Banking Culture – Page 71 – Digital Finance Analytics (DFA) Blog

2018 Crunch Time For Digital Transformation

In a new report, Forrester says that Digital transformation is not elective surgery. It is the critical response needed to meet rising customer expectations, deliver individualized experiences at scale, and operate at the speed of the market. This echoes our Quiet Revolution report, released just yesterday.

They say the results are sobering:

Over 60% of executives believe they are behind in their digital transformation. Lagging results have created a loss of confidence in the CIO, driving up the number of chief digital officers and business units creating their own digital strategies.

But that misses the point. Digital transformation is a CEO issue and an economic question.

Digital transformation is expensive; CEOs can’t drive operational savings fast enough to fund it and are cautious about destroying margins.

In 2018, CEOs must show the political will and, with the CIO and CMO, orchestrate digital transformation across the enterprise.

Some CEOs will use their balance sheet to acquire digital assets and buy time. But 20% of CEOs will fail to act: As a result, those firms will be acquired or begin to perish.

Westpac capital requirements increased after breaching regulatory obligations

The Reserve Bank in New Zealand says that Westpac New Zealand Limited (Westpac) has had its minimum regulatory capital requirements increased after it failed to comply with regulatory obligations relating to its status as an internal models bank.

Internal models banks are accredited by the Reserve Bank to use approved risk models to calculate how much regulatory capital they need to hold. Westpac used a number of models that had not been approved by the Reserve Bank, and materially failed to meet requirements around model governance, processes and documentation.

“This is very disappointing. Operating as an internal models bank is a privilege that requires high standards and comes with considerable responsibilities. Westpac has not met our expectations in this regard,” Reserve Bank Deputy Governor and Head of Financial Stability Geoff Bascand said.

The Reserve Bank required Westpac to commission an independent report into its compliance with internal models regulatory requirements. The report found that Westpac:

currently operates 17 (out of 35) unapproved capital models;

has used 21 (out of 32) additional unapproved capital models since it was accredited as an internal models bank in 2008; and

failed to put in place the systems and controls an internal models bank is required to have under its conditions of registration.

The Reserve Bank has decided that Westpac’s conditions of registration should be amended to increase its minimum capital levels until the shortcomings and non-compliance identified in the independent report have been remedied. Westpac’s minimum capital ratio requirements will be 6.5 percent for Common Equity Tier 1 capital, 8 percent for Tier 1 capital and 10 percent for Total capital, with the additional 2.5 percent capital conservation buffer applying. Currently, for all other locally incorporated banks capital ratios are set at, respectively, 4.5 percent, 6 percent and 8 percent, plus the 2.5 percent buffer.

In addition, the Reserve Bank has accepted an undertaking by Westpac to maintain its total capital ratio above 15.1 percent until all existing issues have been resolved. The Reserve Bank has given Westpac 18 months to satisfy the Reserve Bank that it has sufficiently addressed those issues or it risks losing accreditation to operate as an internal models bank.

“We believe the regulatory action is appropriate given the seriousness of Westpac’s non-compliance and the need to protect the integrity of the capital regime,” Mr Bascand said.

The Reserve Bank has taken into account that Westpac has not deliberately sought to reduce its regulatory capital. While there have been serious shortcomings and non-compliance, it appears that Westpac has remained well above its required regulatory capital levels.

Westpac has confirmed that it does not dispute the findings of the independent report, that it is committed to remedying all the issues identified, and that it will maintain its total capital ratio above 15.1 percent.

Major aggregator issues fraud warning to brokers

From The Adviser.

One of the industry’s largest aggregators has said that brokers are “on the front line” of preventing mortgage fraud as regulators turn their attention to the third-party channel.

In a compliance update this week, Connective pointed to findings from the 2016 Veda Cybercrime and Fraud Report, which recorded a 27 per cent year-on-year increase in falsifying personal information.

“Falsified documentation — particularly documents that verify a customer’s income — is the most common type of fraud that a mortgage broker is likely to encounter,” the aggregator said.

“It is your responsibility to ensure [that] the income declared on a customer’s loan application truly reflects their actual income. That puts you on the front line in terms of mortgage fraud prevention.”

Since 2010, ASIC has investigated more than 100 matters relating to loan fraud, and it banned, suspended or placed conditions on the licenses of more than 80 individuals or companies.

“We can only expect this scrutiny to intensify,” Connective said. “Quite recently, one mortgage broker was actually jailed for five years for colluding with clients over fraudulent loan applications.”

The award-winning aggregator urged brokers to carefully check income and verify living expenses by “studying” payslips and bank statements.

“You should check carefully to ensure that these documents, particularly the payslip, contain the information you would reasonably expect to see, and make an effort to check [that] the documents have not been altered or doctored.”

Connective provided this list of what should appear on a payslip:

Employer’s and employee’s names

Employer’s Australian Business Number (if applicable; verify by looking it up online)

Pay period

Date of payment

Gross and net pay

Hourly rates and amount paid

Any allowances or bonuses

Superannuation deductions

Any other deductions (such as child support payments, HECS payments)

Leave balances

A year to date summary

“If you are in any doubt, it is a good idea to ask your customer’s permission to call their employer and verify the information in their payslip,” Connective said. “If they refuse to give you permission, this can be considered a red flag.”

Back in June, Equifax BDM Steve Arsinoski informed brokers at a Pepper Money roadshow that 13 per cent of frauds reported were targeting home loans and there has been a 25 per cent year-on-year increase in frauds originating from the broker channel.

Citibank refunds $3.3 million to credit card customers and $1m on transactions

ASIC says Citibank has refunded Citibank has refunded around 4,000 current and former customers more than $1 million after misstating the bank’s obligations around unauthorised transactions on customers’ accounts. Separately, Citibank will refund more than $3.3 million to around 39,500 current and former customers for failing to refund customers when credit card accounts were closed with an outstanding credit balance.

Citibank will refund more than $3.3 million to around 39,500 current and former customers for failing to refund customers when credit card accounts were closed with an outstanding credit balance.

Citibank will provide refunds for Citibank, Virgin Money, Bank of Queensland, Suncorp and Card Services branded credit cards and for Citibank Ready Credit loan customers. Citibank is the credit provider for all of these products.

This error occurred on accounts as far back as 1994 but did not happen every time an account was closed.

Citibank is writing to eligible customers to advise that they will receive a refund of the credit balance with interest. Former customers will receive a bank cheque and current customers with an open account will receive a direct credit into their account.

The closed credit card and loan accounts with more than $500 in credit balances, which were not transacted on for seven years (or three years as applicable) have been transferred to ASIC as required under unclaimed money legislation.

Citibank has strengthened its systems so that cheques for credit balances are issued to customers automatically when they close their accounts.

“Customers should be confident that when they close an account, they are refunded any outstanding balance,” ASIC Deputy Chair Peter Kell said.

Mr Kell also said customers may be entitled to claim their balance through ASIC’s MoneySmart website which holds unclaimed money from accounts which have been inactive for a certain period:

“If you think you might be impacted, your money may be with ASIC as unclaimed money. I strongly encourage you to search your name on ASIC’s MoneySmart unclaimed money search.”

Citibank reported the issue to ASIC, and has cooperated with ASIC in resolving the matter.

Background

Citibank (Citigroup Pty Ltd) has commenced writing to all affected customers, and affected customers will be contacted before 30 November 2017.

Citibank has refunded around 4,000 current and former customers more than $1 million after misstating the bank’s obligations around unauthorised transactions on customers’ accounts.

Citibank had refused customers’ requests to investigate unauthorised transactions because it claimed the requests were made outside the time period permitted under the Visa and MasterCard scheme chargeback protections.

Affected customers had made reports to Citibank about ‘card not present’ unauthorised transactions (such as internet transactions), where a payment was made using the credit or debit card number details, rather than the physical card itself.

In letters sent to customers in response to their requests, Citibank incorrectly stated that because the request was made outside the timeframe specified by Visa and MasterCard, it was not required to assess the claim, and that the customer’s only options were to approach the merchant or a fair trading agency.

The letter would likely have misled customers about their protections under the ePayments Code. The ePayments Code provides protections to consumers for unauthorised transactions – these protections are separate to, and not the same as, the protections provided by Visa and MasterCard.

As a result, customers did not have their claims properly considered in accordance with Citibank’s contractual obligations with those customers under the ePayments Code.

To remediate affected consumers:

Current customers will have their accounts refunded

Former customers who are owed more than $20 will be sent a bank cheque

Former customers whose individual amounts were more than $500 and cannot be located will have their funds treated in accordance with unclaimed money requirements

For former customers owed less than $20, and those who cannot be located with amounts less than $500, an equivalent amount will be donated to charity

If a donation is made and the customer comes forward, Citibank will honour individual refunds.

Citibank has also reviewed its processes to ensure there are no further miscommunications about its obligations under the ePayments Code.

“If an unauthorised payment has been made on their account, customers should be confident that their bank will appropriately investigate the payment. Customers should never be misled about their rights under the Code.” ASIC Deputy Chair Peter Kell said.

“Banks should ensure in all their communications that they are clear and accurate with customers about their consumer rights.”

Citibank’s remediation program covered consumers who may have received the letter between 1 January 2009 to 22 July 2016, and did not have their claim appropriately assessed.

Brokers should ‘move away from being a broker’

From The Adviser.

As technology and artificial intelligence make loan processing easier to automate, brokers should be looking to move from being a broker toward having “a professional mortgage practice”, a mortgage industry veteran has said.

According to author, broker and High Trust mortgage sales training specialist Todd Duncan, brokers should be focusing on improving culture and building trust if they are to succeed, as the dominance of technology means that “the trust barometer is really suffering”.

Speaking at The Adviser’s US Study Tour in San Francisco last week, Mr Duncan explained: “I want you to think about the decision you make as a leader, in terms of culture. I want you to think about how you’re building and running your organisation. I want you to be thinking about what is the strategic advantage that everybody in my company has in any customer interaction. And to understand that the measurement in life of any company — whether it be product, culture or the final relationship a customer has with you and the overall experience — is based on trust.

“Because what we see in the world is that the trust barometer is really, really suffering right now. We see world trust declining, we see corporate trust declining, we see financial sector trust declining, we see trust in a one-to-one relationship being held at suspicion if there’s not some direct referral, or some previous knowledge or existence of that person and what they do. And what I know about trust is that it really becomes the most important selling proposition that anybody has in this room.”

However, Mr Duncan acknowledged that trust is the “hardest” aspect of building a successful business.

“We can spend our entire career building an organisation around trust, but it can be gone like that [in a click]… And the decline of trust can absolutely bury a company, can tilt a company from forward-thinking growth to being reactive and respondent, all the way to non-existent.

“So we need to think about how every person on our team has to be not only an initiator of trust, an embracer of trust, a creator of trust, but also an endorser and a practitioner of trust. Because it is the one thing that gives you a strategic advantage in the marketplace.”

Establish an emotional connection ‘mandate’

Mr Duncan gave the example of the US bank Wells Fargo, which recently lost billions of dollars of deposits because of a perceived “low trust culture, with incentivised sales and compliance and regulation deficiencies”.

He said that the best companies, therefore, make it a “mandate” to have every sales activity centre based around empathy and emotional connection, as that is the unique trait of humans that technology has not been able to replicate — and is one which is the fastest at establishing trust.

The Duncan Group founder said: “It’s not about coverage, it’s not about advertising, it’s not about marketing, it’s not about any of that. It is about, at the very essence, the heartbeat between two human beings. One’s a specialist and one’s in need of advice around the most important decision they’re ever going to make in their household, which is buying and financing real estate…

“Plus, customers with an emotional investment in the business are more likely to turn into repeat long-term customers, and customers with an emotional connection to your business are likely to recommend your business to others.”

Specialisation is key

Mr Duncan added that specialisation was also a key trait to have, as there are an increasing number of products, rates and mortgage technology out there that can cause confusion.

The High Trust founder and CEO gave the example that when searching for a “do-it-yourself mortgage” on Google, there can be more than 17 million results. Further, there are 72 million results for “online mortgage”, which means that brokers are at the forefront of sifting through the noise and reducing customer confusion.

He outlined that brokers should therefore start building trust by moving away from branding themselves as brokers, but instead marketing their companies as “a professional mortgage practice”.

“I would even move away from being a broker. I would rebrand myself, I would rebrand the way that I operate. I want to position myself as having a professional mortgage practice, and I want this to be my brand.”

Mr Duncan concluded: “I think you need to begin to look at what you’re doing in the marketplace to have unadulterated, unequivocal, rating-supported, compliance-driven trust.

“Because if you have high trust, you shorten sale cycles. If you have high trust, you lower loan expense. If you have high trust, you accelerate the referral networks that are available to you in your marketplace that are just screaming for this kind of solution. And if you don’t have that, then you have nothing.”

The Robots Are Coming to a Bank Near You

The NAB results yesterday included one of the clearest signals yet of the digital disruption which is hitting the finance sector (and other customer facing businesses too).

Worth also reflecting on the fact that since the turn of the century NAB’s net interest margins have fallen 100 basis points, to below 2% today. They have to find a different economic model for the business. Just pulling back to Australia and New Zealand and flogging more mortgages will not solve their problem. The biggest expense by far is the people they employ.

They will shed 6,000 banking jobs and replace them with 2,000 people holding digital skills, from analytics through to software engineers. The future of banking is indeed digital.

This is because banking is a very “bittable” business, and just like newspapers do not need to sell physical documents to distribute news, banks do not need branches, or people on the customer service or sales lines. If they get the digital design right.

In fact, when we completed our last “Quiet Revolution Survey” which looked at customers and their banking channel preferences, we concluded:

The Quiet Revolution highlights that existing players need to be thinking about how they will deploy appropriate services through digital channels, as their customers are rapidly migrating there. We see this migration to digital more advanced amongst higher income households but momentum continues to spread. So players which are slow to catch the wave will be left with potentially less valuable customers longer term. Players need to adapt more quickly to the digital world. We are way past an omni-channel (let them choose a channel) strategy. We need to adopt a “mobile-first” strategy. Such digital migration needs to become central strategy because the winners will be those with the technical capability, customer sense and flexibility to reinvent banking in the digital age. The bank branch has limited life expectancy. Banks should be planning accordingly.

Many households and small businesses were critical of the slow pace at which banks were moving to service digital, and the lack of innovation available via mobile banking applications. And not just younger “digital migrants”.

So the task in hand for NAB and other other industry players, is to manage down the traditional branch and ATM infrastructure, while building compelling digital alternatives, whether it be payments, core banking or wealth management. And keep the business afloat during the transition. Think changing the propellers on an airplane for jet engines while in flight!

It is quite feasible to use robo-banking technologies to replace mortgage brokers, and financial advisers. It is completely possible to apply for a mortgage end-to-end on line, and deliver a quicker and more compelling customer fulfillment experience. Electronic payments can now replace cash. The mobile device will contain an electronic wallet and payment capability and rewards programmes and much more. Physical plastic credit cards are a thing of the past. Every electronic transaction produces data which is now the new life-blood of banking. Use that data to guide customers to new solutions.

The barriers to change have been the culture (especially in the middle management ranks) within banking organisations, so defaulting to a “let the customer choose” channel approach. But this was always a cop-out. Plus the complexity of the ancient “back-end systems” many of which are tens of years old, have to be tackled or replaced (as the CBA has done).

But now, banks have to be re-engineered and migrated to digital, harnessing the power of algorithms, robotics and user experience experts. A whole new world. We may need banking services, but do we need a bank?

Then there will be consequences for society. First, banks of the future will have many fewer staff, and those who remain will need different skills. Almost none will be customer facing. Just as robots replaced workers on the assembly line, robots are now becoming bankers.

Second, the minority of customers who a Digital Luddites will need to be handled appropriately. The current branch infrastructure is just too expensive. How will banks meet their implicit service obligation? Or will they try to trade it away, as they did with the ATM network?

But third, and this is the rub. What we are discussing here is also happening across other industries, and as the digital revolution gains pace, the risk is that more people find themselves without employment.

This is the worry-some aspect of digital transformation. Digital efficiency will mean fewer jobs. What happens to those without?

We are just 10% along the digital journey. It is unstoppable, and business models, careers and whole chunks of the banking system will be shaken to pieces. Just ask the Fintechs! But the social implications should certainly be considered too.

MP grills CBA on brokers, offsets and big mortgages

From The Adviser.

NSW MP Kevin Hogan said that mortgage brokers have told him that it is in their best interest to get clients to borrow as much as they can.

Mr Hogan was on the parliamentary committee that questioned CBA chief executive Ian Narev in Canberra on Friday (20 October), where he was eager to find out from the CEO how brokers were behaving.

“You have one of the most extensive broker networks in the country,” Mr Hogan said, addressing Mr Narev.

“Brokers, as well as customers, tell me it’s obviously in the broker’s interest to get the customer to borrow the maximum amount of money they can get them to borrow — they get remunerated that way — even though they might not need that much money. And then they open an offset account and put the money they don’t need in that account, but they have drawn down the maximum amount of money they can borrow.”

The MP then asked Mr Narev if he has noticed “a big difference” in the number of customers who open an offset account, with money put in it straightaway, between the broker network and their branch network.

The CBA boss took the question on notice, but provided his thoughts on debt levels and the financial wellbeing of customers.

Mr Narev said: “You are raising a different and very valid point, which is: how much should people borrow? In the context of the broader regulation on general advice versus specific advice, we have a lot of discussion about that at the bank, and it is a very live discussion both through our own channels and through proprietary channels.”

Mr Narev noted that, historically, there has generally been a view that “whatever the bank will lend me, I should borrow”.

While he stressed that CBA lends responsibly for what people can service, Mr Narev said that the question of what level of debt somebody is comfortable with is “very personal”.

“The whole industry — and we are certainly doing it, including through behavioural economics in conjunction with academics from Harvard University — is working through how, within the constraints of the law on advice, we can have richer discussions with people to go down exactly the distinction you’ve drawn.”

Mr Hogan restated his belief that brokers get incentive to put customers in larger loans, saying: “It is obviously in the broker’s interest to get that person to borrow as much money as they can possibly get them to do — which might not necessarily be in the best interest of the customer — and you have an extensive network.”

Outgoing ASIC chairman Greg Medcraft also believes that brokers encourage customers to borrow more. In fact, he even admitted that he would do it himself if he was a mortgage broker.

Speaking at a Reuters Newsmaker event on 12 September, Mr Medcraft touched on a recent report from investment bank UBS, which suggested that around $500 billion of mortgages could be based on inaccurate information.

Mr Medcraft said: “The mortgage commission is based on [the fact that] the larger their loans, the more you get. So, logically, what would you do?

“It’s human behaviour. I’d do it.”

Banking Regulators Asleep at the Wheel?

Well, finally, we got an admission from APRA that mortgage lending standards have decayed over the last decade, and that they needed to take action to reverse the trend. And now they are looking at debt-to-income.

Poor lending standards, they say are systemic, driven by completion, and poor bank practices. They recently intervened (a little). And late to the piece (now) debt-to-income is important. Did you hear the door slamming after the horse has bolted?

This is after ASIC called out poor lending practices, and the RBA have been raising concerns about the high household debt, and the downstream risks to growth this represents.

A completed change of tune from the declarations of 2015 when everything was said to be just dandy!

Those following this blog over the past few years will know we have been flagging these concerns, especially as the cash rate was brought to its all time low. We said DTI was critical, that standards should be tightened, and the growth of debt to income was unsustainable.

These three parties, plus the Treasury form the “Council of Financial Regulators” which is chaired by the RBA are all culpable. This body, which works behind the scenes, is referred to when hard decisions need to be take. If you look back at recent APRA and RBA statements, the Council gets a Guernsey!

The problem is there has been group-think for year, driven by the need to use households as a growth proxy for the failing mining and resource sector. And no clear accountability.

But too little has been done, too late. And it is poor old households who, one way or the other will pick up the pieces – not the banks who have enjoyed massive profit and balance sheet growth.

Even now, lending for housing is growing three time faster than incomes or cpi.

Regulators are now lining up to call out the problems. Managing the risk going forwards is a real challenge. Time to review the regulatory structure.

Worth remembering that the Financial System Inquiry recommended the creation of a new Financial Regulator Assessment Board to assess the performance of the regulatory framework, but this was rejected by the Government!

ANZ and ASIC Agree to Settle the BBSW case

In a short release, ANZ says it has reached a confidential in-principle agreement with the Australian Securities and Investments Commission (ASIC) to settle court action relating to the Australian interbank BBSW market.

As a result, this morning ASIC has asked the Court to stand down the trial for 48 hours, which ANZ will consent to, so as to progress the in-principle agreement following which ANZ will make a more detailed statement.

Based on the in-principle agreement, the financial impact to ANZ will be reflected in the 2017 Financial Year results and is largely covered by the provisioning held as at 31 March 2017.

ABA Declares Progress On Bank Reforms

The Australian Bankers’ Association has welcomed the latest progress report from former auditor-general Mr Ian McPhee AO PSM, which has found that banks are on track regarding the six reform initiatives.

Mr McPhee stated that since the previous report, a number of initiatives are now being implemented, which is good news for customers and the industry.

Banks have already introduced three initiatives – the appointment of customer advocates who help customers resolve issues and proactively improve customer outcomes, the adoption of new whistleblower protections, and the conduct background check protocol when hiring staff.

The remaining three initiatives are showing good progress.

ABA Chief Executive Anna Bligh said it’s encouraging that the industry’s reform program is starting to gain traction and deliver real benefits to customers.

“Banks across the board are serious about change and rebuilding trust and confidence within the community. Introducing these initiatives will better protect customer interests and increase transparency and accountability,” she said.

“The banking industry is currently undergoing the greatest program of reforms seen in decades. It’s vital that the momentum continues, so banks can meet the needs and expectations of the community.

“The ABA appointed the former Public Service Commissioner Stephen Sedgwick AO to review how bank tellers and other customer-facing bank employees, their managers, and third parties are paid by banks. The industry adopted all the recommendations and are now in the implementation phase,” Ms Bligh said.

“The industry understands that through the combination of leadership, performance management, remuneration structures, behavioural standards and culture, a real difference is being achieved.”

Progress since the last quarter McPhee review includes:

* Adoption of best practice whistleblowing policies by 19 banks (last bank to finalise by end of year).

* The Code of Banking Practice is now with key stakeholders for feedback. The new Code is on track to be finalised by December 2017.

* Four banks have published their overarching principles on remuneration and incentives ahead of the December deadline.

“The determined effort that has delivered the reforms to date is set to continue in coming months as banks finalise their implementation of the industry’s Better Banking program,” Ms Bligh said.

A copy of Mr McPhee’s latest report is available at betterbanking.net.au.

Category: Banking Culture

2018 Crunch Time For Digital Transformation

Artificial intelligence: the honeymoon for AI is over: blended AI will Disrupt customer service and sales strategy

Blockchain: be ready to face the realities behind the blockchain hype

Cloud computing accelerates enterprise transformation everywhere

Cyber security: businesses will face even more challenges In 2018

IoT moves from experimentation to business scale

Employee experience powers the future of work

Mobile evolves into the digital experience conductor

Westpac capital requirements increased after breaching regulatory obligations

Major aggregator issues fraud warning to brokers

Citibank refunds $3.3 million to credit card customers and $1m on transactions

Brokers should ‘move away from being a broker’

The Robots Are Coming to a Bank Near You

MP grills CBA on brokers, offsets and big mortgages

Banking Regulators Asleep at the Wheel?

ANZ and ASIC Agree to Settle the BBSW case

ABA Declares Progress On Bank Reforms

Artificial intelligence: the honeymoon for AI is over: blended AI will Disrupt customer service and sales strategy

Blockchain: be ready to face the realities behind the blockchain hype

Cloud computing accelerates enterprise transformation everywhere

Cyber security: businesses will face even more challenges In 2018

IoT moves from experimentation to business scale

Employee experience powers the future of work

Mobile evolves into the digital experience conductor

Mobile evolves into the digital experience conductor