients that lets them conduct all their banking business by smartphone.
It includes a private account in Swiss francs, a debit Mastercard for online use that waives foreign transaction fees and an app with various self-service functions.
From mid November, a fully digital investment solution will be available. Mortgage clients will be able to obtain new financing directly in the app, together with extensions of existing mortgage tranches. Pension planning will also be provided.
How cool is that?
Anke Bridge Haux, head of digital banking at Credit Suisse (Switzerland), explains: “CSX is intended for all private clients in Switzerland who want to complete their banking business swiftly and easily, and who value digital, professional financial advice.”
Pandemic lockdowns, now being re-imposed across Europe, have brought a new urgency to digital transformation as customers are forced to bank from home, cheque volumes collapse and no one wants to touch cash.
ClearBank offers particular insights into this.
Bank for other banks
When it was set up in 2017 as the UK’s first new clearing bank in 250 years, ClearBank was a technologically advanced wholesale provider of core banking functions – particularly payments and account handling – for other banks to white label to their own customers.
It was a bank for other banks and in particular for the new ones, the fintechs and neobanks then proliferating.
“New banks were promising better, faster digital services to customers in the UK and we were the infrastructure enabler,” Charles McManus, chief executive of ClearBank, tells Euromoney. “Because whatever those new digital front ends promised, if the back-end processing remained slow and inefficient, nothing much would really change.
“Twenty-five years ago, the typical charge for a retail customer to move a large-value, same-day sterling payment through Chaps, for example to buy a house, was around £25. And today, at many banks, it is still £25,” he says.
Overseeing thousands of banks is a burden … [Regulators] are nervous of what might be brewing at any one of them
Anonymous
The UK’s big four incumbent clearing banks provided clearing services and payments processing for those fintech newcomers on creaking legacy systems, while competing with them for the same customers.
Through Microsoft Azure, ClearBank offered secure and reliable private cloud-based connections to all the payments channels – Bacs, Chaps, cheques, faster payments, link, Mastercard, Visa – with faster and cheaper payments processing.
“With the latest IT infrastructure, you can give a very different answer than £25 to that customer wanting a same-day, high-value payment,” says McManus.
The new banks loved it.
OakNorth prides itself on state-of-the-art credit underwriting and monitoring. It has no competitive advantage in payments processing. It lets ClearBank do all that.
Tide is great at SME customer services and management. It lets ClearBank handle the core accounts through an open-banking service that customers access through the Tide app.
But ClearBank did not rush to onboard every new electronic money or credit institution.
“We do very heavy due diligence at the start because once we onboard a client, we onboard all of its clients,” says McManus. “And as soon as we start processing their payments, we handle their volume in real time. So even if they are FCA-regulated, we look again at each new client’s own client onboarding, its anti-money laundering and fraud checks. And if we don’t think those are up to scratch, we will ask them to upgrade. Onboarding can therefore sometimes take months.”
Cost bases
By the time the pandemic was underway in the spring, ClearBank had just over 80 financial institutions on its platform, with around 100 in the process of joining. By the autumn 108 clients were live and 136 were in the process of onboarding. What explains this jump?
“There is a new wave of older, established banks and building societies now coming onto our banking-as-a-service platform,” says McManus.
“I spent years as a CFO [at Royal Bank of Canada and RBS Ulster Bank], and when the banking industry hits difficulties, the traditional response is to chase revenue and cut costs. This time, revenue is under pressure with interest rates lower for longer and net interest margin is compressing.
“So, unless banks want to take a lot more risk – which looks like a recipe for disaster – they really do have to address their cost bases fundamentally.”
It costs a traditional bank £170 a year to provide a basic retail account. It costs digital banks £30 – and they provide a better experience.
“Established banks can’t change their existing tech stacks fast enough to provide the services their front ends are crying out for,” says McManus. “They are spending large amounts on Swift gpi, which is an updated messaging service, when what they really need is much greater, low-touch, digital-processing capacity for real-time payments and account handling.
“We are getting a lot more incoming queries from mid-tier banks.”
Expansion plans
ClearBank is expanding. It intends to offer the same service it has established in the UK in both the euro area and in dollars. That will require it to establish connections to all the euro payments rails – such as Target 2, the Single Euro Payments Area (Sepa), Sepa Instant and the card rails – just as it did for sterling payments.
However, in the new era of service sharing in banking, it won’t follow that same path in the US, working instead through a local bank already connected to the automated clearing house.
On September 17, ClearBank announced it would be the first clearing bank to offer multicurrency bank accounts through an API.
“Banks see a lot more of their small and medium-size businesses sourcing and selling across borders. Those businesses want real-time payments at low cost,” says McManus. “They don’t want payments to take three days and go through a correspondent network with each bank charging a fee.”
From the fourth quarter of this year, ClearBank will offer more than 30 multicurrency bank accounts, letting customers move funds seamlessly between accounts with real-time foreign exchange pricing based on interbank rates, while removing the need to transfer funds to third-party accounts.
JPMorgan will be the cash management provider bringing access to multiple currencies, pricing and execution all via an API. Client funds will continue to be held by ClearBank.
Jon Lloyd, head of financial institutions group sales Europe at JPMorgan, says: “APIs enable us to bring services to customers in a faster, more customized way, and ClearBank’s approach is indicative of the way in which the market is moving.”
ClearBank is on its way to becoming a cross-border clearing bank.
Urgency
Banks will continue to upgrade their digital technology. They have to.
Their legacy technology, built by previous generations, including internet systems whose architects proclaimed agile development and swift roll out more than 20 years ago and are long gone, lags behind.
Service to many customers has been embarrassing for years.
That’s why established banks are now turning to the likes of ClearBank and nCino, the pioneer of cloud-based operating systems. In October, Barclays adopted nCino’s operating system for client onboarding.
“As speed and digital capabilities become ever more critical, it’s important that we adopt agile and innovative technology to help us accelerate and streamline processes,” says Paul Compton, global head of banking at Barclays.
The pandemic has also increased the urgency to cut costs and shed staff, and shiny new digital initiatives give cover for doing so.
Banks can say they are only providing the digital delivery systems that customers are now crying out for, while towns and villages suffer from loss of branches.
This is a shadow play of operational restructuring to match the one also being performed in the capital markets, where banks are shut out from raising new equity and so are optimizing regulatory capital with inferior forms, such as contingent convertible additional tier-1s.
The curtain will go up on real drama in bank capital once bad debts rise high enough that banks are forced into rights issues.
Likewise, branch closures and new digital offerings are a mere prequel to the serious business of consolidation, now just starting. That’s the process by which large scale branch closures take place and costs are taken out.
Just as regulators have encouraged banks to raise more additional tier-1 capital, so they are also encouraging mergers and acquisitions.
“Of course, bank regulators want to see more M&A,” one banker tells Euromoney. “Overseeing thousands of banks is a burden. It makes their job really difficult, and they are nervous of what might be brewing at any one of them.”
Like all of us, bank regulators want a better, easier life in 2021.
Branches get the chop across Europe
In September, Deutsche Bank announced plans to close 100 of its 500 branches in Germany. The news came at a time when chief financial officer James von Moltke was stressing the bank’s continued commitment to cost cutting even though natural attrition rates of employees leaving for new jobs elsewhere had slowed markedly.
“It may be a little bit more expensive, in terms of restructuring and severance charges, for us to get to our goals in 2022,” von Moltke says.
But management intends to reach them.
“As we look more carefully at our real estate portfolio and revise some of our assumptions and become more aggressive about how we want to use the space, given what we are learning now about the way the workforce will choose to engage and choose to work every day, we think there is some opportunity to actually bring occupancy down as well.”
Commerzbank, which has an even denser domestic network than Deutsche, with 800 branches, is also closing a similar percentage; or rather not reopening 200 that it closed during the first wave of the virus.
Societe Generale is studying a possible combination of group domestic retail banking activities with the potential merger of its two existing networks: Societe Generale and Credit du Nord.
Frédéric Oudéa, chief executive of Societe Generale, says these retail businesses in France remain key franchises of the group, but explains: “We are launching a new strategic stage, drawing lessons from the health and economic crises and the constantly changing needs of clients, in order to confirm the commercial and financial competitiveness of our businesses.”
Societe Generale has 1,749 domestic branches, mainly in cities, while Credit du Nord has 679 branches rooted in the regions.
In the UK, TSB announced that it will be investing in its network of 290 branches, the seventh largest in the UK – investing, that is, after it closes 164 branches and sheds 900 jobs.
“Closing any of our branches is never an easy decision, but our customers are banking differently – with a marked shift to digital banking,” says Debbie Crosbie, chief executive of TSB. “We are reshaping our business to transform the customer experience and set us up for the future.”
TSB makes much of its partnership with IBM Cloud, which, it says, allows the bank to roll out secure digital offerings at pace. This partnership saw it launch TSB Smart Agent, a new online chat function that went live within a matter of days during the Covid-19 lockdown.
