The 2016 banking reporting season saw a number of common themes. Firstly, while profit before tax figures saw an improvement for many, in the main this was driven by lower conduct redress costs (such as the tailing off of payment protection insurance claims in UK). In contrast, underlying performance was relatively flat, with most banks achieving broadly flat or slightly negative top-line income growth. Secondly, although obviously related, most banks have continued to tightly manage operating costs. The vast majority of top-tier banks are carrying on/extending their large-scale simplification/efficiency programs, despite such transformation having already taken place for most of the decade. Indeed, the underlying operating cost base for the top UK banks is already typically 20–25% lower than at the start of this period.
However, while cost efficiency remains a pervasive story for investors on the one hand, progress in digital banking remains the key story on the other. Here the focus has shifted somewhat, from number of digital users (although this continues to increase, particularly on mobile) to meeting user needs digitally, particularly in regard to product sales through the digital channels (i.e. online and mobile). Lloyds Bank, for example, states that around three-quarters of its home insurance and cards sales in 2016 came through its digital channels (compared with approximately half in 2014), with savings and loans at the two-thirds level (compared with one-third for loans in 2014). Similarly, Barclays reported that originated and fulfilled unsecured lending levels doubled from £1bn in 2014 to £2bn in 2016, claiming that the cost/income ratio for such business was in the low 20s (compared with low 60s for the bank overall).
For most banks, this is driving continued investment in digital banking platforms, which remain a core investment priority despite the cost-efficiency drive. Ovum's 2016/17 ICT Enterprise Insights study, which interviewed over 275 consumer retail banks in 4Q16, found that both online and mobile banking remain by far the top investment priorities for 2017. The study found that the top priority in this respect is to further drive self-service capabilities (tied in to the broader cost management imperative), but the second priority concerns enhancing the customer experience. This is in terms of channel consistency and overall quality, covering both the front-end user interface and the overall customer journey. These were common themes echoed by many banks in their results reporting, with Lloyds Bank, for example, highlighting how it had used digital applications to reduce the SME customer onboarding process from requiring 15 separate paper forms to one digital application.
However, for some of the leading banks, the focus is starting to shift further. Enhancing the customer experience is important, but developing the digital channels as a customer engagement platform is the next step. Banks have realized that the digital channels are now the primary way in which customers interact with them. Thus, the ability to personalize communications (particularly marketing-based messages) and proactively respond to events, as well as engage the customer through value-add tools (such as integrated personal financial management or integration with social networks) is critical to drive loyalty and retention, as well as to improve upsell opportunities. Most banks are at a relatively nascent stage in adopting such an approach, but this will be a top focus area for the next two to three years.
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