Agile, responsive, resilient - future-proofing financial services

Quentin Cole: Welcome to the business in focus podcast. I'm Quentin Cole, head of industries at PwC, and member of our UK management board and I'm back to host another episode where we'll be talking about some of the trends we're seeing across the business world. This time, we're looking specifically at financial services. In particular, how shifting customer behaviours, technology and regulation all have created a need for organisations to be more agile and resilient and through it all, the importance of building trust in the industry and across the services provided in an increasingly tough economic climate. I'm delighted to say that joining me today are Adnan Ahmed, head of strategy for Starling Bank and Isabelle Jenkins who leads our financial services practice here at PwC.

Isabelle Jenkins: Hello Quentin.

Adnan Ahmed: Hey Quentin. Thanks for having me.

Quentin: Hi to you both. So, let's get into some of the questions. With so much change driven by the pandemic and, of course, a range of different factors that we see playing out every day at the moment, we probably need to start with a reminder of the major challenges that are actually impacting the industry. So Isabelle, turning to you first, I guess firstly what are those major issues affecting the industry but also are there some slower moving, perhaps quieter dynamics that may not be so obvious?

Isabelle: Yes, thank you Quentin. I mean, it's an absolutely fascinating time in terms of the financial services industry and I'd highlight three major factors that we're seeing at the moment and the first is probably quite an obvious one and it's the move to digital. Now, that of course was happening pre-COVID but actually during COVID it's been supercharged. We've seen customers use digital banking, even people who really didn't want to use it have had to use it and actually they quite like it and it works really well. We saw card spending, 45% of card spending was online during COVID and we've seen cash withdrawals reduced by 40%. The next area is maybe more nuanced and it's about the changes we're seeing in customer behaviour, particularly for the younger generations. So, in the 18 to 24 year olds, they are less likely to use traditional financial services products such as credit cards and personal loans. Interestingly, 58% of them get their financial advice from TikTok and 40% of them think that that is better advice than they would get from any other source. The final area I would pick up is then more internally within the financial services organisations and pre-COVID we were talking about this race between the incumbents and the start-ups and fantastic obviously to have Adnan with us today from Starling. Pre-COVID, we were talking about what would happen first. Would the incumbent get digital and the ability to be agile first or would the start-ups who inherently had those attributes, would they get customer scale. I think as we've gone through COVID, we've seen that some of the start-ups really manage to get scale and there was this big trend in financial services that all organisations need to be flexible to meet these changing customer needs. And that is flexible in how they develop products, how they service customers but how they manage themselves so even down to hybrid working and how do they cope with their changing employee expectations.

Quentin: That's fantastic insight Isabelle, thank you and this feels like a perfect time actually to bring Adnan in for a closer look at how that need for agility and responsiveness felt within a bank. So, Adnan, on that note, I mean, in many ways the pandemic and certainly the early days of 2020 feel like a very long time ago. Perhaps heightened by the fact so much is going on in the world and in the UK since. But turning your mind back, how did you deal with the challenge of needing to pivot so very rapidly?

Adnan: Just before I answer that, I really enjoyed one of Isabelle's comments there about who's going to win out of the big banks because of scale or will the start-ups scale during that COVID period and not biased at all but I think the start-up did pretty well in that in that time. To your question, it's really odd, right, because I think Starling, we were almost built with this in mind. If I think back to, and I'm going back to when Anne had the idea, you know, the business case for Starling, she very much was thinking what wasn't working in the industry. Big banks and big institutions, financial institutions weren't focussed on the customer. They were able to essentially launch whatever products they needed to because they were effectively an oligopoly. But also, the technology was really, really slow, and it was difficult for them to be agile. You know, releasing a new product or making an update to the app would take them, like, six months or something within that time period. Anne saw all those problems and when she said, 'Okay, I can't fix this from the inside. I'm now going to do this with Starling and start from scratch.' What we've done and what we've created or what Anne's created is really a business that is very, very tech enabled. Tech is, you know, throughout the whole organisation, it's at the table. Also, there's a relentless focus on the customer and what the customer needs and a result of that is that we have launched features. We do things in a certain way which really helped us in responding to the pandemic. So, for example, we have 24/7 customer service. We are able to release products quickly or release updates to the app and roll back as soon as we need to. You know, in addition to that, because we are built in that way, we have the controls and governance in place, not only to release updates to the public but also in thinking about product development, the conduct risk, the regulatory burden on us and treating customers fairly was all built in from day one. So, when the pandemic actually hit, you know, we were all working from home within the next day. We were able to onboard customers when they needed us most. So, you know, we were still opening our doors to business customers, new retail customers and we were able to develop and release new products such as the connective card. So, all in all, it's a really interesting question and for Starling in a really odd way we were already built for it.

Quentin: They're in readiness for that, sort of, model having to happen at an accelerated time frame, I guess.

Adnan: Yes. Totally.

Quentin: And Isabelle, it's an interesting point around needing to anticipate future and changing consumer needs. I know this is something you're particularly interested in. Perhaps you could make some comment around how this is being felt more broadly across other sectors within financial services?

Isabelle: Yes, absolutely, and I talked a little bit about what we see is changing customer perceptions and we're seeing this really big drive where people want to manage wealth themselves. So, this, kind of, I think for many of us who are maybe a bit older, the concept of a traditional pension fund. We put our money in a pension fund and we wait till we're, sort of, 65 to get it. The younger generation don't want to do that and they actually want to have more control over their wealth, how they invest it. We've certainly seen that in terms of investments in crypto currency. Now, sitting here in the middle of November, we obviously have seen some issues with some of the crypto exchanges. Currently, over 4 million people in the UK own crypto currency and actually if you look out to the US market, over 22% of the US population own crypto currency. Now, will that change? Will trust in crypto currency decrease over the next few months, years? Potentially, yes, but what's still there is that desire to be able to invest and manage your wealth yourselves. So, the financial services market needs to be able to respond to that need. Now, we see different products coming out and different segments of society using them. So something like buy now, pay later is 75% of the users are under 36 and 75% really interestingly are female. So actually, how are you responding to customer needs is really important but also helping those customers with products that will respond to those changing needs. I think one final point that is important to, sort of, marry up with that is then, and Adnan mentioned regulation earlier, is then the changes we're seeing in regulation. So, we have the launcher consumer duty in the UK and that requires firms to make sure they are delivering good outcomes for retail customers and they've got to be able to prove that both to the customers and to the regulators. So, this combination really of a desire to have more control over your wealth and finances, to have the products to allow you to do that and not wanting them necessarily to be the traditional products that a number of us have grown up with whilst also meeting the requirements of consumer duty regulation. It's quite a challenge for the industry.

Quentin: That's fantastic. I'd like to go back to you Adnan just staying with the theme of anticipating needs. I mean, I guess Starling was well positioned to provide support as we entered the pandemic and during the pandemic. I guess you need to keep that anticipation going and stay close to the profile and needs of your customer on an ongoing basis. I wondered if you could just give us a bit more insight as to how you do that.

Adnan: Thanks Quentin. Yes, I think there's something I just want to touch upon with the whole changing customer attitudes and what gen Z are looking for in particular with that self selection of investment and I wonder whether, you know, if you look at the meme stock rally and what's happened with crypto recently. Given that loss in wealth, I think something like 2 trillion has been lost by retail investors in that space how much of that stock picking side of it actually will persist versus actually understanding what people are investing in. So, just to clarify on that, what gen Z I think are looking for, particularly from their wealth providers and really all financial services is transparency and, you know. If they're picking an investment product whether it's an ISA or a SIPP, and they're going to leave their money in there, fundamentally, I think what they would like to know is I've chosen an ETF, but what's the underlying equity behind that. What are the ESG metrics for that business or for that basket of shares I picked? But it's a really interesting point because the whole idea of what customers want, I think that particularly with the gen Z I think there's a spectrum because you can go from they want complete control on picking every single stock or crypto versus actually whether it's actually more about I want to understand what I'm doing and what I'm getting involved with. Sorry, I went off on a slight aside there because I'm really really interested in that topic about what the changing consumer demand looks like but from a Starling perspective or from a more general perspective about customer voice, I think sometimes you can have too much of it and you can drown in the amount of feedback that you get where you don't actually know where to focus on and what to build if you are listening to all customer demands and it becomes confusing in some regard. And probably quite a strong view to have but I actually think, you know, having a community with a lot of customer feedback actually is a bit of a marketing gimmick. It creates something viral. People are talking about your product, therefore you're going to get more users but when it comes to listening to customer voice, actually I think the best way to do it and this is how we've done it at Starlings.

Sometimes it's better just to launch a product. If it doesn't work, you pull back and you try something else and we did that with things like the connective card which I mentioned earlier. The Kite card. We used capability that we'd already built, our technology capital and we leveraged that to produce different products without actually having much more sunk cost in building that product from scratch. So with the connective card which I mentioned already that was, you know, during the COVID lockdowns. You need to give someone, a trusted person, access to a small portion of your account because you could segregate funds and they could take that card from you and spend it as if it was their own card but obviously doing it for things that you would like them to do and within a capped amount that you chose. So, yes, just to wrap up on that point. For me, customer voices is very very important and I think there are ways to take feedback and refine your product and carry on building a product that customers want to engage with but I think too much of it can be misleading.

Quentin: So it's striking that right balance I guess at the heart of it.

Adnan Ahmed: Yes, exactly.

Quentin: Let's stay with the customer, the consumer for a moment. I mean, one of the things we haven't had a chance to talk about yet is, and something I think we need to acknowledge is the importance of trust in that relationship between the customer and financial service organisations. I guess it's not just trust in the products themselves but it's actually trust in the financial services sector and industry more broadly. We're heading into a challenging economic climate. For many are going to be impacted as we all are I guess by inflation, interest rates and more. So there's tough times now. Maybe potentially tougher times ahead. So, Isabelle, perhaps turning to you firstly, how does that trust component impact some of the challenges ahead for this industry?

Isabelle: Yes, it's an interesting time because if we look back, we've got the industry. You know, the financial services industry post the financial crisis back in 2008. You know, trust levels were very low. Actually, during COVID, we see a number of financial services organisations with a really, you know, have really positively worked hard and worked with the government and the government has supported this as well. But this combination of financial services and government has helped both, you know, consumers at small to medium sized businesses and corporates in terms of payment holidays on mortgages, in terms of lending, so we came out of COVID with actually I think an increase in trust in financial services, but we're now going to hit quite a hard environment in terms of cost of living and inflation. And we're in an environment where we did some research and this was back in the summer of 2022, so before some of the impacts we've seen in terms of fuel prices where even before that time, 30% of the UK population can't access mainstream financial services primarily because of their credit rating. And we saw 16 million people in the UK would struggle to cope with an unexpected bill of £300 or more. Adnan obviously has referred to the 2 trillion that has been lost in value from the investments into crypto assets. So, we're at this time, you know, it's quite difficult obviously for a number of people. Financial services need to support them. We see more households at the moment turning to credit and so we really need the financial services industry to be able to step up and support their customers. Now, interestingly, PwC publish a quarterly survey with the CBI on financial services and in that latest survey that we did in September 2022, we see 49% of organisations already have initiatives to help their customers with cost of living and 29% are planning so that's positive.

The most common things they're looking at is, A, to simplify decision making on financial products so how do you make a decision and how do you help people really understand the pros and cons of different financial products and what's appropriate for them. And the other is really about financial literacy and we still see some quite, sort of, worrying stats and data in the industry. A recent blog by The City UK talked about a specific bank where they'd surveyed their credit card customers and 25% of them thought that a higher annual percentage rate so the APR was better for them when actually of course that it's not. It's worse for them as a product. So, we're going to have a really interesting time when we have a period where I think trust in financial services has gone up but we're going to need to see the financial services take some really positive actions to support their customers going forward in this inflationary environment.

Quentin: That's really interesting because, I mean, there's this, sort of, obvious aspects of trust in the digital world like cyber security but the place you're taking us to there, Isabelle, is that societal purpose reputational area which I think is complex but incredibly important. And Adnan, thinking of that and the competing big issues as we look ahead, how do you in your organisation catch that balance on trust and navigate what is sometimes a fine line between, kind of, commercial and trust amongst your customer base.

Adnan: I'd echo a lot of what Isabelle actually touched upon. I think, you know, focusing it on Starling, there's a transparency in charges and fee structures that really go a long way to balance that trust or balance trust with the product. As Isabelle mentioned, a lot of customers lack the financial literacy across the UK. So, having very clear charging structures, very clear, like, you know, 'This is going to cost you X pounds,' regardless of all the APR and percentages that might be flying around. Sometimes that is a really strong way of getting people to understand what they're getting themselves into, but the flip side to that would also be how people can interact with a product once you've taken it out. So, for example, we've launched a loan product where people can actually self select forbearance if they're having a difficult time. Also, more generally in life, if you're not having any issues, is actually being able to see your balance and see how that's going down over time or how your monthly payments will impact that balance over time. So, I think transparency and customer journeys on these types of products are a huge, huge component of getting that trust metric down, but beyond that, there are also other things that go on. So, you know, think about more from brand awareness and brand metrics point of view. You know, we have more than 70% of customers trust us and I think that really comes down to how Anne started Starling. You know, from day one we were a regulated entity..

We knew getting a banking license would be very very important to us but we also knew that actually having access to the faster payment scheme would be equally as important because you can say you're a bank but if you can't then, you know, settle or sent someone money and it's there straight away or within two hours is the metric then that trust falls away. So, there's that side of things and then I think it's your cultural. Sorry, your organisation value and culture. I think, you know, there's a lot of lip service paid to things like net zero, gender equality, equality across ethnicity as well. But actually, having a tangible target which you can measure against is hugely powerful so for us, especially with Anne founding the business, we've set a target of having equal representation at senior management. We're currently at 41%. That's not good enough. We've still got a way to go but the fact that we can actually fall out of metrics like that and be accountable to it publicly goes a long way in fostering that trust. And just to wrap up that point as to why it's so important, you know, we've seen that for us it's been through customer growth and using CASS as a proxy, so that's the current account switching service. We've been on the podium for top switches by people through the CASS scheme for the last year. Like an entirety of 2022 and I think we were third in the latest public results. And for me, that's huge. That says it all right. We don't offer any money for someone to switch to Starling but yet people obviously know the product. They've heard about the product and have seen our brand and they trust the brand and therefore within a couple of months or within a month or so they decide to switch their accounts fully.

Quentin: Let's stay for a moment just with cultures. Really interested by what you just said there Adnan. So, what's your perspective on how business models and strategy can influence culture and I guess how have you tackled that within your organisation in terms of the culture and mindset. How have you caught that balance?

Adnan: I agree Quentin. This is a really interesting topic and I think we probably could end up speaking for another hour on it but I'll try to be concise on this one. When I joined Starling, I think we were a start-up of 150 people. We're now over 2000 and you can actually see a shift in culture as the business grows, right, from start-up to growth to, you know, a mature company which is part and parcel of any business's life cycle. One of the things I mentioned in one of my early answers and I think this is really important because I spoke about, you know, releasing a version from the app quickly, rolling it back if it doesn't work. Obviously, balancing that with your, you know, governance and regulatory requirements but the fact that we, that was core to our business model and it was a differentiator from all the other banks out there, especially with the big banks when I started the business. Really, I think that's Starling's culture. So that approach to that product delivery and iterating stuff is actually something we do with every single piece of work from customer basing through to the corporate side where I'm mostly based, right. Often we'll just get stuff down on paper and iterate it with the right people and I think that's really powerful and that hasn't really changed from me but, for me, it also actually stems from our business model and the way we approach product development. I think the final thing I would say on this is and it's quite an important one because a lot of people see the tech function as a back office, you know, you come up with the requirements and you ship it off to tech and they build it. At Starling, we have a different approach. Actually, the tech function is very much at the table and that I think has influenced our culture in a very positive way because it's about being inclusive, about taking the view points across different parts of the organisation regardless of any, sort of, you know, legacy views people have on different functions.

Quentin: That's fantastic. So, look, we're nearly out of time sadly but as we start to bring to a close, we always ask our guests for a top takeaway or practical piece of advice for our listeners so Adnan coming to you first what's the one thing to do or the one question perhaps to ask in the next board meeting that you'd recommend for people listening?

Adnan: Another good question. I would say, you know, we've been through a pandemic, now at war which goes hand in hand with the recession. I think there's going to be more of that type of thing. More of those once in a blue moon events happening much more frequently so my big question and I guess advice I'd give is be prepared to change quickly and the question to ask your board is what's stopping us from doing that?

Quentin: And Isabelle, coming to you?

Isabelle: I totally agree with Adnan. It is that ability to be flexible and agile and change in response to a multitude of different inputs.

Quentin: Yes, we talk about agile and resilient but actually being agile is part of resilience isn't it and I think you both brought that out in the various comments that you've made. That really stuck with me. Thanks for that Isabelle. So that's the end of another in conversation with episode of business in focus. Thank you to both Adnan and Isabelle for taking part and being such fascinating and insightful guests. You can discover more insight from our experts about the trends affecting industries and of course practical steps to take on our website PwC.co.uk/industry. Also, please don't forget to subscribe to keep up to date with future episodes. Finally, thank you to everyone for listening and please tune in again soon.

Participants

• Quentin Cole
• Adnan Ahmed
• Isabelle Jenkins