Posted: 21st August 2017

First published by the ABI on 14th August 2017

Described as the “Fourth Industrial Revolution” by many, the internet age is changing the way we live our lives; disrupting social and industry norms, shaping economies and improving the ease and convenience of connecting to others or obtaining goods and services.

A recent ONS survey, which explored internet usage by age group, found that 97% of 35-54 year olds had ‘recently used the internet’ (in the last three months) compared to 99% of 16-34 year olds.

This illustrates a gap that is rapidly closing, and indeed, it is closing even faster within older age groups, with 52% of 65-74 year olds having ‘recently used internet’ in 2011, compared to 78% today.

Given this, the need for financial services to innovate is clear and largely recognised, with several success stories surrounding “digital disruptors” outside of the industry, such as Uber, Netflix and Amazon, inducing the decline in trade of the common taxi or contributing to the total loss of major high-street brands like Blockbuster and Woolworths.

When it comes to leveraging digital channels in the financial services sector; providing greater access to financial services, using data for a more personalised experience that is easily repeatable, and achieving commercial benefits by taking operating costs out of distribution and servicing channels are all core components driving the pace of change.

Against this back-drop, however, are the well-known behavioural biases that make customer engagement aligned to important financial issues (such as saving, pensions and being appropriately insured) a challenge. This is at odds with the “here and now” of everyday banking, managing utility bills and booking travel, which are far higher up the digital adoption curve.

Herein lies a potential disconnect; the inherent presence of regulatory and conduct risks for firms against the need to invest heavily to digitising parts or all the customer journey. The need to market and sell financial products through robust processes, that help consumers to understand the nature and potential risks of those products, is particularly important for financial services compared to other industries

What are the risks of digital innovation, and how can they be managed?

Risk and regulation is often spoken of as a ‘barrier to innovation’. This may well be the case, but it’s an important barrier that helps to protect consumers’ long-term interests and should be taken into account during the development of any financial services firm’s digital strategy.

Conduct will be at the forefront of risks that will need to be managed effectively as firms continue to develop and offer digital solutions on more complex products and services to their customers.

Conduct risk is increasingly being spoken of in terms of customer outcomes; specifically, the risk to delivering a fair outcome. At the core of delivering this for customers, through whatever channel or at whichever stage of a customer journey, are three key challenges:

  1. Effective disclosure – ensuring that disclosures around fees and charges or terms and conditions, for example, happen at the right time and in a way that makes key information clear to customers.
  2. Meeting information needs – key information is presented in a way that resonates with customers and allows them to make key financial decisions from an informed position; risk warnings or tax information on the sale of a pension in light of ‘freedom of choice’ is an example of key areas where firms need to ensure that information needs are met rather than information just being given to ‘tick a box’ – it is also important to consider how the ongoing information needs of customers are met, as outlined in recent thematic findings in relation to long-standing customers.
  3. Customer understanding – underpinning a fair outcome is customers’ understanding the reasons why, and implications of, making one financial decision over another, whether this is on an advised basis or not.

Looking to the future

The approach to developing people, processes and ongoing assurance around the delivery of fair outcomes in more ‘traditional’ customer channels such as face-to-face advice, branch networks, bancassurance, broker networks and telephony has developed immensely over the last few years.

However, the digital revolution will bring its own challenges, not only for the industry to innovate on the digital solutions that it provides to customers, but to ensure that thinking around customer outcomes, the risk to delivering them and ways to monitor them in a digital setting develop at the same pace.

Firms are starting to recognise compliance and conduct as an opportunity to connect better with customers, making them advocates via more personalised experiences and better outcomes. ‘Getting digital right’ is a key aspect of this movement, and one that firms, if committed to moving forward in an innovative yet compliant way, can gain significant commercial advantages from.

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