Preparing for the next wave of challenges in UK Financial Services
Reading Time 10 mins
As we move into 2022, the business environment for UK financial services (FS) organisations is more demanding than it has been for many years.
If the sector stands still and doesn’t take steps towards immediate or improved transformation, with the customer at the heart of everything, it will be another tough year. Here’s how the most impactful financial services trends are evolving and how FS brands can navigate them by resetting their approach to business in the new year.
Profitability highly variable and under pressure
On a global scale, the FS sector’s profitability improved throughout 2021, but UK lenders and insurers have been hit much harder by Covid.
Global investment banking and trading revenues in the first quarter of 2021 were over 30% higher than the same period in 2020 — their highest level since 2010. These profits came from high fee income and increased client trading activity spurred by high market volatility.
However, UK lenders featured in The Banker’s Top 1,000 World Banks 2021 report reported a 53% drop in profits between June 2020 and May 2021. The study attributes these losses to the economic damage inflicted by the pandemic and long-term Brexit uncertainty, halting the profitability momentum seen in 2018 and 2019.
"Companies within the sector should focus on rethinking their operating models while continuing to innovate their products, services, and overall value proposition."
Insurance providers are going through a significant market correction beyond what they would typically expect within the underwriting cycle. With the renewal process under particular regulatory scrutiny, premiums are increasing, and insurer appetite is reducing. According to EY, UK-based home and motor insurance providers face lowering profitability in 2022, as high inflation, FCA pricing reforms, and suppressed premium rates present new challenges.
Along with this challenging economic environment, small financial services players are struggling to acquire and retain customers, whilst larger organisations still face enormous hurdles related to operational costs. As such, the needle isn’t moving with regard cost-to-income ratios.
With this diverse range of financial and organisational barriers still in place, companies within the sector should focus on rethinking their operating models while continuing to innovate their products, services, and overall value proposition. The intent is to ensure that all internal organisational barriers are removed, everyone works together, and the customer is the central driver of every transformational strategy.
Service and omnichannel/seamless experience
Digital banking has advanced rapidly in recent years, with mobile banking apps, digital wallets, and fintech solutions for individuals joining the well-established online banking channel. In 2020, four out of five Brits were using online banking, and 88.6% of eligible payments in 2020 were contactless, according to Barclay’s.
However, despite the billions of pounds invested in technology by banks and insurance firms, core services such as opening a new account or getting a mortgage can still feel overly complex to the customer. In our experience, taking the claims process customer journey as an example, quality varies widely throughout the insurance industry.
Channel switching is far from seamless, and challenges around digital adoption remain, so FS organisations must make new efforts to dismantle silos and create a blended online and offline experience for customers. The alternative is losing them to Big Tech.
According to a Webhelp survey, 46% of UK respondents would switch their FS provider if Google, Apple, Facebook, Amazon, or Microsoft began offering the same services. This sentiment reflects a need for convenient, efficient, highly functional digital banking solutions that mimic the experiences customers are already expecting from Big Tech.
"According to a Webhelp survey, 46% of UK respondents would switch their FS provider if Google, Apple, Facebook, Amazon, or Microsoft began offering the same services."
Furthermore, while 31% of UK respondents either reduced their visits or stopped visiting physical locations, there is still a demand for in-branch services. A total of 69% said that closing branches was a bad idea, so banks should continue to find ways to leverage that locational advantage while improving the overall online experience. For example, several major UK banks have already begun joining forces to provide customers with easier access to cash in the event of a branch closure.
Physical locations and digital experiences form the basis of a customer journey that holds human, technology, process, and organisational initiatives together, so any changes to that journey must deliver the right outcome and not cause friction. In addition, high-quality customer experience (CX) positively impacts the top and bottom lines, so there is value in partnering with providers that deliver a true end-to-end CX service. Ultimately, most organisations don’t operate in an authentic end-to-end or cross-channel manner, those that realise the urgency of breaking down internal barriers will succeed first.
Talent and employee value proposition
The UK is undergoing a massive shift in working models. Many organisations have been forced to offer remote employment, and employees are pursuing career changes if they’re denied a chance to work from home. This trend is driving up salaries in what has become an employee’s market.
One-in-four UK financial services workers want to work from home full-time, while Forbes estimates that the cost of turning over a mid-level employee is 125% of their salary. For senior-level staff, that figure rockets to an eye-watering 200%.
According to the Professional & Business Services Council and the Financial Services Skills Commission, 32% of UK firms are affected by shortages in financial, professional, and business services skills. The economic impact of this talent shortage is equivalent to £38 billion annually, as the sector’s annual output is expected to be 12% higher with sufficient staff.
"Brands that can evolve their EVP in days rather than not months, through benefits, location options, working hours, and flexibility, will see the most success."
The sector responded well to the pandemic, with most firms (78%) providing the ability to work remotely. However, attrition levels are hitting record highs. Job vacancies within the industry increased by nearly 38% between the first and second quarters of 2021, according to the Association of Professional Staffing Companies (APSCo). Against this backdrop, the sector must create a more attractive employee value proposition (EVP).
According to Gartner, 65% of candidates discontinued a hiring process due to an unattractive EVP in 2021, while only 31% of HR leaders felt that employees were satisfied with the organisation’s EVP. FS brands can avoid this by creating flexible and scalable hybrid office/work-at-home principles and considering if traditional work schedules are ready for disruption — a four-day alternative has already been successfully demonstrated by Atom Bank, for instance. It’s essential to involve employees in the EVP improvement process, and agility is critical. Brands that can evolve their EVP in days rather than not months, through benefits, location options, working hours, and flexibility, will see the most success.
Protecting customers and organisations
Approximately 390,000 retail banking customers were reported as high-risk in 2019/2020, representing almost 50% of all high-risk customers seen in the FS industry. These figures far exceed statistics seen in other sectors. The number of suspicious activity reports sent to the National Crime Agency (NCA) increased around 22%, from 394,048 in 2017/2018 to 480,202 in 2019/2020.
On average, organisations spend £53 per customer per year on financial crime defence, according to a survey of 300 financial crime decision-makers working in the financial services sector in the UK.
For many UK Financial Services firms, these massive investments into preventing and mitigating financial crime are not always paying off. The Financial Ombudsman Service recently published a report that identified fraud and scam complaints as one of the main drivers of the complaints they receive. During the first quarter of the 2021/22 financial year, complaints increased by 66% year on year, with a total of 5,025 cases. Of those complaints, 60% were upheld by the organisations involved, up from 50% in 2020/21.
"FS organisations have an opportunity to increase customer loyalty with the way they manage these high-stress situations."
Too many FS organisations are approaching their financial crime transformations from a recovery angle rather than a customer perspective, which is damaging to business. In terms of fraud, FS organisations have an opportunity to increase customer loyalty with the way they manage these high-stress situations. At present, these journeys are typically driven by internal process design rather than a customer journey-led approach to design, which needs to change.
Since fraud and crime prevention often have adverse ripple effects on customer experience, it stands to reason that organisations should place the customer at the heart of any financial crime related transformation strategy under consideration for 2022. In taking this approach, organisations have the opportunity to differentiate within the sector and strengthen customer and regulator relationships.
Along with these challenges, the difficulty of doing business is amplified by a world full of uncertainty.
On the pandemic side, the omicron variant has signalled another wave of government interventions and safety measures. Further Covid variants and complications inevitably present additional challenges for financial services firms. For instance, the government has warned businesses to prepare for a 25% absenteeism rate in January 2022 due to omicron.
According to the House of Commons, in November 2020, economic output in the UK’s FS sector was 3% below pre-pandemic levels in February. Moreover, by the 30th of November, 25,000 UK financial services employees were on furlough (2% of eligible jobs) compared to 13% across the whole economy. Plus, 24% of financial services employers were furloughing staff last year, compounding the issues related to EVP and profitability.
From a customer perspective, the uncertainty of the pandemic is omnipresent. In 2020, the FCA reported that three out of eight adults were experiencing a worse financial situation because of Covid, and several ongoing factors may further exacerbate this situation. For instance, the UK’s furlough scheme has ended, the government has planned universal credit changes, new Covid variants could continue to emerge, and inflation and interest rates are predicted to rise.
"Uncertainty will continue, so organisations need to accelerate their decision making and make nimble direction changes in minutes, hours, or days."
Financial services organisations need to ensure they have the agility to respond to increases in demand from customers who are finding themselves in difficult financial situations whilst offering the appropriate channel choice, education, and support to protect them, especially those who are more vulnerable.
Natural disasters, with climate change being particularly pertinent, political instability and economic crashes also impact operations worldwide, particularly for brands that choose to locate their teams in a single location.
While these events are difficult to plan for, FS companies still have the power to improve their business through strategic transformation and customer-centric investment. By offering attractive employment opportunities for modern workers, balancing offline and online customer service channels, and leveraging technology to reduce the cost of fraud prevention, the industry can boost profitability and prepare to weather the next storm, whatever that might be.
Uncertainty will continue, so organisations need to accelerate their decision making and set themselves up for nimble direction changes in minutes, hours, or days. For those who have already set up multi-workstream transformation activities, the focus should be on delivering early and designing iteratively. The ability to deliver quickly is critical, because the world is an uncompromising place with an unrelenting pace of change.
- While facing the challenges of turbulent profitability, recruitment, EVP, financial crime, fraud, omnichannel service, and external uncertainty, FS organisations must remember that these trends don't exist in a vacuum. Instead, each represents an opportunity to break down silos and develop new cross-functional customer experience strategies that significantly reduce their impact on the bottom line.
- Instead of running separate initiatives, be sure to embed customer experience, financial crime, regulatory changes, and EVP in the same transformation strategy and view them through a customer journey lens.
- FS organisations must have agile enough processes to adapt their transformation programmes in hours and days, not weeks and months.
- Customer experience is typically based on interactions with more than one organisation, so FS brands should look for collaboration outside their organisations to provide better experiences.
Hervé Mazenod is Gobeyond Partners’ Managing Director, Financial Services, and has over 20 years of consulting experience, 17 of which he spent in FS. An engaging leader, Hervé has managed multiple global transformation programmes, helping banking, pensions, and insurance organisations solve complex customer journey problems with innovative solutions.
Find out more about Hervé here.