08 Jan Bank of Ireland pivots to technology to build a more sustainable business model
Francesca McDonagh, Group CEO, Bank of Ireland, focuses on enabling customers, colleagues and communities to thrive by transforming the largest Irish bank
How would you evaluate the overall performance of the Irish banking sector over the challenging last 12 months?
There has been much more adaptability and resilience in both the Irish banking sector and the Irish economy during COVID-19 than during the 2008 global financial crisis. First of all, the economy and banks entered the pandemic in a very different position to where they were over 10 years ago. A huge number of lessons have been learned in terms of origination of lending in banking and, in addition, the regulatory environment is completely different. Besides that, our customers—whether those are corporates, businesses or households—now have a very different attitude toward debt.
The Irish banking sector proactively put in place a comprehensive approach to payment breaks. At the Bank of Ireland, we offered more than 100,000 payment breaks across Ireland and the U.K. This action came from the banking sector recognizing the importance of giving households and businesses breathing space during the pandemic and working to be part of the solution to the crisis.
As a business, we also adapted very quickly to COVID-19, going from maybe 20-30 percent of our people working from home usually, to over 85 percent. All those that were not in frontline branch roles were asked to work from home immediately.
We also recognized the importance of helping more vulnerable customers: we offered cocooning support for older customers, allowing them to still get access to banking services even if they couldn’t leave their home. We also gave priority access to healthcare workers and older customers particularly at the beginning of the pandemic. In the last crisis, the response was about credit, collections and capital. In this crisis, our response was much more about supporting our own colleagues and customers. There was a very empathetic people-based response to this crisis.
The economy of Ireland is also very different now: we’ve seen a huge amount of foreign direct investments (FDIs), which enabled Ireland to be one of the only economies globally that grew in 2020. We grew by 3.7 percent last year and that’s because there was a two-speed economic response to COVID. On one hand, the multinationals grew by over 7 percent year on year, whereas domestic-oriented sectors contracted by about 5 percent. So, a story of two quite different parts of the economy, but it’s a story of resilience and, as we look to 2021, we would expect the recovery be much more broad-based.
When it comes to Brexit, many point to a unique opportunity for Ireland’s financial services industry as it becomes the destination of choice for U.K. businesses wanting to set up in an EU jurisdiction. Where are the challenges and opportunities for Irish banks with regard to Brexit?
Brexit has created a lot of uncertainty for years now, and many small- and medium-sized enterprises (SMEs) were really concerned about taking on new debts. There has been very muted credit formation since the U.K.’s Brexit referendum, as smaller businesses in particular are uncertain about taking on debt without knowing how disrupted their supply chain will be. Bank of Ireland is the leading lender to SMEs in Ireland and the largest lender to the agricultural sector, which is quite vulnerable to changes in the supply chain. The number one concern in the banking sector is that there was less credit formation.
In terms of our readiness as a bank, we were in a very good position, even in the event of a no-trade deal Brexit, which was fortunately averted. We have a U.K. business, which is a separately capitalized subsidiary with its own independent board, so operationally we were ready. The biggest issue was the potential impact on our customers, particularly SMEs and corporates. Some of them saw opportunity, but a lot of them uncertainty, which impacted confidence. Every new political twist had a big impact in terms of business confidence and willingness to invest, which resulted in a competitive gap between Irish and European SMEs.
That uncertainty was an issue, as was the level of exports from Ireland to the UK. When Ireland joined the European Economic Community in the 1970s, the U.K. was a major trading partner. Yet Ireland has since modernized and it has access to European markets, so that now exports to the U.K. actually represented 7 percent of Irish exports in the third quarter of 2020—as opposed to about 20 percent in the 2000s.
The reduction of exports to the U.K. has been coupled with an increase in exporting to other countries in the European Union (EU). From 2019 to 2020, this represents a 30 percent increase in EU exports year on year. That diversification of export partners has also acted as something of a mitigation to the impact of what we are now seeing with post-Brexit non-tariff trade barriers. For example, agro-food remains tariff free but our SME customers are finding red tape or non-tariff barriers that are delaying imports or exports, disrupting some parts of the supply chain or causing indirect costs. We hope those are short term and will be ironed out and addressed.
Brexit, in my personal view, is in no one’s interest—not Ireland, not the EU and not the U.K.’s economy. It is impacting growth as we come out of recovery, but we are still in a net-recovery position. The fact that Irish businesses have developed exporting partnerships beyond the U.K. reflects our resilience and adaptability, which is a real trademark of the Irish economy.
Bank of Ireland is one of the country’s largest financial services group. What are the key differentiating factors that make the bank stand out in the Irish market?
Bank of Ireland is the leading lender. We have the lead position in lending to corporate Ireland and we are number one in terms of market share of SME lending. We are first or second in every other segment that we participate in. For instance, we had close to a 26% market share in mortgages in 2020, that’s a quite unique position. We are also the only bank assurer in Ireland, with a 60-percent market share of bank assurance, and also the leading provider of insurance and pensions to both individuals and businesses. We have an important part of our business in the U.K., and we have some select international diversification as well. We are a top 10-bank in the U.K., through partnerships with the U.K.’s post office and other niche lending brands that are an important part of our overall group.
Bank of Ireland has a long and proud history of over 235 years, but our focus is very much on transforming the bank for the future. We’ve gone through a huge amount of change in terms of our culture, technology and business model to make us more profitable for our shareholders, but also a better bank for our customers and our colleagues. During this period, we’ve seen net promoter scores go to their highest level ever, which is a good indicator of how customers experience us. We had a 22-percent reduction in complaints in Ireland in 2020. We really put the customer first and we’ve seen a massive step-change in terms of our internal culture and colleague engagement over the last three years.
Can you share the main highlights of the bank’s 2020 results to illustrate the importance of the group in the local market?
We have had a challenging year, as every business has. In 2020, our priority was in supporting customers, colleagues and communities, but also staying focused on our key strategic priorities. In terms of our results, we had an underlying loss before tax of €374 million for the year, but we were profitable in the second half. That really reflects the challenges of the first half of the year. Despite those challenges, we had a very strong capital position and our regulatory ratio was 14.9 percent.
What was important to us was delivering on our strategic priorities. We reduced our costs by 4 percent year on year. The six-monthly reporting periods for the last 3.5 years show that we’ve been improving our cost efficiency, which we’re very pleased about. We also grew our market share in mortgages. We continue to invest and grow in our wealth insurance business. Technology was a big tipping point for us in 2020, around consumer behavior and preference, but also in our own investment in and delivery of some big changes in our information-technology transformation. We will close one-third of our branch network by the end of 2021 and that’s a reflection of where customers want to bank with us most, which is online and digital.
What have been the key lessons learned from the COVID crisis for the bank?
I think the pivot to technology. Even before COVID-19, we had seen a reduction in physical branches and increasing usage of digital, but that has accelerated during the pandemic. When the economy opens up, we’ll look forward to going back to restaurants, gyms or cinemas but I don’t think people are looking forward to going back to branch banking. That doesn’t mean that we won’t have branches—we will still have a very large branch network. Two-thirds of our network is still going to be open for this year and beyond, but the adoption of digital banking is much higher. Adoption of digital across all customer profiles has increased by 50 percent. In 2019, six out of 10 of our customers would look to buy a day-to-day banking product online, that went up to seven out of 10 in 2020 and we’re expecting it to go to eight out of 10 in 2021. In response to that, we’ve changed. Personal current accounts can be opened in six minutes using biometrics and a selfie, and we’ve got mortgage journeys that can be done entirely online. Customers want a frictionless, easy experience. That has taken out costs for our shareholders but has also improved experience and satisfaction amongst our customers. That is the number one, most enduring change in terms of our business model.
The second change is from an employee perspective, and that is more flexible ways of working. We have had over 85 percent of people working from home and I don’t expect everyone to come back full time. Preference is for a hybrid model. Our head-office usage will reduce and will be different. It will be for team building, training, development workshops and creativity. That has been a positive for many people and it’s helped us with diversity, gender and social inclusion. People don’t have to be based in the capital city to have career path.
What is Bank of Ireland’s strategy for financial inclusion, for contributing to the development of rural Ireland and for narrowing the gap between large multinationals and Ireland’s domestic companies?
We support international companies coming in to Ireland. We bank two out of every three FDI companies. We also have over 50-percent market share of SMEs and we’re the largest lender to the agricultural sector, which is a really important part of rural Ireland. We are closing branches, some of them are in rural Ireland, but very importantly, we have agreed a joint venture with the Irish post office—in the vicinity of every branch that we are closing is a post office within an average of 500 meters. We’re very cognizant, as banking changes, not to leave any town or village without access to cash and financial services, that’s very important.
In terms of broader sustainability, we have recently published our responsible and sustainable business strategy. This includes enhancing financial wellbeing among customers and communities, and also supporting the green transition. In terms of financial wellbeing, we have adopted this as a core pillar of our activities as a bank. We have a very active Financial Wellbeing program, which offers advice and support to all customers of all ages.
We’re also aware that some communities have been especially exposed to COVID-19, particularly ones that are dependent on charitable support. So we’ve invested €4 million in community programs across the island for Ireland.
New technologies are disrupting and reinvigorating the worldwide banking sector. Where do you see most disruptions happening and what’s your vision for the financial services industry of the future?
There’s a huge amount of change happening, both with new entrants but also incumbent banks. It’s in direct response to customer expectations around every type of activity, including financial services. The biggest change we’re seeing in Ireland is around payments, where customers are looking for more innovation. Mobile and contactless payments have now become very well established, as has the opportunity to have bill sharing or bill spitting. A number of the Irish banks, ourselves included, have founded a joint venture to provide a very user-friendly alternative to some of the competitors out there to enable peer-to-peer, peer-to-customer and consumer-to-business payments as well.
Technology is the future of banking: to reduce our costs, be more efficient, to grow the business by offering customers a proposition and to diversify income away from just traditional lending. We’ve had a lot of cost reduction by being more efficient, allowing, for instance, the opening of current accounts on mobile phones in six minutes. This removes friction and costs for the bank and it is much better for the customer. We’ve invested in our wealth insurance business: now over half of all of our general insurance is done through insurance wallets. It’s a very quick process for general insurance products. That’s an example of diversification in terms of how we think about technology: it isn’t just about information technology but also about the mindset of people. There’s a big focus on having stronger capabilities and a more digital culture and mindset. Working remotely has made everyone become more digitally competent.
When I think about the future, I think about artificial intelligence (AI), the cloud, big data and application programming interfaces (APIs). The cloud gives us much faster time value for innovation and a much more agile environment in which to manage data. Data is like the oil of banking. We’re putting a huge amount of emphasis on our data usage to support better outcomes for customers. AI has often been used to reduce costs, for example, robotics at the most basic level, but increasingly we will see AI fuelling growth. The cloud, AI, data and APIs would be the four basic pillars of any tech-forward-looking banking strategy that we certainly have, and I think that’s becoming very common amongst European banks.
In addition to digitalization, transparency and sustainability are growing concerns in banking. What are Bank of Ireland’s accomplishments in that regard?
Environmental, social and governance (ESG) issues are incredibly important for us and there’s increased expectation from shareholders, investors and regulators in this area. Our ESG strategy is focused on enhancing financial wellbeing of customers, colleagues and communities, and enabling the transition to a green economy. We were the first bank in Ireland to launch a green mortgage. And we committed to a sustainable finance fund of €1 billion, which we’ve now doubled to €2 billion. We’ve seen €950 million drawn down already, particularly to homeowners who want to have green mortgages, support the transition or retrofit their properties. We also completed our inaugural green bond issuance and issued €750 million to fund sustainable projects across green buildings, energy efficiency, renewable energy and clean transportation. We have targeted our own operations to be net carbon zero by 2030 and have committed to working with our customers, colleagues and communities to support their transition to a net-zero economy by 2050.
2021 promises to be a year of hope for many in the world. How do you see the year panning out?
I’m cautiously optimistic, particularly about the second half of the year. Economic rebound and recovery is dependent on the successful rollout of the vaccination program. Our projection is for a gross domestic product (GDP) growth of 5 percent this year. While businesses in the first half of 2021 are adapting to various degrees of lockdown, it is really in the second half that we expect to see the economic rebound. Then 2022 would see a GDP that is actually above pre-COVID levels at 5.8 percent.
Private-sector saving has really increased as people have had less reasons to spend their money, and so we’ve seen private-sector deposits grow by 15 percent in 2020 compared with 2019. This makes us feel confident. 10 years ago, households had a relatively high debt-to-income ratio; today it’s nearly half was it was. Households are less indebted and many of them have savings. Some, obviously, have been really impacted negatively by the pandemic, but those who have been working sectors that haven’t been impacted have saved. There will be opportunity there for consumer spending that will help with the reopening of the economy. As we see consumer confidence coming back, we expect businesses can look forward to a growth period.
Brexit will be in the rear-view mirror: the economy will reopen and hopefully successful vaccination will mean that there’ll be cautious lifting up into hospitality, which we expect to be the last sector to open. There are real reasons to be optimistic: as a bank, our ability to lend to support businesses, and to provide wealth and insurance advice, is clear. We are doing that from a more efficient, more digital base than we were before COVID-19. So I think there are reasons to be cautiously optimistic, dependent on the successful rollout of the vaccination program.
You’ve been leading the bank for three years now. How would you summarize your long-term vision for the Bank of Ireland?
Our purpose is to enable our customers, colleagues and communities to thrive. For me, running the largest Irish bank is about increasing our efficiency, growing our profitability to achieve returns for our shareholders that are above the cost of capital, and building a more sustainable business model for the future through technology, business-model change and through our own commitment to ESG.
It’s also important to rebuild trust in the sector. Irish banking still has those shadows of the last financial crisis and Bank of Ireland is the first and only bank in Ireland to have fully repaid the taxpayer. We did that a number of years ago. Rebuilding trust in banking is incredibly important because, to be successful, the Irish economy needs profitable but also trusted financial institutions. That’s a really important part of what we do, be it through the provision of payment breaks, the investment we’ve made in our technology or the support we’ve given to SMEs and mortgage customers during 2020. Hopefully these will continue to grow the trust that consumers have in the Irish banking sector.
What would be your final message to our Newsweek readers?
Bank of Ireland is Ireland’s leading lender. We are strongly supporting economic recovery and growth—in Ireland, and in every market where we do business.