Led by Shoosmiths, eight in-house lawyers representing the fast growing fintech community spent a spring morning discussing the reality of doing business at a distance from customers, a challenge that has accelerated rapidly due to Covid-19. The virtual roundtable was hosted by sector lead for financial services at Shoosmiths, Stephen Dawson and principal associate Thomas Morrison.
The topic of the roundtable was borne from recent statistics showing the increasing shift from high street banks to exclusively digital rivals such as Monzo and Revolut. As traditional banks have struggled to match the immediate service delivery of their digital rivals, customers have been deserting them in their droves for digital alternatives, meaning work in the distance space is increasing.
This stimulated Dawson to break down the situation for challenger banks and how they are appealing to customers into four principle themes, beginning with customer engagement at a distance. Why are these fintech challengers such a compelling proposition for customers? Intuitive and consistently performing tech were noted as key elements within the lenders’ business models, allowing for speed and simplification. The group acknowledged user experience as key, particularly relating to how challengers deploy their tech.
“Fintechs can paint tech as more of a differentiator than it really is. The real differentiator is how you deliver tech and the user experience that you provide,” argued one participant.
Being a tech business first and foremost
It was highlighted that providing financial services at a distance is not possible without smartphones. The group discussed how challengers can promise customers a slicker digital experience, cutting down the clicks they have to make when setting up an account or accessing their bank account – often directly through the bank’s app. It is this instant access and the feeling of ownership and satisfaction customers feel which is defining challengers in the industry.
“A big part of financial services at a distance is having a product someone can sit down and sign up to quickly. Before the card has even been physically delivered customers can start using their account and enjoying it,” stated a participant.
Customers have high expectations about slickness of process, benchmarking their experience and journey against other apps (outside the FS space). It was clear to the group that it is not just about having the tech in place, but continually improving it, and ensuring its consistent performance. One lawyer pointed out that people are not just interested in their own experiences, but those of the wider customer base. They look around and see what’s going on. Consistent standards need to apply to everyone in order to maintain reputation and retain customers.
Some of the participants stated that their banks were keen to be described as tech businesses as opposed to payments businesses – or as one participant stated, “a tech company that happens to provide financial services.”
“If every aspect of a consumers’ financial life is based on their smartphone, it is tech first then product second,” another participant commented.
At the back-end, tech also enables the simplification of complex transactions. However as one lawyer pointed out, with the law accommodating far slicker processes compared to ten years ago, there is a question mark around the extent to which friction needs to be built in to allow for proper consideration of matters such as terms and conditions and airmail.
Changing the rule book?
Though challengers are not bound to legacy systems in the same way as traditional banks, issues surrounding legacy also remain a concern for the lawyers.
“We all have the same rule book. We all have to do the same things when we sign up a customer,” stated a participant. “You can have dramatically different processes that are fulfilling the same legal objectives. However, because of both tech and bureaucratic legacy there is still a reluctance to do things in a different way. In recent events, it’s been a real struggle for the compliance departments to even accept electronic signatures.”
Dawson acknowledged cost of services to customers and the diversity of charging structures as another principal theme. Due to not having a legacy cost base some of the challengers can offer large reductions in the cost of currency exchange fees while others don’t, for example. Offering products with built-in travel features, cutting out tedious charges when customers are away from home, is also very important to the remote model.
However, beyond the basic customer proposition, challengers still charge for many of their products.
“So it can’t just be the free products that are appealing to people. If customers are prepared to pay, do they value your services more than the free products offered by traditional banks?” Dawson asked.
“If every aspect of a consumers’ financial life is based on their smartphone, it is tech first then product second,”
“There’s a premium to customer experience” highlighted one lawyer. The group agreed that the extent to which customers are happy to pay largely comes down to the way in which their bank communicates and engages with them.
Another lawyer argued that organisations that are going to be successful are those that can build their processes so slickly that the whole customer journey is built around what they referred to as a “customer life moment.”
“Rather than a customer wanting a credit card and then deciding to do something, it’s thinking about the step before this. Why do you take out a credit card? You want to have a line of credit so you can buy a car, or get a mortgage. Why do you want to transfer money? You want to pay somebody. So we focus on the moment the customer is trying to achieve rather than the financial services element.”
The issue of cost was summed up by one participant: “Customers pay because of emotional attachment. It’s a move away from marketing based on what’s cheapest to drawing in customer base and giving them something they can relate to.”
However, it was also raised that the regulators have not yet taken customer thought processes into account.
A lawyer voiced their concerns about the FCA increasingly acting as a price regulator and introducing more pricing transparency. “Looking at what the FCA is doing in the savings market with easy access accounts, I think it can be taken too far. It marginalises how customers think about product selection.”
Another lawyer pointed out that the economists that draft overdraft regulations mistakenly think that customers are guided only by price. “In reality customers want simplicity, agility, usefulness and the product to be where they are. The regulator could land themselves in issues by forcing firms to create products based on their understanding about what a product should by not putting it in the hands of firms who are closest to customers.”
On the subject of barriers, Morrison asked the group which real or perceived legal barriers they face when conducting financial services at a distance.
One lawyer answered that one challenge was regulators recognising that they can complete financial services at a distance, particularly with regard to witnesses and the execution of deeds. “What we come up against is convincing regulators we can KYC (know your customer). Some European jurisdictions require a human interposed in the process, others don’t.”
As many customers don’t have printers or scanners, alternative ways of getting documents executed, by using a photograph of signed pages, can be employed. It was suggested that legal teams should work alongside compliance colleagues to find solutions for this. “We need to do things as a connective rather than just legal in isolation” one participant suggested.
Morrison made reference to the Financial Action Task Force’s (FATF) updated guidance on digital identity which could present challenges, particularly in the anti-money-laundering (AML) space and returned to the issue of electronic signatures.
“It may be a while before a more business friendly, sensible approach is taken to the interpretation of this guidance. But FTAF is essentially saying that a digital identification journey could be safer than relying on human verification – and help in terms of cost benefit and time,” Morrison stated.
As many businesses have updated, or are in the process of updating, their systems and procedures to allow for documents to be signed electronically, there is still a nervousness around relying on digital evidence.
Morrison added: “Legacy systems and legacy compliance policies lead to a strong sense that it’s better to see a passport or a utility bill. Changing the mindset of the money laundering team may take time but FAFT is opening the door to that.”
The session concluded with the group discussing the subtle variation in regulations for different products. When building a tech solution, whether customer onboarding or customer ongoing maintenance (replying to queries, sending them docs, exiting), different processes have to be designed to support this.
“Different wording in regulations determines how a bank sends a customer statements for an investment product and a a loan product,” a lawyer said. “Or you just take the lowest common denominator and build your system round that. So real legal barriers are minimal but the real problem is the mindset, including the mindset of the regulator building regulations that do not match customers experiences or expectations.”
Shoosmiths was delighted to lead a roundtable on the subject of financial services providers doing business “at a distance” from their customers. Many thanks to all the panellists (from businesses as happy to be called “fintechs” as much as “financial service providers”) for the engaging discussions and lively debate.
Initially we discussed customer engagement at a distance. Engagement, the group concluded, is only achieved with consistently appealing technology. Fintechs are as much part of the tech community as the financial services industry. Targeting over-complex or underserviced markets, with a commitment to speed and efficiency, seemed to be extremely important to the whole group. Simplifying a world that has always been conventionally conservative has also differentiated these providers from the existing branch-based, institutional lenders.
Discussion didn’t linger long on the legal barriers to doing business at a distance, with the consensus being that the legislation and direction of travel of the regulators was to support the conclusion of customer onboarding, KYC and execution of contracts electronically. Perhaps surprisingly, the group wasn’t fazed by the legislation. The same wasn’t necessarily true of the more unpredictable regulators.
And last, but certainly not least, we moved on to discuss customer retention at a distance. The group all agreed on the importance of being “useful” for customers if longer term retention is to succeed. Paying for services seems less important than providing a valued service – being available to the customer wherever they are and whenever they need it.
A fascinating debate – only beaten by time!
Stephen Dawson, financial services sector head and partner, Shoosmiths, Manchester