Banks desert high street for the digital superhighway
We’ll send you a myFT Daily Digest email rounding up the latest Cyber Security news every morning.
Picture the scene: you go for a run, armed with a smartphone app that measures how far you go, your speed and the energy you expend. As you push yourself onwards, the app connects with your bank and transfers small amounts of your cash to a higher-yielding account. The harder you run (or the further you walk), the more money you make through your savings.
It sounds outlandish but is already a reality. Russia’s Alfa-Bank last year began offering its Activity scheme to customers, linking up with their fitness tracking software on their smart devices and giving a 6 per cent interest rate on the higher-earning account.
This niche innovation illustrates the speed with which the internet, mobile devices and financial services are converging to transform our relationships with our banks. From fitness apps to biometric security, advice-by-video and cheque imaging, digitisation is prompting banks to offer myriad new services at the touch of a button.
Some have the potential to smooth transactions, bringing convenience to our daily lives. Others can connect us with services we never imagined we needed.
But how far do we want financial services groups to intrude into our lives? Will these services open new avenues for fraudsters? And in the race to digital banking, will the Square Mile’s incumbents be superseded by the forces of Silicon Valley? FT Money has taken a look at the advances in banking technology and asks what these mean for customers.
Plastic and paper
Sales of mobile devices have seen phenomenal growth, in 2012 overtaking computers as the core device for people to connect to the internet. Three out of four UK adults now use smartphones, according to Enders Analysis, the media research group.
Just a few years ago, no one used their phones for banking services; now they routinely turn to their devices to check balances, pay bills, apply for loans or compare financial products. Last year banking apps were downloaded more than 14.7m times on mobiles and tablets, according to the BBA, which represents banks.
The smartphone is set to make deeper inroads into our finances. One of the mainstays of modern banking is the credit or debit card, which has been flexed by UK consumers since the 1960s. But the days of the traditional card may be numbered: just as a card today can be slotted into, swiped through or held against a terminal to pay for something, so can the same technology embedded in some smartphones.
Raman Bhatia, head of digital at HSBC UK, says people’s familiarity with using mobiles to buy goods and services online is driving banks ever faster towards enabling new transactions on the devices. “The future of money and your phone will coincide,” he says. “The mobile wallet will become a reality . . . Experts have been predicting this for ages but it is now happening and the trend will accelerate in the next few years.”
Cards, whether of the conventional kind or residing virtually on a phone, are also becoming increasingly customisable, experts say. Steven Cooper, chief executive of personal banking at Barclays, says it will be possible to limit cards to a specific type of transaction, or even a specific purchase.
Some might be bespoke in other ways: a mother, for instance, might give her teenage son a card that allows him a certain limited spending power but refuses purchases on online gambling or adult websites. It might refuse to allow purchases after a certain hour of the day or, if associated with a phone, would be possible to locate using geolocation technology.
“You can choose how much they can spend and when they spend,” Mr Cooper says. “Complete customisation and flexibility is coming.”
Banks are rushing to develop these systems for another reason: they hold out the prospect of a new relationship with their customers in which the data they accumulate on spending habits allows banks to offer targeted goods and services.
The power of “big data” to predict intentions and needs is already being exploited by supermarkets and other retailers. Banks, with access to much more comprehensive financial data about an individual, can potentially act as a retail proxy, guiding them towards purchases and helping them finance, insure, maintain and replace them — assuming account holders are happy for them to do so.
Packages of services which are not independently available are the likely first port of call for banks, Mr Cooper says: someone who wants to get themselves set up on the internet, for instance, might be offered a package comprising a computer, internet connection, training and financing. Another might be the logistics associated with a wedding or moving house: after all, your bank already knows which utility companies you use.
Key to the success of a “banker as retailer” strategy will be striking the right balance between offering useful information and deluging people with commercial deals. “Not everyone will want it, but increasingly society is saying, ‘Inform me, make it relevant to me. Don’t give me a hundred different offers that make no difference to my life’,” Mr Cooper says.
Technology is often cast as a dehumanising influence. But when the FT went into the City of London branch of Nationwide to sample its remote advisory service for mortgage borrowers, it received a perfectly civilised welcome.
“Would you like a cup of tea or coffee?” asks Paul Marks, in spite of the fact that he is sitting 65 miles away in Northampton and speaking via a high-definition video link. He taps briefly at a keyboard, then moments later, the door opens and a staff member at the Threadneedle Street branch arrives bearing a freshly brewed cuppa.
Nationwide, the second-largest mortgage lender in the UK, has 60 remote mortgage advisers stationed in three offices around the UK, but it plans to ramp up the numbers to 400 by September — and eventually provide the option of coverage in all of its 700 UK branches.
“It allows you to provide an adviser in places they wouldn’t normally be available,” says Chris Rhodes, Nationwide group retail director.
The story of bank branches is one of precipitous decline: the numbers going into bank branches has dropped by 30 per cent in three years, according to the BBA. More than a quarter of branches have closed in the 20 years since 1992. Some new banks such as Atom or Starling have no branches at all, operating digitally and piggybacking off existing retailers for their physical requirements.
But rather than spelling the demise of the branch, Mr Rhodes argues technology can breathe new life into them, sustaining a range of services in far-flung parts of the network. The benefit for mortgage borrowers across the UK is that they can arrange a consultation at their convenience, rather than, as in places such as Oban in Scotland or Kirkwall, capital of the Orkney Islands, waiting two weeks or more for a visit from the consultant.
Like other big providers using video, Nationwide plans to widen its offering to include other aspects of financial planning. But it also sees value in offering specialist services such as dealing with the complex and sensitive emotional issues triggered by bereavement or divorce. “We can train 2,500 people in the branches — but they’re never going to be as good as 25 specialists with 100 per cent coverage of the network,” Mr Rhodes says.
What is it like to use? There is no discernible time lag in the long-distance conversation and Mr Marks’s image is crystal clear on the high-definition screen. Voice quality is less impressive, with some distortion that Nationwide says is the result of poor acoustics in the booths used by its consultants; these are being redesigned.
Mr Marks says the response from customers has been almost entirely positive. Curiously, Nationwide gets higher satisfaction ratings on its video mortgage service than its in-person equivalent. This may be partly down to an optical quirk of the system: the adviser makes direct eye contact with participants, even when there’s more than one of them. Mr Marks can therefore appear to be giving his undivided attention to both partners in a couple simultaneously, conferring an inadvertent advantage over a consultant who is physically present in the room and able to address only one person at a time.
Does the embrace of new technology by banks open up more opportunities for fraudsters? In many ways, banks argue, it makes life harder for them.
Developments in biometric security will give banks much greater certainty that the person using an account-connected device is the true owner rather than a thief. Banks are exploring a range of additional safeguards to back up their current procedures around PIN numbers, secret questions and randomly generated codes. Identity recognition through a person’s unique “voice print”, fingerprint detection or, better still, finger vein patterns are all in use or under development.
Those applying online for an account might be asked to send the bank a time-stamped selfie via a bespoke application, showing they were present as the transaction was requested and documents scanned. Other systems look at customers’ physical use of a device — the particular rhythm of their typing, the length and pressure of their “swipe” and their pace and routine of clicking — which experts say exhibit near-unique characteristics when combined.
Cifas, a not-for-profit body for anti-fraud organisations, found that the number of cases where criminals had been able to take over people’s accounts had fallen by 38 per cent in 2014 — suggesting that banks’ efforts to raise new barriers to fraudsters are paying off.
However, in figures released this week, it said cases of fraud where the criminal had concocted a completely spurious identity to access funds rose to over 34,000 in the first three months of 2015, a 27 per cent increase on the same period last year. Some 47 per cent of all fraud is now identity fraud — where criminals either create a fake identity or pose as someone else — and the numbers are increasing. “The internet offers a fantastic opportunity for fraudsters to attempt fraud on an industrial scale,” Cifas said in its 2014 UK fraud report.
John Marsden, fraud expert at credit referencing agency Equifax, says the problem is significantly under-recorded by banks and retailers, which tend to chalk it up erroneously as bad debt rather than fraud. “We’ve still not come to grasp the full extent of synthetic fraud,” he says.
The rewards can be lucrative. He cites an Equifax investigation that concluded one individual was responsible for orchestrating 105 separate identities at 25 addresses. Each identity could have yielded as much as £25,000 if the perpetrator maxed out cards and loans.
To generate a fictitious identity, obtaining a real physical address is vital: fraudsters often use blocks of flats where a made-up name on correspondence will go unnoticed among transient residents, and where post can be more easily accessed in a shared hallway.
The perpetrator might use the electoral roll or a faked utility bill to obtain a credit card from a retailer, which typically require lower levels of security when setting up. Buying goods and services in shops and online and using loans from one card to pay off debts on another, they begin to lay down an electronic trail for the fake identity, making their spending and payment habits appear as normal as possible. This is a prerequisite for the ultimate aim of obtaining a current account, since banks typically check applicants by looking at their electronic spending history rather than demanding to see a passport.
Mr Marsden says the typical period from initiation to “bust-out” is 12-18 months, as the criminal cycles cash between accounts to raise their credit limit. It is possible, though, to spot patterns of behaviour — but only if investigators can see what the fake individual is spending and paying across all of their cards and accounts. “When you put the lens across the whole of a credit file you can see it quite clearly,” says Mr Marsden.
Banks and credit agencies are also getting better at spotting when several different account requests are emanating from the same device or computer — a classic red flag for identity fraud. “Controls are becoming more robust,” says Nick Mothershaw, director of fraud and security at credit agency Experian.
Banks are pressing ahead with digital plans not only to win customers from their immediate rivals but also with an eye to the potential threat from Apple, Google and other tech giants. Silicon Valley’s big players may not be interested in turning themselves into banks; but they have shown an appetite for absorbing services traditionally provided by high street financiers.
Apple now has over 800m people signed up to its iTunes application — most of which carry credit card details — and last year launched its Apple Pay mobile wallet. Electronic payment services such as PayPal are, in effect, taking deposits, a core function of a bank. Google and Amazon, with their vast knowledge of customers’ spending habits, are in pole position to create enhanced payment services that bypass banks. Meanwhile crowdfunders and peer-to-peer lenders have opened up another front against banks in their core lending business.
Consumers are unsentimental about their banks: in a US survey last year by Accenture, 50 per cent of respondents said they would be happy to go with Square, the payments system, if it offered banking services. Forty-one per cent said the same about PayPal, and 29 per cent about Apple and Google.
With tech companies — and now peer-to-peer insurgents — eating into their business, banks are in a race against time to protect their market share.
How they handle the move to digital will be instrumental in determining whether they retain any future claim to be the natural providers of consumer financial services.
Get alerts on Cyber Security when a new story is published