ENSURING SEAWORTHINESS TO CHARTING A COURSE - How Australian Banking Can Survive the Perfect Storm - Accenture
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ENSURING SEAWORTHINESS TO CHARTING A COURSE How Australian Banking Can Survive the Perfect Storm
2
Australia’s banking industry—
and the country’s financial services
industry more broadly—has faced
a perfect storm over the past year:
• The Royal Commission on the banking To survive the storm and chart a course
industry released its final report1 forward, banks must repair their ships to make
in early February, with a series of 76 them seaworthy—which, broadly speaking,
recommendations designed to rein in the requires appropriately adhering to the new
excesses of the financial services industry. and existing regulatory requirements—
and then chart a course out, primarily
• The Banking Code of Practice (BCoP)
by improving the customer experience.
comes into effect in July, and requires
Specifically, they should consider to:
that banks focus far more on the customer
by designing for a service culture and • Switch from a sales culture—which, the
behaving ethically. Royal Commission found, was broadly
• Expanding on the above two regulatory behind the industry’s excesses—to a
demands, the Big Four face an estimated service culture across all channels.
additional A$2.4 billion in regulatory and • Ensure that regulatory spend improves
compliance costs over the next three years.2 both the customer experience and banks’
• Less publicly, but no less of a challenge, digital channels.
the business environment for the Big Four
Understand that poor conduct lies at the
banks3 has deteriorated for a number
centre of the storm, and that fixing this will kill
of reasons, many of which are likely
two birds with one stone: both improve the
to continue.
customer experience and address the BCoP’s
This is without considering the growing compliance requirements and the
threat of digital disruption. The advent of findings of the Royal Commission.
open banking, for example, will see the
Taking these actions may allow banks not
implementation of the Consumer Data Right
only to survive this storm, but to chart a new
system this year, which will require banks
course that may assist them to thrive in an
to provide customer data to clients and to
industry that is undergoing profound change.
accredited third parties. Additionally, the
spread of digital banking means customers
can more easily switch providers—whether to
other banks or to fintech providers.
3
THE PERFECT STORM
WAVE 1 The Royal Commission’s key
THE ROYAL COMMISSION recommendations include:
The Royal Commission pulled no punches • The remit of the Australian Prudential
in determining that the cause of misconduct Regulatory Authority (APRA),
was corporate and individual greed; which supervises financial services
that “providing a service to customers institutions, and which administers
was relegated to second place”; that “sales BEAR, will be broadened beyond the
became all important”; and that the primary management of financial risk to include
responsibility for what went wrong lay with misconduct, compliance and other
boards and senior management.4 The prevailing non-financial risks.
undercurrent was that shareholders’ needs • APRA will establish limits on the use of
trumped all others—especially those of financial metrics for long-term variable
customers. The sector’s culture, governance and remuneration. Additionally, employee
remuneration policies came under the spotlight. remuneration systems must focus on
The leaders in Australian Government have non-financial risks and misconduct.
indicated that they will take action on all • Lenders will be banned from paying
76 recommendations and may introduce further commissions to mortgage brokers and
measures.5 Briefly, the outcome will see few aggregators—this will be phased in
changes to responsible lending. But banks over three years. Trailing commissions
must report on conduct and culture; regulators will be banned from July 2020.
have been granted additional powers; there is
• Mortgage brokers will be subject to
a strong focus on remediation and commissions;
the same laws that apply to financial
and the Banking Executive Accountability
advisers, including a best-interests duty.
Regime (BEAR), which came into effect in
2018, has been extended to other financial • The Banking Code of Practice will
services institutions. be extended to cover loans to small
businesses of less than A$5 million.
4WAVE 2 It also commits banks to behaving
ethically, lending responsibly, and being
THE BANKING CODE more transparent, and will pressure them
OF PRACTICE (BCOP) to ensure good employee conduct.
The BCoP was introduced by the Australian Key clauses (see diagram) focus on culture
Banking Association (ABA), partly in an drivers—integrity, empathy, capability and
unsuccessful bid to head off the threat accessibility—areas that, if addressed,
of a Royal Commission into allegations could see across-the-board improvements
of misconduct in the financial sector. in compliance and the customer experience.
Changes announced to the Code in late
The Code, which is scheduled to take February will further protect customers,
effect in July, will ensure that banking the ABA has said.6
products are both easier to understand
and more focused on what personal
and small business customers need.
• Fair, Ethical, Reasonable Conduct • Culture of inclusivity and integrity
• Data protection and Confidentiality • Sensitivity, respect and compassion
• Adequate notice and warnings for diverse/vulnerable customers
• Customer Advocate roles
• Support customers facing hardship
and financial difficulty
INTEGRITY EMPATHY
CAPABILITY ACCESSIBILITY
• All Staff Trained and Competent • Provision of timely, clear and
• Diligent and Prudent bankers information in ‘plain English’
• Clear terms and conditions
• Accessible banking for remote
customers
• Access to Complaints Handling
5WAVE 3 On the earnings side, the share of interest-only
loans—which provide the highest margins—
A CHALLENGING as a proportion of total housing loan approvals
BUSINESS ENVIRONMENT dropped from about 40 percent in 2000 to
about 19 percent in 2017.9 At the same time
The business environment for the Big Four has property values have fallen, leading to a decline
deteriorated for a number of reasons: from in the value of banks’ property books. And lastly,
lower property prices to increased competition; the mortgage rate trend has been downwards,
tighter margins and diminished incomes in areas with the average lending rate for major banks
such as trading and wealth management; and a declining from about 6 percent in 2000 to
stagnated share of deposits (for three of those about 4 percent in 2017.10
banks) combined with the fact that banks now
source a larger share of funding from the US. There have been two positives for banks:
net interest margin improved due to the
Take that final point: according to the repricing of certain mortgage types, and
Reserve Bank of Australia, the share of improved deposit spreads. But bank levies
domestic short-term funding declined from and the higher wholesale funding costs have
about 8 percent in 2000 to about 5 percent offset some of that, and matters are unlikely
in 2017, while the proportion of short-term to improve much in the near future: banks will
offshore funding climbed from about 5 percent face costs reskilling employees and assigning
to about 8 percent over the same period.7 them to new customer-focused roles as they
Given higher US interest rates, that will pivot towards a more customer-centric model.
further squeeze margins.
Additionally, the remediation program—
In addition, term rates on deposits of A$10,000 whose goal is to identify and make good
more than halved from about 5 percent in 2012 all customers that received poor financial
to about 2 percent in 2017. Over the same advice, and which is being overseen by ASIC
period, household term deposit growth declined —will also hit the bottom line.
from nearly 20 percent to about 5 percent.8
The consequence of this shift in interest At the same time, banks face an unprecedented
rates has been that term deposits, which in threat to their dominance from fintech companies
the five years after the global financial crisis that are hungry to take market share from them
were the fastest-growing deposit product, were —and that have the skills to do so.
outstripped by transaction and savings deposits.
6WHAT SHOULD BANKS DO?
REPAIRING THE SHIP AND
CHARTING A COURSE
Banks, then, are not only measures that limit sales as a factor in
remuneration, and that incorporate elements
facing a future in which they like customer satisfaction, risk management
must contend with greater and team-based goals.
scrutiny and far more rigorous
It will take time to implement, but it is
expectations of ethical conduct; vital as the banking landscape undergoes
they must also improve the a seismic shift with fintechs and GAAFA
customer experience or risk competitors (i.e. Google, Apple, Amazon,
Facebook and Alibaba—tech firms offering
losing business to new, financial services) competing for banks’
more nimble competitors. business, and wholly altering customers’
expectations for the sector. Success will
1. IMPROVING THE also require a change in management culture,
along with reassurances for employees that
CUSTOMER EXPERIENCE customer satisfaction trumps sales.
Achieving this requires action in three Banks must also avoid the mistakes made
key areas: in the UK a decade ago: there, the sector
• Shifting from a sales-driven culture focused its spending on meeting control
to a service culture; and risk needs, and failed to improve the
customer experience, leading to the rise
• Ensuring that this shift happens across of nimble, customer-focused challengers.
all channels; Banks must maintain spending on the customer
• Prioritising regulatory spend that also experience and digital channels and do
improves the customer experience and so with a focus on human-centred design
digital channels. (HCD)—which means considering problems
from a human perspective, and relying on
Designing for a service culture that focuses collaboration, empathy and experimentation
on customer-related outcomes rather to create innovative solutions that people love.
than on a sales culture will meet the Royal
Commission’s and BCoP’s requirements, It is this approach that GAAFA firms have
putting the customer front and centre. It is used to build global behemoths, and banks
also an essential step to success in the digital need to design their response to regulatory
world. Banks in other countries have already requirements using HCD.
trodden this path, introducing blended
72. REBUILDING TRUST It also means:
• Identifying proactive and predictive
The Royal Commission revealed three insights so banks can monitor and
elements at the heart of the crisis: a lack manage business conduct and culture risk.
of accountability, flawed incentives and
unethical behaviour. • Expanding their historical approach to
reporting (focusing on incidents), and
The BCoP provides part of the solution generating proactive, forward-looking insights.
and is central to efforts to lower conduct
• Integrating multiple data sources,
risk and improve the customer experience.
systems and processes to ensure fluid
It puts more emphasis on ethical behaviour
engagement of new digital systems.
by bank staff, provides increased transparency
of banking products and services for personal Banks need to show they are complying
and small business customers, and outlines a with their BCoP obligations, and that senior
range of rights and protections for customers.11 management are doing the same under BEAR.
In part, that requires knowing what is working
However, banks must also win back trust,
and what is not– and success in this arena
ensure accountability and proper alignment
means using technology and data analytics
of employee incentives, and build an effective
to fix data failings.
Conduct and Culture Model. This requires a
customer-centric approach where sales practices
are ethical, controls over conduct are in place,
and corporate culture changes for the better.
83. PUTTING THEORY Banks must also clean up data-points in
their systems of record (SOR) to ensure
INTO PRACTICE better analytical insight.
Accenture suggests a three-step process Step two: maximise control by introducing
to action. systems to improve understanding of the
compliance environment and generate deep
Step one: conduct a gap analysis to
insights from internal data. This proactive
understand where regulatory initiatives
approach means insights are viewed vertically
like the BCoP will have the greatest impact,
and horizontally, creating greater accountability
and to discern the changes needed to ensure
and allowing evaluation of compliance with
that systems, policies, processes, controls and
regulatory requirements.
bank collateral comply with them in time.
Step three: link to the customer experience
The graph below includes a timeline of
and make regulatory-driven investments
resolved complaints/requests. The percentages
a win-win. That requires insight into customer
and resolution times depend are subject
journeys and understanding where the BCoP
to various factors.
and the customer experience intersect. Banks
The BCoP module of Accenture’s Risk & Insights can then add a BCoP or customer experience
Platform (RCIP) maps controls, risks and element to investments that are underway.
obligations to the bank’s value chains. Conduct The RCIP Customer Journey module can provide
and compliance cut across all operational aspects, this understanding by visualising, tracking and
and moving from a business-unit view to a drilling down into customer journeys.
value-chain approach makes understanding the
environment, actions and accountabilities easier.
68% Instant resolution
Customer Interaction ~80%
12% Request + 1 day
Customer Type of customer requests and
Requests distribution where they are solved/closed
72% 8% Complaints
Digital Branch
SQR
Mobile 12%
banking
5% 3%
Call Centre
Logs
Internet
banking
Telephone
Typically t+1 Days
time
t + 10 1–2 4–6
Days Months Months
9In conclusion, a holistic, Looking ahead, we expect the environment
will remain challenging, and that is why
data-driven and proactive banks must act now. After all, in a storm
approach is the only way to get it doesn’t pay to sit tight and hope for the
out in front of today’s commercial best—what’s needed is to fix what’s broken,
ensure the vessel is seaworthy, and chart
and regulatory challenges.
a course out. In that way, when the storm
Increased competition, greater passes, the ship is still afloat and in the
regulatory scrutiny and a crisis best possible shape to keep sailing.
of trust means banks have little
choice but to reinforce controls,
conduct and compliance, and
improve the customer experience.
The innovative modules on
Accenture’s Risk and Compliance
Insights Platform mean banks
can do both at once.12
10REFERENCES 7. Developments in Banks’ Funding Costs
and Lending Rates, Reserve Bank of
1. Royal Commission into Misconduct in the Australia, Bulletin (March 2018). See:
Banking, Superannuation and Financial https://www.rba.gov.au/publications/
Services Industry (2019). See: https://www. bulletin/2018/mar/developments-in-banks-
royalcommission.gov.au/sites/default/ funding-costs-and-lending-rates.html
files/2019-02/fsrc-volume-1-final-report.pdf 8. Developments in Banks’ Funding Costs
2. Note to clients by Morgan Stanley banking and Lending Rates, Reserve Bank of
analyst Richard Wiles, as reported by ABC Australia, ibid.
(September 14, 2018). See: https://www. 9. The Limits of Interest-only Lending,
abc.net.au/news/2018-09-14/bank-royal- Speech by RBA Assistant Governor
commission-how-much-will-misbehaviour- Christopher Kent (April 24, 2018). See:
cost-the-banks/10246846 https://www.rba.gov.au/speeches/2018/
3. National Australia Bank (NAB), sp-ag-2018-04-24.html
Commonwealth Bank, Australia and 10. Developments in Banks’ Funding Costs
New Zealand Banking Group (ANZ), and Lending Rates, Reserve Bank of
and Westpac. Australia, op cit.
4. Royal Commission into Misconduct in the 11. A new higher standard in Australian
Banking, Superannuation and Financial banking, Australian Banking Association
Services Industry (2019), op cit, pp 1, 2, 4. (July 31, 2018). See: https://www.
5. Restoring trust in Australia’s financial ausbanking.org.au/media/media-releases/
system, Speech, Date : 04 February 2019, media-release-2018/a-new-higher-
Author: The Hon Josh Frydenberg MP standard-in-australian-banking
https://joshfrydenberg.com.au/latest- 12. The Accenture Risk and Compliance
news/21179/ Insights Platform is pending patent.
6. Banking Code shakeup after Royal
Commission Final Report, Australian
Banking Association press release (February
27, 2019). See: https://www.ausbanking.
org.au/media/media-releases/media-
release-2019/banking-code-shakeup-after-
royal-commission-final-report
11AUTHORS ABOUT ACCENTURE
San Retna Accenture is a leading global professional
Managing Director, services company, providing a broad range of
Financial Services Productivity services and solutions in strategy, consulting,
Lead, Accenture Australia digital, technology and operations. Combining
and New Zealand unmatched experience and specialized skills
across more than 40 industries and all business
s.retna@accenture.com
functions—underpinned by the world’s largest
delivery network—Accenture works at the
Tales Sian Lopes
intersection of business and technology to help
Managing Director, Finance clients improve their performance and create
and Risk Services Lead, sustainable value for their stakeholders. With
Financial Services, Accenture 477,000 people serving clients in more than
Australia and New Zealand 120 countries, Accenture drives innovation to
tales.s.lopes@accenture.com improve the way the world works and lives.
Visit us at www.accenture.com.
CONTRIBUTORS
Jennifer Pham
Manager, Management
Consulting, Accenture
Rimon Nissan
Manager, Management
Consulting, Accenture
DISCLAIMER
The views and opinions expressed in this
document are meant to stimulate thought
and discussion. As each business has unique
requirements and objectives, these ideas
should not be viewed as professional advice
with respect to your business.
Copyright © 2019 Accenture.
All rights reserved.
Accenture and its logo are trademarks of Accenture. 190419You can also read
