A quantum leap for customer service

BY EWEN FLEMING
MOORE GOOBAL FINANCIAL SERVICES SECTOR LEADER
 
Financial services companies will face increased pressure this year to prove that their products are trusted by customers – and do not lead to them being worse off.

This regulatory scrutiny has the potential to enhance consumer trust in an industry whose reputation was tarnished by the 2008 financial crisis and its lingering impact but it will cause some fundamental changes in the way providers design, market and monitor the effectiveness of their products and services.

The UK will be the test bed of this new approach and the rollout of new Consumer Duty rules is being watched carefully in other financial centres. The objective is to drive good outcomes for retail customers by setting clearer and higher standards of consumer protection.

Providers will be compelled to make financial products easier to understand and demonstrate that they acted in a way designed to deliver good customer outcomes – and can also show evidence these goals have been met.

This will create headaches for financial services firms in the first half of the year as they refine products, processes and pricing while simultaneously building new datasets and upgrading governance structures. Executives and boards will be held accountable for the fairness of current products as well as those that have already been sold, possibly years ago.

One impact of the new approach is that consumers are likely to be more directly involved in the design of financial products and the introduction of robust and systematic mechanisms to gauge levels of customer satisfaction, loyalty and trust.

This will involve a combination of traditional human interaction and next-generation technology.

There will be focus groups, customer surveys and face-to-face meetings to scope out the broad outline of new products while, behind the scenes, quantum computing will be utilised to crunch the mountains of data firms hold in order to enhance risk assessment, decision-making and fraud detection. Cloud computing platforms are vital to this technology revolution and banks’ spending in this area is forecast to grow to $77 billion by end of 2024, according to research by IDC.

Two more big developments will have an impact in 2024, one short term and the other long term.

The short term outlook for interest rates appears to show a downward trajectory. This is generally regarded as good news for consumers and businesses who would be expected to borrow more as the cost of money falls. That, in turn, should promote economic growth.

This appears to be good news for finance companies but there is a sting in the tail. Many of them have profited from a widening of their net interest margin (NIM) as central bank base rates were frequently hiked to tame inflation. With base rates now believed to have plateaued it is likely that NIM will narrow in 2024 and 2025, with firms experiencing a squeeze on profit margins.

The longer term development is the rise of central bank digital currencies (CBCDs). Around 100 countries are exploring their potential adoption: the Bahamas, Jamaica, and Nigeria have implemented CBDCs while the European Central Bank is inviting tenders from vendors to provide the plumbing for a digital euro.

The idea behind these is that a digital dollar or euro would offer many of the convenience benefits of commercial cryptocurrencies like Bitcoin but without the volatility that can see their values fluctuate wildly – and central banks cannot go bust, unlike crypto exchanges.

The rise of CBDCs seems inevitable, and it remains to be seen how central banks and commercial banks work together. A big worry for commercial banks is that they see their value chain deconstructed, as happened with the emergence of new payments providers in the last decade.

However, the more probable scenario is that they will remain connected directly to their customers and support central banks with the administration of these assets to minimise overheads. They will probably end up using crypto deposits as a source of funding, just as they do with traditional currency.

We expect to see the accelerated adoption of CBDC leading to standardised cross-border regulation. While this may increase the burden of compliance, the positive end result will be greater market stability and improved trust in the vitally important financial services sector.