Deloitte Customer UK

Financial services is an industry that is not often perceived to put the customer at the heart of business models. The industry has sometimes been slow to adopt new technologies and customer relationship models and to respond to consumer needs.

However, recent economic and societal developments have changed the playing field irreversibly. The combination of: capital constraints, new regulation, low growth in mature markets, digitisation, and the rise of the connected consumer are hugely disruptive forces in the financial services landscape.

In her blog back in May, Emily Puddifer raised the moral question: “If you took out PPI aware of the terms of the policy, would you complain anyway, knowing that you could receive compensation?”

And here we are in November, six months on and PPI is still claiming headlines. Provision for PPI pay outs by Barclays, Lloyds, RBS and HSBC have reached £10bn, for those government backed banks these are provisions that could have otherwise been paid back to the tax payer. It is clear the PPI redress situation has turned out far worse than the government, regulators, customers and the industry anticipated.

There is no doubt in anyone’s mind that the ‘mis-selling’ of payment protection insurance to customers is plain wrong and that banks must, if they haven’t already, put safeguards in place to prevent future such scandals.

However as PPI provision alone has caused such a severe impact on the performance and recovery of the banking industry, do we as customers need to reflect on our part in this ‘disaster’? Should we take more responsibility when purchasing financial products?

The last few weeks has seen corporate banks hit the headlines as they cut 10,000’s of jobs and announce restructuring plans to enable a focus on key markets.

On the face of it the segmentation they are using focuses on profitability of markets and risk exposure. Very simple but also very sensible. The differentiating factor is that they are changing how they work based on these insights. What other businesses are changing how they work based on changes happening in their market segments or customer segments?

As we went into recession we saw changes in the consumer market we’d not seen in previous recessions, as interest rates fell mortgage payments changed, with some households being better-off and others worse off. For the worse off we saw that spending reduced but items seen as luxuries in the ‘90’s recession where now necessities, like mobile phones, Sky TV and holidays. Many companies predicted and observed these market splits and changes but how many acted on them?

Britain’s leading supermarket chains, never known to miss an opportunity as they strive to become one-stop-shops, are entering and expanding ever further into the financial services industry.

As the banking industry has faced many a scandal with technical difficulties, Libor fixing and PPI, customer confidence in the traditional financial institutions is at an all time low, and supermarkets are seizing this opportunity to tempt customers away. However, should you be convinced to switch to these supermarket brands, you may not necessarily be getting the clean break away you’d hope for.

Most of the supermarkets have had to enlist the help and support of the banks in making their break into this industry through partnership relationships. Sainsbury’s Bank is an established joint venture with Lloyds Banking Group. M&S Money’s new banking service is half-owned by HSBC and the recently re-branded Asda Money is using a variety of different providers to offer its range of services.

Years after the collapse of Lehman Brothers and the beginning of the global financial crisis, UK banks are still suffering from the repercussions. Regulatory pressures born from the crisis are sharply increasing the cost of doing business in the sector, and dangerously eroding return on equity (ROE). The new regulations, most of which are yet to come into full effect, have the double effect of both shifting the weight in favour of non deposit products, therefore reducing sources of interest based income, and curbing traditional sources of non–interest income.

However, whilst these regulations are forcing banks into shrinking their balance sheets, the UK market is increasingly presenting profitable lending opportunities. The immediate result is an unmet demand for lending, which has made the market suddenly more appealing for a varied set of new players. Overseas banks, start-up businesses and UK companies looking to expand into financial services are taking advantage of this window of opportunity, reversing a decennial trend of market consolidation and suddenly making the UK bank sector a much more competitive field. Consequently, growth opportunities are scarce and both incumbents and new players are engaged in the difficult game of securing the most profitable customers in the market.  

An issue that has claimed many headlines over the last 12 months is payment protection insurance (PPI), a product that has been widely sold across the financial services industry for many years. PPI is the most complained about insurance product ever sold in the UK and financial services companies are setting aside billions to repay those who were mis sold PPI.

What is PPI? Payment protection insurance (sometimes called ’loan protection’) covers loan or debt repayments in the event of certain problems – for example, if you are unable to work because of illness or if you are made redundant. How these policies work and the benefits they offer, vary from organisation to organisation and from policy to policy. Payment protection policies are usually sold as part of a deal when consumers take out a loan, mortgage or credit card.

Why are people complaining? It has come to light that hundreds of thousands of policies may have been mis-sold to consumers for lots of different reasons – the two main ones being: 1) consumers have tried to make use of their policy by claiming on it and have been turned down, often due to small print they were unaware of; 2) consumers did not actually know they had taken out the policy or it was ‘forced’ on them at the time they took out the core product, such as a loan or mortgage.