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August 11, 2021updated 22 Feb 2022 10:39am

Customer Experience in Banking: Regulatory Trends

Customer experience has come under increased focus over the last 12 months amid Covid-19. The pandemic has shifted customer’s focus towards environmental, social, and governance (ESG) trends increasing the scope for customer experience. Leaders in customer experience should, therefore, identify various customer experience elements and prioritise them based on existing customer satisfaction scores and capabilities of competitors.

Listed below are the key regulatory trends impacting the customer experience theme, as identified by GlobalData.

Growing regulatory concern around “addictive” financial applications

Tech companies specifically formulate experiences not just to be quick and easy but to optimise dopamine release; that is, to be addictive. As digital banking providers emulate these principles, it is possible regulators will look more closely at the subliminal messages that are built into such applications.

On the one hand, connecting users with real-time market movements in this way is clearly a core dimension of modern digital experiences. But it is also true that these experiences may entice users to trade more often unconsciously and thoughtlessly and/or with less real-world risk awareness, which present significant downsides such as those we’ve seen with gambling websites.

Focus on “strategic” compliance to achieve customer experience goals

The most cost-effective way to comply with practices such as open banking is to build a business more strategically around open finance, rather than just viewing it as a compliance exercise that confers no business benefit. While General Data Protection Regulation (GDPR) is largely a compliance exercise for companies, it also presents an opportunity for better customer relationship management. GDPR forces providers to document all that is known about a customer, which is often not recorded formally within the wealth space as wealth managers tend to know customers informally.

Proactive approach to transparency

Regulators have clamped down on punitive overdraft charges, interchange fees, mis-selling of payment protection insurance, and hidden fees in commissions. Transparency is a subset of ESG, but has received particular focus in a customer experience context in the efforts to restore trust and build long-term customer advocacy.

There are profound structural barriers to progress here, such as quarterly stock market performance and sales staff commission packages, and it is wrong to suggest any large bank has broken rank to remove all fees and penalties and be fully transparent. But efforts in that vein are common as a form of enlightened self-interest. High fees and hidden penalties made banks especially vulnerable to disruption as it was so easy for new entrants to go after that friction – high fees – to grow market share.

Regulatory arbitrage and the impact on customer experience

Know Your Customer (KYC), anti-money laundering (AML), and counter-terrorism financing regulations have increased the complexity of the customer onboarding process for banks. Regulations on advice have also impaired the user experience (UX) banks can offer. For example, many banks were held back from offering safe-to-spend features in case data was construed as “advice” by regulators, meaning an elongated set of disclaimers and notifications, and possible regulatory fines in the event of inaccurate safe-to-spend estimates.

Fintech partnerships and service-level agreements

The trend towards fintech partnerships, particularly with younger, less proven start-ups to access new features and functionality, means more focus on service-level agreements. But specific performance guarantees, a process for recovering performance in the event of downtime, and liability amid data sharing all require clarification.

Ongoing uncertainties around machine learning algorithms

Endorsing or promoting new technologies presents reputational risk, which is part of the reason incumbent banks evolve practices more slowly than new entrants. For example, while machine learning boasts great predictive power, the opaque nature of these algorithms, is largely incompatible with the need for “informed consent” and the requirement for banks to be transparent about how they use data, where, and when. This is partly due to its experimental nature and its propensity to find new uses for data, and also because it may not fit contexts where data is observed rather than directly provided by data subjects.

Banks’ compliance functions evolve to support remote working

Many bank performance expectations have been revised downward as staff adjust to new working locations and routines. For key roles, such as financial advisors or loans officers, banks may need to re-evaluate the design of their compensation planning. As regulatory bodies like the European Banking Authority have stressed, banks should pay close attention to how the shift to remote working and the potential pressure for banks to make up for lost volumes could test banks’ AML and market conduct practices.

Continued focus on digitisation to provide transparency and guard against product push

Arguably, digitisation and liberalisation in banking have achieved more in terms of better outcomes for customers in the last five years than the last hundred years of consumer protection legislation. Continued digitisation, through the adoption of platforms that deliver early customer insights, will continue to provide a pathway to implement stringent affordability and income verification assessments, while identifying financially vulnerable customers and abiding by regulatory requirements.

Focus on fair customer treatment amid ongoing pandemic

To guard against product push and “buyer beware” sales practices, regulators are imposing caps on variable pay, and supporting so-called balanced scorecards or needs-based selling. Regulators around the world increasingly examine customer complaints for examples of problematic sales practices and inadequate customer service. Covid will put that into even sharper focus, and it is likely banks will still be called upon to do things to support customers not currently within the technology roadmap.

Ring-fencing corporate, small and medium enterprises (SME), and retail arms of universal banks

A countervailing pressure here is the regulatory need for ring-fencing between the insurance, retail, and wealth divisions of banks and the need for tight data integration to enable the most integrated conversations around realising customers’ retirement goals. The industry and policymakers need to work together to better understand potential data-sharing risks and how to mitigate them.

This is an edited extract from the Customer Experience in Banking – Thematic Research report produced by GlobalData Thematic Research.

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