First published through Thomson Reuters Regulatory Intelligence on the 9th November 2018
Back in 2015, the UK Cards Association reported that more than a quarter of all online spending was in financial services (for example, renewing home insurance). When this data broke, it seemed a welcome sign that UK consumers were finally comfortable with engaging their financial services providers via digital channels.
Now – three years later and in a world in which challenger banks, Open Banking and digital start-ups are reshaping the playing field – it almost seems unthinkable that there was a time in which we didn’t use the internet to bank or pay.
However, as we enter previously uncharted territory, it becomes all the more crucial to pay attention to customer outcomes and the risk frameworks that protect both consumers and businesses operating through online channels.
The literature surrounding digital conduct risk, especially as it relates to start-ups and digitally-based challenger banks, is still in its infancy, and the regulator remains ‘channel-agnostic’ – intending their rules and regulations to be media-neutral. Recently, however, we have seen the FCA take a position on Open Banking, emerging crypto-currencies and digitally-based crowdfunding models, perhaps a sign that the regulator is rethinking its agnostic stance and is starting to probe the risks of customers engaging in digital environments further.
The FCA advocates the positive use of behavioural economics to ‘nudge’ online customers into reaching suitable outcomes. With the FCA having upskilled their staff in this area, there will be an expectation on firms to produce positive outcomes within their digital sales framework.
It remains imperative that firms consider conduct risks when developing and selling digital products online, as well as the threats and benefits that they might bring.
A truly digital world
Digital transformation has meant that business as usual is over. Mobile use now represents at least 65% of the time we spend with digital media. Some studies have even found that we pick up our phones 150 to 200 times a day! Alongside this mobile revolution, there has been considerable advancement in customer analytics, machine learning and predictive analysis.
However, whilst these products and services can help resolve many issues, they also come with challenges.
Digital maturity varies greatly across the financial services sector. Whilst some firms may be at an advanced stage, others are just beginning their digital journey. Firms must consider what capability they have in this regard, as digital immaturity often leads to poor integration of data, fragmented business processes and inefficient systems.
Digitally-savvy organisations will fully understand customers’ desire for personalisation and their complex buying decisions. Customers today are better informed, more expectant and given more choice than ever before. By understanding the complexities of customer traits (evolving as quickly as technology in most cases), firms will be not only be able to ensure loyalty, but also ensure the delivery of good outcomes to customers.
The FCA’s expectations for firms around addressing key issues (such as customer vulnerability, access, inclusion and behavioural economics) can be more difficult to achieve via digital channels. A detailed assessment of the digital customer journey and impact of various customer touchpoints can allow firms to identify any inherent risks relating to typical customer behaviour and biases.
Firms can use this assessment to determine the controls they will need to implement to mitigate risks, including through the use of ‘record and play’ technology. For example, programs exist that can record sessions on a website or app, allowing the owners to see exactly what their customer is seeing and interacting with. By putting explicit risk indicators around such interactions and by ensuring targeted real-time interventions occur, firms can start to effectively manage their digital conduct risk exposure.
Managing the customer journey
The product build stage is critical in the digital customer journey. It sets the tone for everything that follows, allows you to understand and mitigate conduct risks. We recommend that firms consider the following at each stage of product development:
Customer / market research – Qualify and quantify the size of opportunity and target market. Robust customer research is required to check understanding within a sample group, and findings should be used as part of the overall design process.
Design delivery mechanism – Adapt the product to fit digital delivery, including consideration of appropriate controls. Ensure that a customer cannot be misled by seeing one section of the journey in isolation. Understand and / or mitigate where the delivery is excluding parts of the target market and ensure robust risk indicators are in place for the product launch to ensure the target market is reached and consumers receive good outcomes from chosen products.
Product launch – The launch needs to be controlled. If your firm is adapting an existing product not originally designed for a digital delivery platform, ensure that consideration is given to potential behavioural biases which can be accentuated through the digital channel.
Post-implementation review – Ensure that products are performing as expected; within tolerance for business levels and risk - test, learn and adapt. Perform outcomes testing to check understanding of the product and that the product and delivery mechanism are functioning as designed. Consider how the digital channel has impacted your treatment of vulnerable customers.
Continuous monitoring in real time
When it comes to developing the product, the conduct risks that would exist in other delivery channels will still exist within the digital arena – but they may appear at different stages or in different ways.
Five common areas in which Huntswood commonly receive questions concerning conduct risk include:
- How can we prevent our customers from mis-buying products?
- How do we ensure financial inclusion and support those less experienced in the digital environment?
- Are our controls robust enough to manage digital conduct risks?
- How can we best support our customers in making an informed decision to purchase?
- How can we best measure the impact of technology when comparing to our risk appetite?
In order to be able to answer the above questions, firms we have supported have started to invest in technology which can measure digital outcomes. As firms continue to develop their offerings and respond to their new, digitally-savvy customer base, the need for good product development practice and outcome monitoring remains high.
Continuous monitoring of the product and its performance should not be forgotten once it has launched. Compiling meaningful and good quality management information on product performance is critical to enabling a firm’s management team to reach balanced and informed decisions on the performance of the product and, in particular, the digital conduct risk exposure for your firm.