The UK economy is sending mixed signals. Unemployment rate has shown signs of improvement, having fallen to a 7-year low (5.4 per cent in the three months to August). However, the Consumer Prices Index fell by 0.1% (source: ONS) turning UK inflation to negative again. It is yet to be seen how these recent figures would influence the Bank of England decision on the interest rates change. In this ever-changing environment, UK banks are facing a new set of challenges in their savings portfolios. There are three main themes that will prevail on banks’ agenda as we run closer to 2016: (1) changing regulatory landscape, (2) interest rate change and (3) Basel III compliance.
PART I – Changing regulatory landscape. FCA Remedies: What Impact Will They Have On Banks’ Deposit Portfolios?
Imminent new regulations being introduced by the Financial Conduct Authority will alter the way banks communicate and manage rates in the market. These regulations are largely being shaped by the findings of an in-depth survey by PWC, comparing “cash savings” in international markets (September 2014). The survey found that there was a generally low level of savings churn or switching in most markets studied. Ironically, the UK had the highest switching rates among its peers of Australia, Germany, The Netherlands and USA. Furthermore, the survey, commissioned by the Financial Conduct Authority in the UK, was prompted by the fact that a significant portion of easy access savings in the UK were yielding customers just 0.5%, which curiously was the Bank of England’s base rate at the time (and still is).
Regardless of the trigger for these regulations, the motives are indeed laudable. Over the period of the financial crisis, customer experiences in all services consumed have changed dramatically. Consumers expect more transparency; consumers expect “instant” and consumers expect simplicity. Why shouldn’t they expect it from their bank? This is what their experience is today in most other industries.
So, the new proposed regulations are there to improve efficiencies, transparency and consumer outcomes. Many of the recommendations of the FCA are common sense in today’s market. The recommendations have gone through a feedback process with the banks and this consultation process remains open until mid-October 2015. In addition, the industry and FCA is seeking to introduce a 7-day switching process for cash ISAs by January 2017.
The recommendations for regulation broadly aim to provide consumers with:
Improved disclosure of information
Improved switching processes
Improved convenience measures (i.e. how to help consumers who are less inclined to make their decision based on rate alone)
Improved “sunlight measures” (a term I had not heard of in my 25 years of banking, but basically measures to counteract inertia in savings)
While the new regulations will result in some operational pains for banks as they alter current processes or design, the need for banks to understand their portfolios, customers and key behaviour has never been so acute.
The use of data to support the management of the deposits portfolio will invariably lead to a number of things:
Greater understanding of consumer behaviours and preferences (e.g. convenience over return)
Deeper understanding of saver actions in the context of the bank’s competitor actions
Understanding the impact of rate changes on volume movements and margin
The capability to analyse and understand the key components of the portfolio easily and instantly
The ability to design product based on real, known preferences and behaviour
Provision of demonstrable evidence of pricing strategies based on scenario building and testing
The timing of actions (such as introducing promotional rates) and the impact of such actions
Coupled with the impending interest rate changes, the need for data analytics and science in deposit portfolio management is a clear strategy that banks are now investing in to adhere to new bank regulation and to ensure sustainability of their business in the long term.
Nomis Solutions has been working with global banks (incl. UK) for over 10 year on applying science to pricing disciplines. The results of this has far reaching implications - to improving the bottom line (~15bps average p.a. on portfolios), to improving customer transparency to informing more refined strategy such as product design, channel selection and customer communications. The demand for such solutions among traditional and challenger banks in the UK is increasing significantly given the increased challenges of the market.
Damian is a career banker with more than 25 years of experience. He spent most of his career with Bank of Ireland where he held a number of senior roles, including Head of Deposits and Current Accounts, Head of SME Banking and Head of Customer Management and Customer Analytics. At Nomis, Damian is Managing Director responsible for the APAC region.