Are Banks Losing
the Innovation Game?
Neopay
Research
Report
2016
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
Our changing relationship with banks
Page 1
Banks provide a firm foundation for financial services in Europe, but increasingly they are struggling to keep up with the accelerating pace of change in society.
The traditional banking system isn't designed to cope with the needs and demands of a modern, digital, networked world and the cracks are beginning to show.
As a result, young, smart, customer-centric businesses are eating away at the traditional monopoly banks have held over how we manage our money and make
transactions.
The conditions are right for these new businesses to thrive.
•
Customers are becoming increasingly confident with handling money digitally or through non-traditional means, e.g. smartphones.
•
There is evidence that the traditional perception of banks is changing – a shift in levels of trust (especially amongst younger customers), growing
frustration with poor customer experience and a weakening relationship between banks and their customers.
•
Regulators are happy to encourage innovation to drive greater customer value and to iron-out issues with the cumbersome banking system.
•
And finally, there is a solid and trusted regulatory framework across Europe that ensures consumers are able to use new services with confidence.
At Neopay, we assist such e-money and payment institutions to develop successful compliance frameworks and become authorised to operate across the EU.
We have helped more business achieve authorisation than any other specialist consultancy and have a 100% success rate thanks to our detailed, holistic
approach.
As a result, we have a unique perspective from which to see how the relevance of banks to modern consumers is being weakened by new entrants into the
market.
The purpose of this research report is to assess how far this change has already gone and look for indicators for how far it might go in the future.
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
Who do we trust?
Page 2
One of the key barriers to entry into financial services is the issue of trust.
Phrases like “you can bank on it” show how, traditionally, banks have been synonymous with
dependability and solidity within our collective consciousness.
% people who wouldn't trust their bank
with e-money transactions
However, research indicates a shift in these perceptions.
Since the banking crisis, the solidity of banks has been cast into doubt. Also, the increasing
50
41
frequency of scandals (PPI, interest rate swaps, Libor rate fixing etc.) combined with concerns
24
about infrastructure and reliability (e.g. computer system failures preventing access to funds)
24
17
have all served to erode trust and undermine the reputation of our banks.
At the same time, we’ve seen the emergence of a new breed of corporate superpower.
18-24
25-34
35-44
45-54
55-64
Age Group
Technology companies are rich, entrusted with our personal data, courted by governments the
world over and are seen to be fuelling much of the innovation and growth across the wider
economy.
If you were an 18 year-old, starting your first job, who would you trust to handle your money?
% people who would trust a technology company
(e.g. Google or Apple) with e-money transactions
Well, perhaps surprisingly, the answer is still likely to be a bank, but to a much lesser extent than
in previous generations, with other providers of financial services now very much seen as
32
credible alternatives.
24
25.5
19.5
As the research* opposite shows, clearly a change has begun. We, as consumers, no longer see
17.5
banks as the only option when it comes to taking care of our financial needs, especially when it
comes to the digital economy.
This is opening the door for other organisations, especially where the delivery of that service
depends on the effective use of technology.
*Nationally representative sample of 2,000 UK adults. Conducted March 2016.
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
18-24
25-34
35-44
Age Group
45-54
55-64
Customer experience – how are banks performing?
Overall, our research shows that banks perform well on customer service when
Page 3
Causes of Frustration with Banks - % of
customers
compared to other everyday service providers, such as energy companies or local
authorities.
UNFAIR BANK CHARGES - E.G. WHEN
OVERDRAWN
This is to be expected. They are well-resourced and highly regulated organisations
24
that work hard to manage the millions of customer engagements they undertake
each day.
BRANCH CLOSURES
18
IT FAILURES - E.G. WHEN CAN'T ACCESS
ACCOUNTS VIA WEBSITE OR CASHPOINT
18
However, while overall customer experience is satisfactory, there is evidence of
growing frustration with certain aspects of banking services.
When asked about recent experience with their bank, 57% of customers
expressed some level of frustration.
As can be seen in the chart opposite, these frustrations cover a wide array of
DELAYS IN MY BALANCE UPDATING - E.G. NOT
REFLECTING THE LATEST TRANSACTIONS
16
MISTAKES - I.E. ERRORS IN TRANSACTIONS /
CHARGES
13
issues from unfair bank charges to delays in bank balance updates.
SCANDALS - E.G. PPI MISSELLING
12
SECURITY BREACHES - E.G. UNATHORISED
WITHDRAWLS
12
LACK OPPORTUNITY TO TALK FACE TO FACE
12
For over a quarter of bank customers (26%) these problems are perceived to be
getting worse, compared to just over a fifth who reported an improvement (21%),
indicating a net reduction in total satisfaction with banks over the last year.
These problems are opening the door for other organisations wishing to provide
financial services.
If customers become too frustrated with their bank’s lack of progress, they are
going to be receptive to other providers who can offer a more customer-centric
LACK OF OPPORTUNITY TO TALK OVER THE
PHONE
approach.
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
9
0
5
10
15
20
25
30
Loosening ties – a changing relationship with banks
Page 4
Advances in technology are also weakening the personal relationship
between banks and their customers.
Trust between organisations and their customers is reinforced through
regular engagement.
How frequently have you met someone
from your bank in the last year? (% of
Customers)
Every contact is an opportunity for an
organisation to prove itself to a customer, ideally meeting or exceeding
expectations to strengthen reputation.
However, direct contact with our banks (previously a regular destination
53
when we needed to manage our money) has fallen dramatically.
14
Online banking and other arms-length services (such as automated
account management terminals) means the need for contact between
None
16
6
6
2
1
0
1
0
1 time 2 times 3 times 4 times 5 times 6 times 7 times 8 times 9 times
banks and their customers is significantly reduced.
2
10
times or
more
53% of bank customers haven’t seen a member of staff from their bank
in the last year and 83% do so less than every six months.
Compare this to the frequency with which customers are in contact with their favourite coffee shop, or the level of engagement they have with technology
brands such as Facebook, Apple or Google.
For younger banking customers they may never have had a close relationship with a bank. Therefore, it’s perhaps understandable why loading money onto a
smart phone app to pay for your daily coffee or a mobile wallet to pay for public transport is something that seems just as natural as opening a current
account.
Equally, when banks want to launch a new innovation, do they really have the level of daily contact needed to encourage high levels of uptake from
customers? Compare this to a coffee chain – which brand has the direct human contact with customers help sell the benefits?
Banks may have the marketing budgets for big ad campaigns, but without the direct human touch these will be less effective.
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
Opportunities for new providers
All of these issues and changes are creating
opportunities for other companies to encroach on the
Page 5
In which of the following ways do you wish your
bank provided a better customer experience?
traditional monopoly of the banks.
FAIRER AND LOWER FEES AND CHARGES
41
While e-money can’t tackle all of the customer
frustrations identified in our research, there are plenty
of areas where they can.
•
MORE LOCAL BRANCHES
INSTANTLY UPDATED ACCOUNT
INFORMATION - E.G. LIVE BALANCE…
ways to move money or provide information to
customers.
Also, of significant interest is creating more
responsive ways to track our spending, creating
services that offer live balance updates.
•
BETTER SECURITY
22
MORE ETHICAL BEHAVIOUR (E.G. FEWER
SCANDALS)
21
MORE PERSONAL CONTACT - FACE TO FACE
TO OVER THE PHONE
21
MORE INNOVATION - E.G. FINDING BETTER
WAYS TO IMPROVE MY EXPERIENCE AND…
20
BETTER ACCESS TO CREDIT OR LOANS
20
Innovating with new ways to improve the overall
customer experience, making it easier and more
pleasurable to manage money and transactions.
•
32
Top of the wish-list for bank customers are ways to
tackle fees and charges, looking at more efficient
•
32
Finding solutions for specific customers – for
example bespoke services for children and
FEWER IT PROBLEMS
19
BETTER SERVICES FOR CHILDREN /
TEENAGERS
12
THE ABILITY TO MAKE PAYMENTS THROUGH
MY SMART PHONE
teenagers.
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
8
0
5
10
15
20
25
30
35
40
45
Reducing fees and charges
Page 6
Our digital economy means we have become used to services being delivered instantly and at minimal cost (or even free of charge).
In this context, the charges and timescales inherent within the traditional banking system seem to be from another century (probably because they are).
E-money businesses tackle these issues by creating new solutions that are cheaper and faster than those offered through banks.
Case Study: International Money Transfers
If you want to send money abroad through a bank or building society, according to the Money Advice Service, this will take 4-6 business days and typically cost
between £15 to £30 (although some banks do offer a fee free service to some customers). As a nod to the need for greater speed, some will also offer an
‘express service’ of a distinctly 20th Century 1 to 2 days, although for this lightening-fast speed they will charge you even more.
Services such as GlobalWebPay.com have been built to target this cost-inefficient service. In contrast to our banks, they have a much lower fixed fee (£4.75 for
any transfer amount) with the promise of better exchange rates than those offered on bank charges. This is a service being increasingly used by consumers
and business-users, to dramatically cut costs.
Users who discover such services are quick to pass on their recommendation (GlobalWebPay.com for example has a 9.7/10 score on TrustPilot) meaning that
this traditional monopoly of the banks is quickly being eroded by alternative service providers.
As consumer habits change, there is the potential for the floodgates to open, with alternative providers looking for other ‘rip-off’ bank services to undercut and
undermine.
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
Keeping on top of our spending
Page 7
We live in an age of instant information and real-time service. It’s unsurprising therefore that almost a third of banking customers (32%) wish that their
(ironically named) current account could provide accurate updates of its actual balance.
Instead, there are a number of issues that cause banks a headache in this respect:
•
Cheques – any payments made by check are subject to different clearing timescales. For example, according to one major UK building society, a check paid
in on Monday 4th April 2016 would have been subject to the following timings:
⁻
2 days later - 6th April – interest will start being earned on the amount deposited.
⁻
4 days later - 8th April – you can withdraw money against the amount paid in.
⁻
8 days later - 12th April – you can be certain that the amount deposited will not be reclaimed (i.e. a bounced cheque).
⁻
Of course, this timescale may be different depending which type of account you’re paying into and (of course) only business days count (so much
for a 24/7 service!).
•
Direct Debits – these may be due to be paid on a given date (e.g. 1st of every month), but there’s no guarantee that this is the day the amount will be
subtracted from your balance.
•
Card payments – these too may not be accounted for, even if they were made the previous day.
For people on limited budgets, those with shared accounts or at times when people are trying to juggle large payments in or out of their account, this can prove
to be a real nightmare. At worst it can create a situation where accounts go overdrawn, leading to refused payments or unexpected bank charges.
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
Keeping on top of our spending contd
Case Study: Banking-Lite Accounts
Banking-lite accounts allow money to be transferred into a pre-paid account and then this account can be used in virtually the same way as a bank account,
normally for a small charge. The difference being that, as they don't operate on the same systems as banks, they can offer greater benefits and flexibility.
PrePay Solutions for example reported that in 2014 it handled €5bn of transactions worldwide, with MD Ray Brash reported as attributing this growth to the
flexibility of such products.
“To a card-holder, prepaid is a flexible companion that can offer additional benefits a traditional bank account might not, such as real-time transaction
information, detailed spending analysis to help you budget, or better rates when travelling abroad. It is an ideal product to help teach young people how to
handle their money in an increasingly digital age. And as a result we see more and more of our clients implement so called ‘banking lite’ solutions. “
Similarly, Raphaels Bank, one of the EU’s largest issuer of Visa and MasterCard prepaid cards, has partnered with Payment Card Technologies to launch the
Change Account which claims to push the boundaries of the traditional approach to banking with multiple budgeting purse features, mobile based account
management, online faster payments and direct debit/credit capability.
Commenting on the launch, Director Mike Smith highlighted how the new service was a direct challenger to traditional bank current accounts: “The Change
Account is positioned as a ‘banking lite’ offering although in many ways it actually provides more functionality than a normal current account.”
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
Page 8
Introducing children to managing money
Page 9
As we’ve seen from our research, there is a growing attitude amongst younger generations that while they need current accounts, they may not necessarily
need a bank.
Unsurprisingly therefore, we are seeing increasing innovation in e-money services being designed around the needs of children and teenagers.
Research by the Prepaid International Forum found that under 16-year olds are more likely to use an e-money solution than a traditional bank account.
26% of children use financial products to make purchases. Of these, 40% use debit cards linked to a bank account, while 58% use a prepaid account either
through a card or mobile wallet apps.
Innovations by non-bank service providers for first accounts are driving up this high uptake. Parents surveyed highlighted balance and transfer notifications
(43%), mobile money transfers (28%) and the ability for children to use financial products for online transactions (23%) as being crucial to decisions about
where to open first accounts.
Put simply, these are customer-centric accounts targeting needs that banks have failed to satisfy.
Case Study: Youth Accounts
Specific youth emoney accounts are growing at a rapid rate. Osper reports hitting a peak of 30-plus cards being ordered a minute with 20% growth in monthly
orders since 2014. Similarly, goHenry, claims 200,000-plus users growing at a rate of 10,000 per month.
They have wide appeal, with customers as young as 8-years old and remain relevant to customers up to the age of 18. By staking a claim for the ‘first banking
account’ puts such brands in a powerful position, looking at ways they can extend their relationship when customers come of age.
Like banking-lite accounts, such services offer great flexibility and functionality. Also key to customer relationships for such brands is taking the lead in teaching
financial awareness and responsibility. This is a powerful benefit, with many pieces of research highlighting the harm caused by a lack of such skills amongst
adults.
As a new generation becomes used to managing their money in this way, using instantly updated and responsive tools, why would they be willing to
downgrade to a traditional bank current account when they get their first full-time job?
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
Supporting greater financial inclusion
Page 10
The UK Government’s estimates that over 9 million UK adults (17% of the adult population) do not derive any benefit from the traditional banking system*.
This includes:
•
The unbanked (i.e. those without a traditional bank account)
•
Those who hold basic bank accounts but still manage their finances in cash
•
Those who have bank accounts but are paying over £100 or more each year in fines or fees.
This is a problem throughout Europe, with each country facing its own set of challenges. For example, in Italy 15 million people do not have bank accounts
(29% of the adult population), the largest absolute number in Europe.
Banks have a poor record of serving this group who are often seen as unprofitable customers or a bad risk. However, these people are just as in need of the
benefits of financial inclusion (e.g. the cost-efficiencies of paying bills through direct debits, obtaining online discounts for goods and services or the
convenience of having salary or benefits paid directly into an account).
This issue has led to increased discussion of a ‘poverty-premium’, meaning the extra cost of being poor caused by a lack off access to the full range of financial
services and extra penalties and charges. Organisations like the Financial Inclusion Commission are increasingly seeing e-money as a solution, offering ‘cashlike’ control and an alternative to mainstream accounts and can help people manage their money more effectively.
Case Study: Serving the Underbanked
E-money solutions are increasingly being used to tackle this issue. One of the leading providers of such services, APS (which operates the Cashplus account)
recently reported that money in its accounts nearly doubled to £3bn in just 11 months. CEO Richard Wagner has acknowledged that at least part of this growth
is being fuelled by its appeal to the ‘underbanked’.
“Although we have a wide variety of customers using our Cashplus account, many are now clearly using us as an alternative bank. As a result these customers
are able to gain access to the benefits of banking services without the need to ‘earn’ access, from a traditional retail bank.”
Research into how consumers are using such accounts reveals that 64% of customers have their wage paid into their account, 15% use it to receive government
benefits and 22% to pay direct debits **. This trend mirrors that of the US where 20 million adults are believed to be unbanked***. Here increases in banking
fees have caused many people to choose alternative ways to manage transactions.
* Source: Financial Inclusion Taskforce, “A new approach to banking report”
** Source: APS 2015
*** Source: World Bank 2015
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
Regulators are encouraging e-money innovation
Page 11
If the cumbersome nature of traditional banking systems has unlocked the door for new providers to enter the market, then that door is being wedged wide
open by the positive attitude of regulators.
Firstly, the application process to operate an e-money service across the EU is relatively straightforward compared to other large markets, for example the US,
with one licence giving access to all EU member states In simple terms entrepreneurs need to provide:
•
A business that meets the threshold conditions (e.g. an office in EU, EU resident directors, a capital bank account, technology that is ready for approval or
at least in later stages of testing).
•
A clear and rational business plan
•
Proper controls (e.g. anti money laundering, risk management)
•
And, finally, the directors must meet the ‘fit and proper’ persons test.
In addition, the regulators have very positive attitudes towards business and are seeking to foster innovation that can enhance the experience of consumers,
helping to ease frustrations with traditional financial service providers.
In the UK for example, the Financial Conduct Authority (FCA) runs several initiatives to foster competition and growth in financial services by supporting both
small and large businesses that are developing new products and services that could genuinely benefit consumers.
In its first year alone, the FCA assisted 175 businesses looking to launch innovative services within the UK (which also provides a stepping stone access to the
whole EU market).
E-money businesses couldn’t wish for more attractive conditions to invest in the EU market. The UK approach especially is very collaborative with business and
the FCA is very keen to promote greater innovation and competition, not least for the many reasons outlined in this report.
Regulation is also very pragmatic, looking at whether a proposed business model meets the intention of the regulation (e.g. to protect consumers and prevent
illegal practices). As long as a proposal is sound, the FCA does not place barriers in the way simply because it is an idea that hasn’t been approved before.
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
Summary
While banks are still doing much of the heavy lifting when it comes to the smooth running of the market for financial services, it’s clear that there is an urgent
need for innovation to offer better customer experience and value for money.
This simply isn’t going to come from the banks. They have proved to be too cumbersome and bogged down with legacy issues (not least increasingly
antiquated IT systems) lacking in the skills and motivation to make a real difference.
They also have long established business culture and working practices, that may hamper original thought and innovation. The benefit of introducing fresh
blood into the industry, is to have people look at the issues faced by customers with totally fresh eyes.
Also, where is the motivation for banks to change? They already have most of us as customers, so why spend money revolutionising a system of fees and
charges that boosts their profits until they are forced to do so by the market?
It seems that the regulators and national government are of the same opinion, doing everything they can to foster a vibrant e-money market to bring fresh,
customer-focused thinking into the market.
Innovators have responded, meeting customer needs – both for the mass market and also niche groups who are poorly served by the traditional banking
system.
In financial terms this may feel like small beer for the banks – especially, where the new companies are meeting the needs of people they perceive to be
unprofitable or poor risk.
However, the long term impact may be more significant than that. If the last 15 years in business has taught us anything, it’s that sectors that have lost
relevance and relationships with their consumers are soon superseded.
While banks might be too integral to the economy to go the way of music companies and multiple retailers (after the emergence of iTunes, Spotify and
Amazon), they would do well to heed the warning of what happens when you lose the innovation game.
Neopay Limited. 4th Floor, Chapel House, 18 Hatton Place, Farringdon, London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.
Page 12
Neopay Ltd
Telephone: +44 (0) 20 7404 7477
Email: [email protected]
Website: www.neopay.co.uk
TERMS AND CONDITIONS The information in this document is intended to furnish users with general
information. While every effort has been made to offer current and accurate information, errors can
occur. Neopay Limited disclaims all liability and responsibility for any errors or omissions in the content
contained in this document. The information presented in this document should not be construed as
legal, regulatory or any other professional advice or service. You should consult with a Neopay
consultant or other professional advisor familiar with your particular situation for advice concerning
specific regulatory or other matters before making any decision.
COPYRIGHT NOTICE All material in this document is Copyright © 2016 Neopay Limited. All rights
reserved. No part of the materials in this email, including the text and graphics, may be reproduced or
transmitted inNeopay
any form,
or by4th
anyFloor,
means
without
Neopay
Limited's
written
permission.
Limited.
Chapel
House,
18 Hatton
Place,
Farringdon,
London, EC1N 8RU, United Kingdom.
Email: [email protected]. Phone: +44 (0) 20 7404 7477. Registered in England 6570182. VAT Registration No: 917 5967 77.