How banks and insurers increasingly push risks towards their customers?
22 November 2020
In a past Capilever blog we have already raised awareness of the lack of tooling for clients to properly manage their finances and associated risks. PFM and BFM modules are being developed rapidly and keep getting better, but most of these are still limited to a reporting/dashboarding layer. This allows customers to get better insights into their day-to-day finances, but still lacks the tooling to support the customer in optimizing their finances and in easily converting the insights and advice into tangible actions. The result is that customers still take either (i) too much risk (e.g. taking too many credits or investing their precious savings in assets that are too speculative), (ii) too little risk (e.g. being overinsured, investing too much in expensive capital guaranteed funds, holding too much money on saving accounts, cfr. our blog “How Capilever can help activate savings to fight economic recessions“) or (iii) don’t optimize their finances from a cost perspective (e.g. tapping too much into expensive overdrafts, not refinancing an expensive mortgage, or investing via banks with too high transaction and/or custody fees). You could say that this is beneficial for the bank, as it results in higher revenues, but with competition increasing in the financial sector, this seems a quite short-sighted strategy.
At the same time there is a continuous trend to push risks taken today by financial institutions towards their customers. This trend is driven by the market (e.g. the high volatility on the stock market and the low interest rates), by regulators (e.g. by imposing higher capital requirements) and by customers themselves (wanting lower prices, more personalized services and higher returns). As a result, banks push more towards off-balance services, for which a service or transaction commission is charged.
Some recent examples are:
- In October ING introduced as the first bank a negative interest rate on current accounts holding more than 1 million euro and as of January 2021 ING will automatically transfer the amount exceeding 1 million EUR from a saving account to a current account. A logical decision given the current market conditions where banks pay interest to park money at central banks, but it is unfortunate that the necessary tooling is not always available for customers to transfer money in time to avoid having to pay this negative interest.
- Usage-based insurance: these are insurances where you pay based on your usage (how much you use the insured object and how you use it, i.e. which risks you take). Although this product is highly demanded by many customers, who now have more flexibility and may feel to be treated more fairly, this type of service also moves the risk management partially back to the customer. Instead of having fixed premiums, they become variable based on the behavior of the customer. Unfortunately the tooling to assist the customer in managing their decisions are not always available and you could agree whether this extra degree of freedom (to determine your premium based on your behavior) does not add additional concern and complexity in your life (overchoice).
- In the Pension sector, we also see a shift towards pushing the risk to the customer. In the Netherlands, traditional Defined Benefit (DB) based pension funds (i.e. funds guaranteeing a well-defined monthly annuity at retirement) will gradually be converted to Defined Contribution (DC) plans, for which the policy holder’s pay-outs (at retirement) depend on the market situation during the pension build-up and retirement period. Also in Belgium, we see that the minimum guaranteed returns on pension plans are under increasing pressure, due to the low interest rates. As a result these minimum guaranteed returns have already dropped considerably, becoming close to 0%. Obviously in the current low interest-rate climate, this is logical, but it is unlikely that these minimum guaranteed returns will increase again when interest rates start to increase.
Furthermore in the 3rd pension pillar in Belgium (and also in many other countries) people need to make several complex choices, like deciding to save 960 EUR at 30% fiscal deduction or 1,230 EUR at 25% fiscal deduction, or maximizing your fiscal advantage via long-term saving. These difficult choices are currently not supported by any tooling.
- Following the bank crisis and also due to the rise of many new players in the market (often heavily depending on VC capital injections to survive), the risk of your bank going bankrupt is not to be neglected. Most countries have some kind of deposit guarantee, protecting savers to lose their money in case their banks goes bankrupt, but often this is limited to a certain threshold (e.g. 100,000 EUR in Belgium) and not applicable to business accounts. This forces people to manage this new risk themselves, by spreading their money over multiple banks or investing in off-balance products.
All these examples show a trend to push bank (and insurer) risks towards customers. This can be positive, as it allows a more personalized service and more competition, but it’s important to provide the necessary tooling to the customer to support this new customer’s “responsibility”.
Such tooling should be user-friendly, intuitive and designed for the layman.
Ideally customers should still have the choice how much of this management they want to do themselves. In short we could identify 3 levels of services:
- Bank managing for the customer. Similar to discretionary management, but then not only limited to the assets under management, but to the full financial management (a sort of concierge service).
- Bank advising the customer. This can be a personal advise or an automated advise (like a robo-advisor) and different degrees of pro-activity could be defined
- Self-service. Customer manage their finances fully by themselves, but obviously supported by the necessary tooling
As banks don’t have much experience with the psychology of how people want to manage their finances (there is a thin line between a rational optimization and still allowing certain irrational choices, to make sure the customer’s character and preferences are considered), we would advise to focus first on self-service and build experience from the customers behavior to gradually offer also the advisory and discretionary services.
For the self-service to work well, tooling should exist to manage all your short-term and long-term risks and financial activities, i.e.:
- Short-term liquidity management: as a customer you want to get maximum return on your assets, while having sufficient liquidity for your day-to-day (planned) expenses but also for your exceptional expenses.
As such a bank should typically provide following tooling:
- A tool to forecast your expected daily/monthly income and expenses, allowing to immediately transfer excess money from your current account to your saving account
- A tool to forecast your expected less frequent income and expenses (like quarterly and yearly bills), to foresee sufficient money on your saving account. Any excess money on the saving account should be automatically invested
- A credit form to easily & fully automatically receive credit from your bank in case of unexpected expenses, while taking your investments as collateral. This means customers don’t need to keep a buffer for unexpected expenses and don’t need to sell their medium- to long-term investments for freeing up money. The LABL product (Liquid Asset Based Lending) of Capilever perfectly fits this need.
- Optimization of your financial products and services:
- Audit your insurances to see if you are not over- or underinsured
- Check if your credits are still optimal, e.g. suggest to regroup credits, (partially) reimburse your credit or refinance/rewrite one of your credits (providing details on interest cost benefit versus penalties)
- Long-term financial planning:
- Help customers to balance out the medium- to long-term imbalances in their finances, like having a shortage of money at the start of their career and a surplus towards the end of their career. A product like Capilever’s FLEX product (Financial Life Event Xeduler) can help here.
- Assist customer to save for a large expense in the future, e.g. via a feature like “Saving goals”
- Tooling to plan customer’s retirement. Important here is to have a good holistic view on all assets and liabilities. Capilever’s NLPT tool (Non-Liquid Position Tool) can help here.
- Tooling to plan succession
- Review of your investments
- A check if the customer’s investment portfolio is still in line with their risk profile
- A check if the customer’s investment portfolio is not under- or overinvested in certain currencies, sectors, regions, companies, etc.
- A check of the portfolio diversification in general. Capilever’s RSTT tool (Retail Securities Trading Tool) offers this type of functionality
- Assist customers in buying and selling assets in their portfolio, by automatically taking profits and limiting losses, by eliminating timing risk by executing trades spread over time
- Help customers to hedge their market risks via simple hedging products
- Facilitate the switch from building-up (accumulating) wealth to a distribution of wealth (typically at your retirement). The bank should provide easy products and services which can optimize the investing of a lump-sum received from your pension plan(s) in a product, which gradually pays-out in monthly annuities
Clearly most of these aspects are not covered yet by banks today, but actions are definitely taken towards this approach. Given the complexity and impact on the bank business model (e.g. advising the customer to switch from a highly profitable product to a less profitable product is not easy to accept), it will take several years before this evolution is fully unfolded.