These are turbulent times for the Financial Services industry. In the last 10 years there has been more technological disruption and more new market entrants than ever before. FS companies are facing stiff competition, new regulations and increasing customer expectation.
Amid this backdrop of continuous change, businesses face an uncertain future. With an increasingly crowded marketplace, organisations need to raise their game to attract and retain customers and distinguish themselves from the competition.
At the heart of this issue, businesses need to be able to engage and understand their customers, and then have the agility to adapt to what they hear. This is the challenge that Mike Allan, LendingCrowd’s Director of Operations argues needs to be the primary focus for every FS organisation.
“Customer understanding will define success, and what we will see in the future is much greater communication and transparency. Take the investment industry for instance, if you look at the interaction organisations have with customers it is extremely limited. There is a lot of attention on the sale to get that initial investment but then very little engagement thereafter. And this can have a negative effect.
For many people, the most important investment they will ever make is their pension. But ask yourself what your actual rate of return is on your pension – you probably don’t know. The most important investment that you possess and you don’t even know what return you are getting. You might find out what its value is once a year, or you might know the projections based on a few assumptions, but very few will know their rate of return. And this is what you need to compare products.
It’s not good enough. So this is an area where clear improvement can be made. What I think we will see in the future is communication being given much more priority, and the companies that get this will start to win out over the companies that don’t.
There will be a similar shift on the borrowing side, where we are already seeing much more competition. 10 years ago, if you wanted a loan, your options were pretty much limited to the high street banks. Now we’re seeing many more organisations lending money, and doing so through a wide variety of different means, and this is resulting in different types of loan products.
I think what we are going to see in future is instead of a business saying they want a £50,000 loan for 5 years, it’s going to be a conversation saying I want to be able to do this with my business, how do I go about making it happen? I want to invest in a new machine; it’s going to cost me £50,000, it’s going to depreciate at 10% per year – but this is the change its going to deliver to my business. And then off the back of that conversation you are going to be given a specifically tailored loan product, one which is much more in tune to the needs of the customer.
As a result of this shift, I think we are going to see organisations focussing on specific sectors and specific needs – creating specialised products. And that requires a strong relationship between the organisation and the customer. That will mean that the lenders themselves have to develop specialist offerings, while the intermediary sector, like the loan-broker or introducer will have to adapt and demonstrate added value.”
In terms of the market forces driving the shift, is this largely customer demand or has this primarily been a result of new entrants?
“There has been a general distrust in banks and what we are seeing across the board is that brand loyalty, customer loyalty is withering. People will jump ship much more quickly than they would do in the past. In times gone by, if you attracted a customer, then you had that customer for 10 years or more. I think those times are gone.
Meanwhile, this same distrust has created a culture of organisations thinking that they can do better than the banks, and we have seen a lot of new entrants coming through. The reality is that it’s a very difficult ecosystem to do the same thing that a bank does, it takes a lot of investment up front, there is a lot of adherence to regulation, and it’s an expensive business to run. As a result, a lot of them will fall away and disappear. But the ones that succeed, the ones that get it right from the customer point of view and find their niche – they will get traction.”
There certainly is evidence which points to less customer loyalty than there was previously, but the swing away from mainstream providers hasn’t occurred to the degree that many predicted.
“I think that depends entirely on the products you are talking about. In terms of mainstream products like current account, savings accounts and mortgages, then it will take a long time to dilute the market share of the larger FS organisations – although this will slowly happen as the millennial generation makes up an increasing proportion of the market. Whereas if you take the less mainstream products like investments, there’s already much more competition and diversity.
For the current accounts specifically, I don’t see that dilution happening anytime soon. I look at my own account and I can’t see me changing it in the next 5-10 years, unless there’s some sort of event which drastically changes the game. It’s just too much of a pain.”
Edinburgh-based LendingCrowd is the only Peer to Peer lender headquartered in Scotland
With these pain-points, is this primarily down to routine and simplicity or do you think there aren’t the necessary regulatory mechanisms to facilitate effective competition in this area?
“I think the regulators are doing their best but there are a lot of things which need to improve. When you think of the process tied to your current account these are very reliant on your sort code and account number, and switching means new sort code and account numbers. A current account number is almost part of your identity, like your address or mobile number – so why should you have to change it?
Ideally, what should happen is that an identifier for your account number and sort code should be owned by you as an individual, so that you can move it between suppliers in the same way as you would with a mobile number using a PAC code. If you look at the mobile market, consumers did not really switch provider until mobile numbers became portable. There’s no real equivalent to that for your bank account number, and until they implement something of that nature, you’re not going to get that degree of competition within the market.
I do think the move to Open Banking regulation is a step in the right direction, in terms of the customer centric focus and the recognition that the data belongs to the individual. I think this will have a positive effect, both for customers and for the businesses that service those customers, particularly when it comes to an area like personal finances.
It can be quite a difficult task for many people to see what exactly they are spending their money on, and break this down. You can go into your current account and you can download statements or spreadsheets with a big list of transactions on them. But without combing through all the figures at length, the format isn’t suited to seeing what has been spent and understanding your outgoings.
But I think with open banking there will be many more services that come in and offer better visibility and transparency on where your money is going and what you are doing with it. It is going to take time to occur though. Some people think that as soon as Open Banking comes about, the world is going to change, but it is going to take time for the propositions to be developed and for these to become mainstream.”
Do you think Open Banking and increased data-sharing will create more collaboration between FinTechs and incumbents? In years gone by, there was a lot of talk around FinTechs ‘eating the lunch’ of the banks, but this seems to have given way to talk of co-existence, collaboration and partnership. How do you see this relationship evolving?
“I think there is definitely a mutually beneficial relationship that can be created between a small FinTech and an incumbent bank, and in various areas we will see that happening. The banks continue to be on a simplification agenda, they are looking to reduce the number of products they have available and streamline their operations. And this may fuel a rise in referrals from banks to other organisations which will create opportunities in areas where the banks themselves don’t operate. I think we will see the new entrants targeting these niche areas specifically and specialising their services accordingly.
There will also be a considerable element of acquisition, where the banks will swallow up successful companies to take on their products and customer base. In some circumstances they might incorporate that into their main business and product line, in others they may want to keep that running separately as its own agile business brand.
But I do think there will still be a big element of competition, the banks will fight back against the new FinTech entrants and create products in areas where they want to have a presence in that particular market – so there will be competition as well.”
The LendingCrowd platform has facilitated £15m of loan funding to date
From an internal standpoint, how do you ensure that you can compete and survive – how do you plan or strategise when the environment around you is changing so rapidly?
“I think for a lot of companies now change is constant. Certainly for us we see change as part of the ‘Business As Usual’, it’s just the norm. Some organisations will still have one area of the business focussed on the constant with another geared to look at the change. But for us we need to see it as BAU.
The companies that will succeed are those that can embrace that and encourage change. Ultimately, survival will be determined by the ability to adapt to market forces. This is where I think the small, niche players have a real edge. One of the big complaints I hear from people working in large organisations is the time it takes to make change. Partly it’s the people but it is also the scale of the operation and the interdepencies at play in a large organisation. That poses a big problem for the large incumbent enterprises.
But it’s still something that smaller companies have to get right. They have got to make sure that they have leaders that can adapt to change very quickly. In our case, if LendingCrowd had not changed and adapted at least a dozen times in the last two years then we wouldn’t be where we are today. We completely overhauled our entire model for the way we engage and acquire investor and borrower customers. And we delivered a new investment product and an ISA from concept to market in 3 months. That product is now our most popular investment product and has put the business on a very different footing. If we had not made those changes, we would be in a very different place as a business.
This can be hard going, but you need to be willing to discard your assumptions based on the information you are getting – even if it means fast and difficult change. But whilst the process is tough the result of prioritising what works is results. In our case we surpassed last year’s loan volume in the first six months of the year, and I would directly attribute this to the changes we made across the business.
You have to be adaptable if you are going to thrive in this market. You have to continually learn from the customers, the processes and the people around you, and make decisions to change your working practices. Strategy has to be in line with what the customer wants and you have to focus on that – sometimes to the short-term cost of the organisation. It’s very easy for people to be internally focussed and concentrate on making internal process more efficient. But above everything you should prioritise the customer experience, what they want, and focus your efforts on delivering that.”
You mentioned the importance of customer experience and understanding needs and requirement. How do you go about this in practice, is this where data and analytics comes in?
“There has been a huge hype around the value of data, and looking at analysing information to improve business intelligence, tailor services and offer personalisation. But all the data in the world can’t replace face to face contact, so data isn’t the be all and end all. It can act as a valuable source of information, and it can be a really good pointer. But only by speaking to individuals and having real relationships can you really understand the issue. So data can flag a problem but it’s not going to solve it for you.
You can cut out so much pain just by speaking to people. You need a statistically significant amount of data just to make the insight worthwhile – and this can take a lot of time to gather and process. Often you can learn much more just from taking a small sample of your customers and actually speaking to them properly. These conversations can often be much more beneficial in feeding back what you can do to improve their experience or enhance your customer acquisition.”
Do you think in the shift to digital channels that some of the customer understanding has been lost?
“There’s no doubt that from our perspective we’ve had feedback from investors that the reason they are going with us instead of a competitor is because they can get us on the phone or meet face to face. There are people that are happy engaging online, but others still want to be able to speak or meet in person. So you have to be able to adapt and offer to connect in the way that responds best to the preferences of the customer.
Ultimately, I still think that we’re social beings and people will always want to speak to you, especially if there is a problem, so shutting down call centres or branches is a dangerous game. I realise why it’s happening, but you’ve got to ensure that people can still reach a human being when they need to. If you look at the key frustrations from a customer perspective, it usually stems from the inability to reach the right person to deal with their issue or solve their problem. So we do have to change with the times and use technology where it can help, but we’ve got to understand the needs, match this to the most appropriate service channel and ensure we always put the customer first.”