Customer is in charge

The recent economic crisis has lead to swift and dramatic changes in the Financial Services market. Banks and insurance companies view their key assignment as delivering their services based on the customers’ financial needs and offering complete transparency along the way. If this is done well and sincerely, they stand to gain the appreciation of other stakeholders and thereby win their licence to operate.

Customer intimacy has made its re-entry as critical success factor for financial institutions in order to regain trust. To achieve this, a dramatic shift is required from the financials. Their drive to expand has literally and figuratively cost them their customers. Banks generated more profit through their own investments and Asset-liability Management than by selling banking products. Direct customer contact was lost by closing bank offices and using the internet as channel for many transactions. The resultant lack of trust brought about by developments in the Financial markets, has proven that this situation is highly unfavourable.

The customer is empowering itself

The financial crisis has fundamentally changed the rules of the game for stakeholders. The influence held by consumers and governance bodies monitoring consumer interests, far outweighs that of shareholders. Discussions on shareholder value have fallen silent. The power in this chain of execution has shifted towards the consumers, who have organized themselves effectively and successfully into consumer interest bodies, consumer programmes or social networks. Financial Institutions who now make mistakes during the advisory stages of a project inevitably run the risk of major damage to their reputation. A reputation impossible to salvage by the mere running of a cleverly constructed marketing campaign.

Increased and expanded supervision

Aside from the traditional supervisory bodies DNB (the Dutch National Bank) and AFM (Netherlands Authority for the Financial Markets), other parties have begun influencing and pressuring the Dutch economy in the interest of consumers. The government offers financial support and commissioners, the Minister of Finance and the Dutch Parliament hold a critical eye over the Financials. The European Commissioner of Competition is empowered to intervene with Financial Institutions on issues regarding their size and to direct cases where state aid is alleged. The Financial Services Ombudsman is empowered to act on behalf of consumers duped by non-transparent transactions. The media is eager to broadcast extensively on these matters. The coming period will see increased public scrutiny and adjustments in public opinion in an effort to gain control of the situation. Forcing financial institutions to give greater insight into their activities.

Simple products with guarantees and seal of government approval

The financial crisis has highlighted the need for simple, uncomplicated products. Commissions paid, the reason for the product and the cost structure should be transparent. Such products serve only one purpose and are not packaged as a myriad of products that benefit only the banker. It seems likely that future financial products, just as other consumer products, will be extended with a guarantee. Unsatisfied customers can revert to this guarantee. In the long-term, the Dutch government will install a seal of approval for financial products, via an official guarantee institution, stating to consumers that a financial product complies with a number of basic requirements. This trend can already be seen in America. Interestingly, a number of products sold by Dutch financial institutions will not be approved under the requirements of the American system.

Financial education: duty of the bank

The financial crisis cannot be attributed only to the irresponsible risks taken by financials. Customers are not entirely without blame either. People are eager. They would like to drive the latest and largest model cars, but want to pay as little as possible. This mindset also applies to savings and investment products. Years ago, banks would have the same customers year after year, but now consumers shop around for the best interest rates. Financial institutions that succeed in re-establishing customer intimacy will be given the opportunity to educate their customers in appropriate financial behaviour. Government cannot be expected to take this responsibility. Advice has to be given with a view to long-term financial planning as opposed to a few snap shots taken at random intervals. This means that the financial advisor also has to say ‘no’ if a product does not suit a client´s profile.

The pension bubble is going to burst

It is critical that financiers take ownership of this next issue as we are facing a dramatic financial problem. Many consumers are blissfully unaware of the problem and financial institutions are neglecting to act pro-actively. We are talking about the pension bubble, also dubbed the expectation gap. Research by the AFM suggests that the impact of the bursting pension bubble will be greater than that of the ´toxic´ mortgage files.

Consumers are shocked when confronted with their pension accumulation, their future liabilities and the income needed to cover these expenses. A gaping hole exists between what is necessary and what will be available. The fact that consumers are financing their homes without paying off the capital of the home loan and not saving sufficiently for their retirement, due to breaks in the pension accumulation period or investment losses of the pension funds, are all contributing factors. At the end of the mortgage loan period, they are left with too little income to repay the loan. Another factor that needs consideration is the increasing value of fixed assets. This is no longer at the same levels as before. Therefore this ‘nest egg’ has also dissolved. A last factor is the 30-year limit on tax benefits to mortgage loan holders, in doing so the government has removed the logical option of moving to a cheaper home.
The government has contributed to consumers’ false expectations by first giving homeowners an attractive tax break, but after 30 years, they may find themselves in a financially precarious situation with very limited options.

Better anticipation and greater risk awareness from banks

In short: Financial institutions urgently need to create greater financial awareness among their clients. By anticipating their clients’ situation better, they can prevent many problems. This can be achieved by creating risk profiles for their clients, utilizing both their own data and some external information. It is possible to install active prevention policies based on these profiles and to act in a timely manner, should problems arise.

The corporate credit and assurances market has been working with risk rating for years: basing premiums on companies’ annual results. This could be applied to the consumer market. By integrating risk management with customer interaction, financial institutions are able to tailor their operations to the business drivers present at any given moment. Originating from governance bodies, legislation, consumers or market developments.

The major trends

  • Customers are the central theme, with greater emphasis on interaction
  • Traditional shareholders’ influence is waning
  • Market is less open to and less willing to accept complicated and risk-bearing financial products
  • Financial institutions are owning up to their social responsibility
  • More emphasis on Risk Management
  • More stringent capital requirements have lead to pressure on profitability
  • New business models, banks limiting their size, ‘maverick’ banks and ‘good’ banks are emerging
  • Sharpened and broadened supervision continues, transparency is not negotiable

Customer experience

Changing business culture to achieve greater effectiveness
Customer interaction and risk management have been identified as the most important aspects for the near future. This implies a policy of customer service and broad risk management including the dynamics in these areas, implemented and upheld by the Management Board and under supervision of the Supervisory Board, AFM and DNB. To date this has hardly been done (certainly not for pension insurance companies); and therein lies a big opportunity. Such policies give clear guidelines to the operational side of the organisation. In an ideal world, the responsibility for and balance between commercial activities, efficiency and risks should be integrated and placed at the front end of the chain (customer experience), at the lowest level. Weighing these factors against each other should be viewed as part of an advisory meeting: at the front end of the organisation, on the customer side. This obviously requires major changes to processes and systems. Once these are implemented, managers have greater influence on their own part of the process, no longer shifting responsibility to the next level in the organisation, as is often the case at present. When that happens it is quite unfortunate, as it feeds anxiety and leaves organisations in limbo. To increase the effectiveness of financial institutions these cultural changes will have to be initiated in the next few years.

Operational management

Resolving tension
Financial institutions’ profitability has come under pressure. The stringent capital requirements introduced by governance bodies have resulted in smaller profit margins to be earned on products. As customer intimacy and risk management gain territory, commercial activities become more intense and expensive. To ensure high quality service delivery, banks will have to justify these increased costs by adjusting their perspective on the importance of these activities. If something does not add value to customer service, contribute to revenue or accelerate the product life cycle it will become obsolete. Banks may be open to looking at outsourcing processes for the products for which they no longer wish to deliver services and for which only an administrative function remains. Cost Management may also be realised by executing back-office processes (payment traffic for example) in conjunction with smaller parties.

Corporate management

Towards a compact and clarifying model
Banks and insurers will specialise even further. They will choose a compact and smaller model, making it easier to manage. A model encouraging entrepreneurship and with clear and recognisable products, with a singular goal. Mammoth organisations have proven too difficult to manage and will start disappearing soon.
Insurance companies will focus on insuring risks only and will develop towards becoming direct writers more and more. They will start working on innovation and efficiency within their supply chain, together with their intermediaries, who deal with clients directly where complex products are concerned. We are starting to see the emergence of ‘good’ consumer banks that are not willing to take big risks and their counterparts, the ‘maverick’ banks, charging a higher premium for taking such risks. Aside from these, there are institutions that will differentiate themselves by a sustainable proposition for example. The combination bank-insurance company remains valuable as long as it effectively provides integrated customer advice.

Risk & Compliance

The market will do what comes naturally
As a response to the crisis, it is likely that Dutch regulatory institutions will over-regulate in the next few years, fuelled by its intention to protect both companies and consumers. This will be followed by a wave of European governance, unlikely to be as stringent as local controls. After a while, the market will discover that responsibility needs to rest with the relevant parties. That is with financial institutions, as well as with companies and with consumers. After all, conducting oneself with integrity is good advice to everyone. Customers should not expect irresponsible risks and banks should dare to say ‘no’. In the end, the market will do what comes naturally.