Imagine not being able to go on holiday because you cannot get travel insurance or it costs more than the trip itself because of your health. Or what about being denied free car insurance with your new car or turned down for a mortgage because you’re too old. Then there are a whole host of banking services that aren’t easy to access – from sorting out your current account to managing your pension and savings – if you’re unsure about the internet or cannot afford to go online.
These are common experiences for millions of people across the UK who are denied access to everyday financial services because of disability, disease, age, lack of digital skills or because of where they live, and are the findings of a paper I co-authored, published by the Financial Conduct Authority, the major UK regulator.
In the course of the research, we came across numerous cases. For example, one man in his 30s and working for the armed forces was refused an extension to his mortgage. The reason was that it would take the term past the age of 60, the compulsory retirement age for the Armed Forces, even though he intended to work longer and his state pension would not start until the age of 67.
In another case, Alison was living with terminal cancer and was given two to five years to live though was in relatively good health. When arranging a holiday, she was turned down flat by many travel insurers while others said they would call her back but never did. In the end she went with the only firm that would cover her, paying £1,300 for insurance for a ten-day cruise in Europe.
Computer says no
Our research suggested that problems like these are only likely to grow as more services shift online and use automated processes that are not set up to deal with non-standard, “imperfect” consumers. This doesn’t even include people who live in rural areas with few bank branches and inadequate broadband and mobile reception, or the 17% of over-55s who have no access to the internet at all.
Many of us will have experienced the frustration of online systems that don’t quite fit our real-world circumstances. For “imperfect” consumers, the problem is far worse. Caught in a maze of impersonal processes, with decisions made by computers instead of people, there are those who are denied credit because their data is “thin” after working abroad for a number of years or on becoming newly widowed or divorced, with no financial products in their name.
In addition, as the population ages, more will bump up against blanket age limits and the proportion of people with health conditions is likely to rise.
The numbers above for different groups are stark and measuring the scale of these access to financial services issues is difficult. Many people turned down for a product do not complain, so do not appear in complaints statistics, and firms do not keep data on how many would-be customers they turn away. Other consumers self-exclude, not bothering to apply because they expect to be turned down, often based on bad experiences in the past.
Since the government abolished Consumer Futures (originally the National Consumer Council) in 2014, the UK no longer has a statutory consumer body with a remit to research these kinds of issues and without proof of the scale of a problem, regulators, government and firms are often reluctant to act. The sad irony is that these consumers are shut out of the system and therefore cannot communicate their needs or wants to firms designing and delivering basic products like pensions and mortgages.
Access issues are especially important. The cradle-to-grave welfare state is a thing of the past, if it ever really existed. There was, at least, a belief that social housing, the NHS and state benefits would catch the homeless, the sick, the frail and the elderly, as part of a caring society.
These days, we are all expected to look out for our own financial well-being, sorting out our own safety nets, secure places to live and viable retirement. But being denied access to financial services means being shut out of modern life and put in a very vulnerable situation.
Author: Jonquil Lowe, Lecturer in Personal Finance, The Open University
A working paper from staff at the Bank of England “Peer-to-peer lending and financial innovation in the United Kingdom” looks at the P2P lending market in the UK. As well as looking at the geographic dispersion of lenders and borrowers, they also make some observations about the future impact of P2P on traditional banks. First, they expect to see a fall in the interest rate charged on unsecured personal loans, which will put pressure on bank profitability in this product line, and second, P2P platforms offer a model for banks as they shift their distribution channels from bricks-and-mortar branches to internet and mobile services.
Although there is P2P lending to fund businesses and real estate, we think consumer credit is the area where banks will face most competition from online platforms. In part, this is because it is the asset class in which P2P emerged and is most mature. For example, one striking fact to emerge from Nesta’s survey of the industry is the difference in the credit profile of individual and business borrowers on P2P platforms.
In the P2P market for personal loans, 59% of respondents sought funding from banks at the same time they applied for a P2P loan, and 54% were granted it but chose to fund themselves via the platforms. By contrast, in the market for P2P business loans, 79% sought funding from banks but only 22% were granted it. One interpretation of these results is that, while banks and P2P platforms are operating with different credit risk and lending models when it comes to business loans, P2P platforms are actually competing away some customers from banks in the unsecured personal loans market.
Looking ahead, unsecured personal loans are the market where P2P platforms are likely to continue to make inroads against banks. In contrast to the retail mortgage and deposit market, no British bank has a dominant position in consumer credit. In addition, British banks’ unsecured lending is typically a small component of their overall balance sheet.
The results of this competition could be good for consumers, increasing the availability of unsecured personal credit while lowering its price. This would amplify recent trends. Last year, UK banks increased their issuance of unsecured personal loans, and quoted interest rates on these fell sharply. However, we caution that P2P platforms still trail banks by some distance in terms of their share of the unsecured personal loans market. For example, in Q4 2014, the net lending flow to individuals through P2P platforms was just over £70 million, while those from UK banks and building societies topped £2 billion.
A second, longer term, less direct but still important impact we expect P2P lenders will have on banks is in how they interact with consumers. Over the last two decades, banks have taken steps to move their customers online to reduce costs from operating physical branches. By some estimates, 30 to 40 percent of retail banks costs in the UK come from running physical branches, even though footfall in them has been falling at 10 percent per annum in recent years, possibly because younger generations are more comfortable doing business just online. This means banks are likely to accelerate the transition of their customers from brick and mortar branches to Internet browsers. As this happens, we anticipate banks will look to P2P platforms for inspiration in how to redesign their websites, as these are often noted for being slick and speedy because, for example, they incorporate videos, pictures and communication channels for investors to interact with borrowers.
Note: Staff Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the Bank of England or to state Bank of England policy. This paper should therefore not be reported as representing the views of the Bank of England or members of the Monetary Policy Committee, Financial Policy Committee or Prudential Regulation Authority Board.
Virgin Money Australia has announced details of its brand new mortgage product, the Reward Me Home Loan, designed to offer customers points of distinction in alignment with the famous Virgin brand, as well as opportunities for brokers.
The home loans, set for launch in May, will initially be sold through mortgage brokers and serviced via a Virgin Money contact centre. Brokers are set to go through an initial accreditation process this week.
Speaking with Australian Broker, Virgin Money CEO Greg Boyle said, “The key rationale for us using the broker channel is that after extensive customer research on home loans, we found that customers expressed a preference for face-to-face interaction. We’re not a branch-based business so the third-party channel was the natural place for us.”
Boyle added that the new home loans take inspiration from Virgin Money in the UK, which does 80% of its lending through third-party channels.
The product will aim to capitalise on the wider reputation of the Virgin name, which demands a certain level of distinction to the rest of the marketplace, says Johnny Lockwood, General Manager of Lending, Cards and Deposits at Virgin Money Australia.
“We have something that has differentiation to what’s on the market at the moment,” Lockwood said. “There is an expectation for Virgin to do things differently at times, and home lending is largely homogenised and I guess regulated at the moment, so we’ve put a lot of consideration into something that’s going to be a little bit different.”
Those points of difference include an array of Virgin-branded benefits, including frequent flyer programs and offers from Virgin Australia, Virgin Mobile, Virgin Wines and Virgin Active. Another unique selling point, says Boyle, will be transparency about what rate discounts are available, with customer research revealing a perceived lack of transparency from lenders regarding discounts.
Boyle added that the target customer will be aged between 25 and 49, based in an urban area and technologically savvy.
The Reward Me Home Loan could also represent a significant development for Australia’s mortgage brokers, thanks to the introduction of a special online tool on the product’s website designed to match brokers with customers.
Lockwood said, “For brokers who are accredited with us, we are going to provide what we’ve called the ‘Find a Broker’ tool.
“Customers will come to our site and will understand they can access our loans through brokers, so we have created a lead capture and referral tool. Customers put their details in and a map will come up showing accredited brokers in their area, and they can choose one that fits their needs, with customer details sent through to the broker and vice-versa.
“Brokers are an important channel for us as they provide the face-to-face interaction with customers. We’ve been talking to some key aggregator groups for some time now so we’ve certainly taken their feedback on board, and we’ll be looking for broker input into any future product.”
The first mortgage aggregator to partner with Virgin Money will be PLAN Australia. Virgin Home Loan’s interest rates will be announced in May.
We recently released the latest 2016 edition of our banking channel report ‘The Quiet Revolution”, which is available on request. Our April Video Blog summarises the main findings.
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 among 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.
Banks have been using digital technologies to help transform various areas of their business. There’s an even bigger opportunity—go all digital.
The digital revolution in banking has only just begun. Today we are in phase one, where most traditional banks offer their customers high-quality web and mobile sites/apps. An alternate approach is one where digital becomes not merely an additional feature but a fully integrated mobile experience in which customers use their smartphones or tablets to do everything from opening a new account and making payments to resolving credit-card billing disputes, all without ever setting foot in a physical branch.
More and more consumers around the globe are demanding this. Among the people we surveyed in developed Asian markets, more than 80 percent said they would be willing to shift some of their holdings to a bank that offered a compelling digital-only proposition. For consumers in emerging Asian markets, the number was more than 50 percent. Many types of accounts are in play, with respondents indicating potential shifts of 35 to 45 percent of savings-account deposits, 40 to 50 percent of credit-card balances, and 40 to 45 percent of investment balances, such as those held in mutual funds.1 In the most progressive geographies and customer segments, such as the United Kingdom and Western Europe, there is a potential for 40 percent or more of new deposits to come from digital sales by 2018.
Many financial-technology players are already taking advantage of these opportunities, offering simplified banking services at lower costs or with less hassle or paperwork. Some upstarts are providing entirely new services, such as the US start-up Digit, which allows customers to find small amounts of money they can safely set aside as savings.
A new model: Digital-only banking businesses
While it’s important for banks to digitize their existing businesses, creating a new digital-only banking business can meet an evolving set of customer expectations quickly and effectively. This is especially true in fast-growing emerging markets where customer needs often go unmet by current offerings. The functionality of digital offerings is limited, and consumers frequently highlight low customer service at branches as a key pain point.
So how should banks think about a digital-only offer?
Because banking is a highly regulated industry and a stronghold of conservative corporate culture, there are tremendous internal complexities that need to be addressed. These include the cannibalization risk to existing businesses and the need to foster a different, more agile culture to enable the incubation and growth of an in-house “start-up.” The good news is that our work shows it is feasible to build a new digital bank at substantially lower capex and lower opex per customer than for traditional banks. This is due not only to the absence of physical branches but also to simplified up-front product offerings and more streamlined processes, such as the use of vendor-hosted solutions and selective IT investment, that reduce the need for expensive legacy systems.
Mobile banking use continued to rise last year as smartphone adoption grew and consumers were increasingly drawn to the convenience of mobile financial services, according to a US Federal Reserve Board report, Consumers and Mobile Financial Services 2016, released on Wednesday.
The report documents consumers’ use of mobile phones–Internet-enabled smartphones as well as more basic phones with limited features–as they bank and carry out financial activities. It is the Board’s fifth annual look at how consumers use mobile phones to access banking services (“mobile banking”), make payments, transfer money, or pay for goods and services (“mobile payments”), and inform financial decisions, as well as their reasons for using these services.
As of November 2015, 43 percent of adults with mobile phones and bank accounts reported using mobile banking–an increase of 4 percentage points from the prior year’s survey. The most common way that consumers use mobile banking is checking their account balances or recent transactions, followed by transferring money between accounts. More than half of mobile banking users received an alert from their financial institution through a text message, push notification, or e-mail–making this the third most common use of mobile banking.
For those who have adopted mobile banking, use of a mobile phone appears to complement their use of other banking channels. Among mobile banking users with smartphones, 54 percent cited the mobile channel as one of the three most important ways they interact with their bank. This share is below those that cited online (65 percent) and ATM (62 percent) as most important, but slightly above the share that cited a teller at a branch (51 percent).
Use of mobile payments continues to be less common than use of mobile banking. Twenty-four percent of all mobile phone users, and 28 percent of smartphone users, made a mobile payment in the 12 months prior to the survey. For smartphone owners who reported making payments with their phones, the most common types of mobile payments were paying bills, purchasing a physical item or digital content remotely, and paying for something in a store.
Use of mobile financial services varies across demographic groups. For particular groups of respondents to the 2015 survey–such as younger adults, Hispanics and non-Hispanic blacks–the shares who reported using mobile banking and mobile payments were higher than the overall survey averages. Smartphone ownership among those with mobile phones is higher for Hispanics than for non-Hispanic whites in this survey.
Consistent with findings from prior years, a majority of consumers using mobile banking and mobile payments cite convenience or getting a smartphone as their main reason for adoption. The main impediments to the adoption of mobile financial services continue to be a stated preference for other methods of banking and making payments, as well as concerns about security.
Concerns about the security and privacy of personal information continue to be expressed by mobile phone users, and the majority of smartphone users reported taking actions that can reduce harm in case of a security incident. The most common actions were installing updates, password-protecting the phone, and customizing privacy settings.
The survey was conducted on behalf of the Board by GfK, an online consumer research firm. The 2015 survey was conducted from November 4-23, 2015. More than 2,500 respondents completed the survey.
Previous surveys have informed the Federal Reserve and other parts of the government on consumer banking and payment behavior and have supported basic research and public discussion.
The addition of brightday is the latest in a series of acquisitions for YBR. While previous acquisitions have contributed to the business’ scale, this acquisition will provide an important capability for the company’s digital strategy the company says.
Executive Chairman Mark Bouris says Yellow Brick Road’s and brightday’s common partnership with OneVue, an independent investment software platform, allows for a logical and simple integration.
“This acquisition is a key part of our direct and online strategy to be launched to consumers in FY17,” Mr Bouris explained.
“brightday serves a similar customer segment to Yellow Brick Road. Our 2020 customer strategy ensures we can serve customers via the means and channel they prefer: many will prefer face-to-face support which is why we will double our branch network by 2020, while others have a bias towards direct-digital product, and the majority will seek a blend of both. The acquisition of brightday helps enable this.”
Consistent investment in consumer-facing advertising over five years has built a strong brand which Yellow Brick Road intends to leverage in the digital space. Mr Bouris said that this brand awareness is already yielding direct inquiries from many customers for insurance, as well as some funds management and superannuation product.
“This digital push is focussed first and foremost on accelerating our wealth business growth. We want 30 per cent of our customers accessing our wealth services by 2020. Wealth is a real differentiator for us and a major focus over the next four years.”
“Giving customers superior digital access and tools for investments and superannuation is an important tactic in building our wealth volumes. We have already seen great engagement through Guru, our robo pre-advice tool. brightday is the next enhancement,” Mr Bouris concluded.
Yellow Brick Road Holdings Limited says a recent report that ANZ is reducing its branch presence while bolstering its broker channels is another signal that brokers are the future of the mortgage industry.
CEO of Lending Tim Brown said Yellow Brick Road’s strategic vision to dramatically increase broker numbers is being reinforced by the actions of the big four bank and by the statistics around popularity of brokers with property purchasers.
The JP Morgan Australian Mortgage Industry report announced that ANZ has been steadily reducing its branch presence since 2011, in favour of increasing its broker usage. The report also highlighted that the broker channel may be perfectly placed to capture greater market share with 75 per cent of refinancers expected to use brokers.
“If we look to trends overseas, a move towards utilising brokers for a larger percentage of lending has already been happening for some time. In the UK, 76 per cent of loans are done through a broker and 87 per cent of the actual loans are through mutuals, building societies or regional banks. That same trend is now beginning here as banks realise old ways of operating aren’t working,” Mr Brown said
Mr Brown says there is no doubt that the traditional bank structure plays into the hands of intermediaries.
“In this day and age, people want to have access to service providers outside the typical 9-5 business day. Our brokers at Yellow Brick Road and Vow Financial don’t work limited business hours, they are driven to take care of the customer’s desire for convenience and that means being flexible with the time and place that suits the customer’s needs,” he said.
“Brokers also have a small business mentality that banks just can’t compete with. They are integrated into their communities in a way banks can only pretend to be. They work harder because that way they build a reputation and make more money. Running the bank’s capped income model is never going to be as popular with consumers long term as the alternative of a broker who is incentivised to give better service, work longer hours, bring more customers in and provide customer-centric service.”
Last year, the Deloitte-run industry roundtable found that more than 51% of mortgages written are going through a broker and also predicted further growth, with expectations of an increase to 60%.
In their recent strategy update, Yellow Brick Road Group said they had a goal of growing to 300 branded branches and 1,000 broker groups by 2020.
“Hearing that one of the big four is forgoing its branch presence in favour of a greater emphasis on the third-party broker channel reinforces the increasing consumer popularity and effectiveness of brokers,” Mr Brown concluded.
However, latest results from our surveys indicate that ever more households want to bank digitally. So, given the compelling data from our surveys, what has happened to the number of branches in Australia in recent years? As branches are expensive, have outlets been closed in response to the digital migration?
Analysis from the APRA Point of Presence databases shows that the total number of branch outlets has grown slightly between 2013 and 2015. There were 5,478 outlets in 2013, 5,496 in 2014 and 5,480 in 2015. Overall almost no change.
Analysis of the count of branches by selected banks, which includes agency outlets, shows that most have reduced their footprints slightly, other than Bendigo/Adelaide Bank, who grew their footprint by 5.6% in 204-15.
On the other hand, Bank of Queensland has reduced the number of franchise branches and recorded a drop of 8.1% in 2014-15.
We conclude that so far banks are not responding to the digital revolution by closing branches, although some have reconfigured existing ones into smaller and more efficient units.
We segment households into three groups. Digital Luddites are the last bastions of traditional banking and centre on branch and ATM access, value face to face conversations, and the bank brand. They are migrating from PC’s to smart devices to access online bank services (if they use them).
In contrast, Digital Natives expect 24×7 access, mobile banking, near-field payments and online applications. They expect their bank to be in the social media environment, and would value video-conferencing with the bank advisor. Branch access, bank brand and face to face conversations are not important to this group.
Digital migrants are somewhere in between, however, more are demanding more from online services.
We think 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 is more advanced among higher income households. So players which are slow to catch the wave will be left with potentially less valuable customers longer term.
Here is a glimpse of our latest profitability index which shows how much less valuable Digital Luddites are compared with digitally aligned households. There is a real risk of stranded costs in the branch network.
Players need to adapt more quickly to the digital world. We are past an omni-channel (let them choose a channel) strategy. 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.
Robo-Advice, the concept of using computer automation to provide tailored financial advice has been hitting the headlines recently. DFA has researched household demand for these digitally delivered services, and today we share some of the results.
By way of background, a robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use human financial planners. Robo-advisors (or robo-advisers) use the same software as traditional advisors, but usually only offer portfolio management and do not get involved in more personal aspects of wealth management, such as taxes and retirement or estate planning. Robo-advisors are typically low-cost, have low account minimums, and attract younger investors who are more comfortable doing things online. The biggest difference is the distribution channel: previously, investors would have to go through a human financial advisor to get the kind of portfolio management services robo-advisors now offer, and those services would be bundled with additional services.
ASIC’s chairman Greg Medcraft says computer-generated financial advice, or “robo advice” could slash investment costs and eliminate conflicts of interest in the maligned financial planning industry. They have established a “robo-advice taskforce”, which is investigating the suitability of potential entrants, who use computer algorithms to match investors with suitable assets at a lower cost than human advisers.
A number of Australian players are experimenting with different offers and solutions. For example, according to the AFR, Macquarie is creating a robo-advice platform that puts in one place more than 30,000 local and international investment choices. Unlike other robo-advice platforms, which are really vehicles for gaining funds under management and charging an asset management fee, Macquarie has opted for genuine portfolio advice that does not discriminate between particular fund managers or show any bias towards particular stocks or sectors.
Midwinter’s “Robo-Advice Survey” from 2015, which comprised of responses from over 288 advice professionals, representing over 65 licensees showed the majority of advisers (55%) surveyed were aware of Robo-Advice and not concerned about its potential to disrupt the advice industry, with 12% of these advisers actually excited about its arrival. Around a quarter of advisers were aware and concerned of the impact of Robo-Advice on their business. Only a small amount of advisers (5%) considered themselves apathetic towards the rise of Robo-Advice.
Fintech’s such as Decimal which was founded in 2006 by former Asgard senior executive Jan Kolbusz, provides new capability to the financial advice industry utilising the power and affordability of the cloud. Decimal has subsequently entered into an agreement with Aviva Corporation that saw the company listed on the ASX in April 2014 as Decimal Software Limited (DSX).
So turning to our analysis, DFA has been examining the prospective impact of Robo-Advice, from a household perspective using data from our household surveys. We have found that currently those who have received financial advice already, and who are most digitally aware would readily consider Robo-Advice services. Our conclusion is that rather than growing and extending advice to more Australian households, the first impact of Robo-Advice will be to cannibalise existing advisor relationships.
To start the analysis,we looked at overall estimated net worth by household segment. Those households with higher balances are more likely to have sought, or are seeking financial advice. On average a quarter of households have at some time sought advice.
Next we looked at the technographic trends across our household segments using our digital segmentation, between those who are digital natives (always used digital), migrants (learning to use digital) and luddites (not willing or able to use digital). The chart below shows the relative distribution by segment across these three. The more affluent, and younger are most digitally aligned, and so are more likely to embrace Robo-Advice.
Next, we combine the data about getting financial advice and technographics. We find a greater proportion of households who are digitally aware have sought advice.
Finally, we asked in our surveys about households awareness and intention to consider Robo-Advice solutions if they were available. The results are shown below, with young affluent households, young growing families and exclusive professionals most likely to consider such a service. The proportions for each segment are those who would consider Robo-Advice, across all the digital segments.
However, the analysis showed that those with existing advice relationships AND high digital alignment were most likely to consider Robo-Advice. Those who are digitally aligned, but not seeking advice showed no propensity to use such a service – at this point in time.
So two observations, first there are many different potential offerings which should be constructed on a Robo-Advice basis, as the needs, of young affluent, and very different from say exclusive professionals. So effective segmentation of the offers will be essential, and different personas will need to be incorporated into the systems being developed.
Second, the bulk of the interest lays with those who have had advice, so it may not, in the short term grow the advice pie. Indeed there appears to be strong evidence that existing advisors may find their business being cannabalised as existing clients switch to Robo-Advice. This is especially true if the range of options are greater, and the price point lower.
We therefore question the assumption expressed within the industry that Robo-Advice is not a threat, as it will simply expand the pie to segments which today do not seek advice. In fact, we suggest the clever play is to make it a tool, and aligned to Advisors, rather than a substitute for them. In addition, the marketing/education strategies need to be developed carefully. There is a lot in play here.
