Appeared on Financial World Online, 1st March 2010
Monday, March 01, 2010
As several new entrants prepare to enter the UK banking sector, Andy Brown considers the opportunities and challenges they may face in taking on the Big Four.
The UK banking industry is set for a year of change in 2010, as several new banks from Tesco and Virgin to Metro Bank attempt to enter the sector. Traditionally a stronghold of the Big Four, these new movers and shakers will need to work extremely hard to make a significant impact on the UK retail banking landscape. However, there is a great opportunity for the new players to leapfrog the competition through the use of more sophisticated and agile technology. The ability to implement systems and processes with a technological ‘clean slate’ gives these banking start-ups a huge potential advantage - if they can capitalise on it.
So as these new banks come onto the scene, what do they need to consider from a technology infrastructure point of view?
The customer comes first
A priority for financial institutions must be on understanding their customers better. By setting up an environment that enables them to get a complete ‘customer view’, new banks will be better placed to track customer activity, prevent fraudulent transactions and encourage increased customer use and activation of bank products. In order to win the confidence of disaffected customers, institutions need to offer added-value, and if appropriate, tailored services to their customers to help build their relationships. New entrants from the retail space, such as Tesco, will have a highly developed understanding of these techniques. The industry will be watching with interest to see how they apply their existing customer knowledge to their retail banking offering.
For corporate customers, better reporting of their payments from all channels and offering dashboards and trend analysis services will prove popular. On the retail banking side; there is much focus on innovative new technologies, such as contactless, NFC and mobile, but the number of transactions generated by these emerging channels is still low. It is the traditional card-based payments that continue to account for significant transaction volumes and revenues. While it is important that banks can use new technologies where relevant, they must also ensure that their current products remain competitive so that they bring in that important core payments revenue.
Back to the future
Most new banks will start off with relatively small UK operations, depending on how they have entered the market. However small they are to start with, it will be crucial to their future success that they build scalability into their processes to effectively future-proof their technology. For example, banks may initially choose to offer a limited selection of cards to their customers, with a view to extending this further down the line to include a wider offering and multi-application cards.
When making early technology choices, it is important to ensure that systems are agile enough to react to the changing market place. This will be particularly important to the brand new banks that are likely to adapt their plans over relatively short time frames as new opportunities become apparent.
Another consideration will be the increasing movement towards agile payment systems or more integrated systems that are capable of handling payments from any channel, whether consumer or corporate, from start to finish – with no redundancy of technology, or duplication of processes and labour. These agile systems will enable financial institutions to manage transactions quickly and effectively, with less need for manual intervention and costly interfaces between different systems.
It is important to differentiate between those financial institutions that have chosen a strategy of organic growth, and those that have acquired smaller players to gain a foothold and the beginnings of a branch network in the UK. For instance, in January 2010 Virgin announced the acquisition of Church House Trust to “provide the platform from which [to] develop a retail banking business in the UK offering a full range of products to consumers under the Virgin Money brand” (Times Online, 8 Jan 2010, ‘Virgin Money buys minnow for retail bank launch’). Banks that decide to take this strategy must carefully consider whether they should utilise and adapt existing technologies, or if it would be more effective to start from scratch from an IT perspective.
While the Big Four are likely to retain their dominance of the UK retail banking market in the short-term, any increase in competition will certainly cause concern for banks that are dealing with dissatisfied customers and public anger at recent scandals surrounding the financial crisis and bankers’ bonuses. These smaller, more reactive competitors could certainly shake things up through the use of innovative and agile technologies, and this in turn can only be beneficial for customers.
Andy Brown, ACI Worldwide.