Showing posts with label Barclays. Show all posts
Showing posts with label Barclays. Show all posts

Friday, 29 May 2015

Why banks should see ring fencing as an opportunity

Banks in the UK should be seeing ring-fencing as an opportunity rather than trying to wriggle out of or diluting the effects of the legislation.

Ring-fencing, the separation of the retail business from the non-retail business is estimated to cost each of the major banks between £1.5 and £2.5bn to set up and a subsequent additional annual charge of between £1.7bn and £4.4bn to run. Each of the UK banks are looking differently at what will be inside the ring fence and what will be outside. For instance Lloyds Banking Group, which is largely UK and retail banking focused, is looking to have most of the existing group within the ring fence and only the corporate bank outside of it. On the other hand Barclays is looking to put the minimum, the UK retail bank inside, while businesses like Barclaycard and the corporate and investment bank would be kept outside the ring fence. HSBC appears to be looking at a similar model to Barclays with the UK Retail Bank – effectively HSBC, First Direct and M&S Bank inside the ring fence with the rest outside with the distinct possibility that the Head Office of the Group would be relocated to Hong Kong.

However the UK based banks are seeing ring-fencing very much as an unavoidable problem that is both unnecessary and expensive.

There is a different, more positive point of view and that is the ring-fencing activity should be seen as an opportunity to fundamentally re-think both how the bank should operate and make those major investments that it has never been quite the right time to implement. Ring-fencing should be seen as a means of investing in the business in order to both reduce the cost base and enable the bank to better compete in the UK market.

Implementing a culture that results in market leadership

Since 2008 there has been a lot spoken and written about changing the culture of banking, moving from the Gordon Gecko ‘Greed is good’ investment banking culture  and back to one where the role of bankers is to serve their customers. The recent Libor and Forex fines handed out by regulators suggests there is little evidence of the change in culture being anything other than talk.

With the physical separation of retail from investment banking there is a one off opportunity to actually design and implement the different cultural model that each of these businesses should adopt. The reality is that there is no one culture that fits retail, corporate, private and investment banking. As Treacy and Wiersema wrote in their seminal work on the Value Disciplines it is not possible for organisations to be the leaders in more than one of the three values disciplines – operations effectiveness, customer intimacy and product leadership. Excelling at each one of those value disciplines requires a different cultural model. The current size and complexity of banks has led to a blended culture that has inevitably led to compromise and resulted in excellence at none of them. Ring-fencing provides the opportunity to put this right.

Use the opportunity to replace legacy IT with architecture driven solutions

Much has been written about the failure of the large banks to step up to the challenge from the digital natives due to the complex legacy IT systems. Ring-fencing provides the opportunity to step back, produce and implement the architecture required to deliver the front to back digital experience that customers, both retail and corporate, are demanding. Under the label of ring-fencing this is the opportunity to ditch the legacy systems that were designed for a simpler banking world and that have been twisted and forced to support a multi-segmented banking business. This is the right time to replace them with architecturally driven, agile, cloud-based, channel agnostic solutions that will enable the banks to deliver the experience and services that customers are demanding rather than the ones that the banks are forcing customers to take. The experience that a retail customer is demanding is quite different from the corporate or investment banking customer requires. After all if the banks are going to have to spend between £1.5bn and £2.5bn why not spend this on something better than today rather than just splitting and duplicating today’s systems across those businesses within and outside the ring fence?  

A chance to significantly drive down cost while improving customer experience

Today’s banks have a real challenge with costs. With the additional capital required to be held, the low interest rates and the increased regulation there is no doubt that the cost base for banks need to be dramatically reduced and changed. Ring-fencing provides the opportunity to look at whatthe cost bases of the businesses inside and outside the ring fence should be. This includes looking at which parts of the cost base the bank actually needs to own and which it can outsource to those better able to deliver the service on a more cost effective basis. Outsourcing can not only reduce the costs it can also allow the bank to focus its key resources on the strategic priorities such as digital.  Ring-fencing provides the opportunity to look at the processes from the beginning to the end and to decide which parts of the processes the bank actually needs to own, which parts of the process would be suitable for the application of Robotic Process Automation and which parts of the processes are no longer relevant. This should enable the bank to significantly improve the overall customer experience as well as drive down cost. This is also a chance to strongly embrace the use of analytics and deploy Next Best Action tools. By executing all of these activities cost can, without doubt, be significantly reduced while exponentially improving the customer experience. This means that not only should the additional cost of operating the bank in a post ring-fencing world be reduced significantly from the estimated £1.7-4.4bn annual charge but the banks that get this right will be far better positioned for whatever the world chooses to throw at them.

Ring-fencing is an opportunity to be welcomed

For banks that see the glass half full (rather than half empty) when it comes to ring-fencing who embrace the opportunity to fundamentally re-architect and re-launch their businesses they will emerge from ring-fencing far stronger, far more agile and far more profitable than those banks who resent the regulation and try to do the minimum to comply with it.

Thursday, 30 April 2015

Can Yorkshire Bank and Clydesdale Bank become challengers?

The latest results from TSB have demonstrated that it is possible for a bank spawned from a global retail bank to be a challenger in the market. With National Australia keen to get rid of its northern hemisphere business, Nab UK consisting of the Clydesdale and Yorkshire brands, could this business be the base upon which a challenger bank is built?

A history of innovation

There have been several attempts to make Clydesdale/Yorkshire challenger brands particularly under the leadership of former Woolwich Building Society executives John Stewart and Lynne Peacock. After all they were the first people to introduce the concept of speed dating for SME customers whereby customers could meet other customers in the bank’s business centres with a view to starting a new business to business relationship.

Before that in the first internet boom it was Clydesdale Bank that launched Kiboodle a b2b portal for customers to buy and sell products using an online catalogue.

Lynne Peacock also tried to invigorate the bank and take on the Big 4 banks in the SME sector by opening up new banking centres particularly in London and the South East. That may be where there is the most money but it is also where there is the most banking competition. Looser lending criteria in order to build market share has been a major contributor to the current problems that Nab’s UK business has with major writedowns on loans made at that time.

What would it take to become a challenger?

So if National Australia has failed to make its UK operations a significant challenger to the now Big 5 banks (HSBC, Barclays, Lloyds Banking Group, RBS, Santander) what would it take to change that?

What Yorkshire Bank and Clydesdale Bank require to become significant challengers to the major banks would be significant investments in digital and core banking to deliver both the sort of customer experience offer the propositions that will attract customers of the Big 5 Banks to switch to them. The banks need to become significantly more efficient and that can only be brought about by investing heavily in automation.

Clydesdale Group is expected to be floated, or preferably sold, in either in 2015 or 2016. What will any purchaser of equity or the business actually be getting?

What do Yorkshire Bank and Clydesdale Bank bring?

Yorkshire Bank and Clydesdale Bank are very strong brands with a high level of customer loyalty. According to Yorkshiremen Yorkshire is God’s country and anything from Yorkshire is better than from anywhere else. That loyalty by Yorkshiremen to the bank extends way beyond Yorkshire. Maximising the value of that brand and the pride in Yorkshire could be key to future success.

The Clydesdale brand is equally strong in Scotland and particularly after the nationalisation of both RBS and Halifax Bank of Scotland (through being acquired by Lloyds Banking Group). Should another referendum on the independence of Scotland result in a ‘Yes’ vote then Clydesdale Bank could become the only bank headquartered in Scotland which could attract a lot more Scottish customers post independence.

Between them Clydesdale and Yorkshire operate 298 retail branches, 42 business and private banking centres mainly in Scotland and the north of England as well as having online operations.  That is comparable to the 316 branches that the still to be launched Williams and Glyn Bank (to be spun out of RBS) will have.

Clydesdale bank is the official issuer of Scottish banknotes and 50% of the currency in circulation in Scotland has been issued by the bank and has the brand on them. No other bank in the UK has their customers reminded of them every time they spend money. Clydesdale is also the first bank in the UK to issue plastic bank notes.

With loan balances in excess of £27bn, deposit balances of £23bn the two banks are comparable  in size and efficiency with Virgin Money.

Who might be interested in acquiring Yorkshire and Clydesdale?

Prior to the offer to buy TSB by Sabadell it had been rumoured that TSB might have been interested in acquiring the business. However one of the stumbling blocks was that there was a significant overlap in branches in Scotland and that would significantly reduce the value to TSB of the businesses.

Theoretically bringing Nationwide Building Society and Yorkshire and Clydesdale banks together should be an ideal arrangement.  It would significantly boost Nationwide’s presence in the north and Scotland. In return Yorkshire and Clydesdale could replace their legacy systems with Nationwide’s new, state of the art, SAP core banking system and significant investments in digital. Nationwide has significant experience of integrating businesses (Anglia Building Society and the Portman Building Society among others) and driving down the Yorkshire and Clydesdale’s efficiency ratio from an eye-watering 70% to much closer to Nationwide’s own 50%. However one of the downsides of being a mutual is that it is far more difficult to raise capital and therefore as sweet as this deal might be it is unlikely to be feasible.

A merger of Nab UK and Virgin Money would not make sense given the significant overlap of their branch locations even though the combination would build a challenger with sufficient critical mass of customers and assets to start impacting the Big 5 banks. Neither Virgin Money nor Nab UK have a suitable banking platform to build a challenger bank on so there  would need to be a very significant investment required to get the efficiencies and customer experience to the level required to challenge the big banks. Virgin Money has a similar cost:income ratio to Yorkshire and Clydesdale. The level of investment required and the payback period are likely to put off the existing investors in Virgin Money.

An argument could be made for Santander to acquire the business as it would significantly boost their presence in Scotland and the North and it has the technology platform in Partenon that it could migrate Nab UK onto, having already done this for Abbey National, Bradford & Bingley and Alliance & Leicester. However Santander likes to be a distress purchaser and never likes to pay over the odds. In addition two of the core assets of Nab UK the Yorkshire and Clydesdale brands would not be of value to Santander and the subsequent re-branding to Santander could lead to a significant loss of customers loyal to the Yorkshire and Clydesdale brands. All of this makes it unlikely that Santander will want to acquire the business at a price that Nab is prepared to accept.

A question then would be whether a foreign investor could be interested in acquiring the businesses off Nab. Given that Abbey was acquired by Santander, TSB will most likely be acquired by Sabadell then the large global Spanish bank BBVA could be a contender. With its focus on being both a bank and a software business and its recent acquisition of Simple, the US digital bank, then it would be surprising if they didn’t consider this as their opportunity to get into the UK retail banking market.

These are all questions that the incoming CEO for the Nab UK business, former AIB CEO David Duffy, will have to address as he prepares the business for IPO and potential disposal.

 

 

Wednesday, 21 January 2015

Why 2015 won't be the year of the challenger bank


When politicians and consumer finance champions talk about challenger banks they are looking for new players to eat into the 77% of the current account market and the 85% of the small business banking market that the Big 5 (Barclays, Lloyds, HSBC, RBS and Santander) currently have.

The figures from the Financial Conduct Authority for potential new banks could give the impression that 2015 could be the year that finally the Big 5 sees their market share being significantly reduced:

6 banking licences issued
4 banks proceeding through the application process
26 new banks being discussed

In addition there are already the likes of Nationwide, Co-op, TSB, Yorkshire Bank, Clydesdale Bank, Metro Bank, One Savings Bank, Handelsbanken, Aldermore, M&S Bank, Tesco Bank, Virgin Money and Shawbrook operating in the UK.

However on closer scrutiny the picture isn't quite as rosy and is unlikely to cause any executive from the Big 5 banks to lose any sleep.

The existing “challengers” broadly fall into one of four camps.

Camp 1: Existing established Players:

Nationwide

Co-op

Yorkshire Bank

Clydesdale Bank

Post Office (Bank of Ireland)

The established players have been operating current accounts in the UK market for many years, Nationwide being the newest of these to this specific market. Despite having been in the market for some time these established players’ impact on the market share of the Big 5 has been minimal. Nationwide is the most proactive in trying to acquire new customers within this group as is reflected by their being one of the biggest beneficiaries since the introduction of 7 Day Switching. Their market share is small but growing and its offering is something that clearly appeals to customers who do not like the Big 5 banks.

Camp 2: Banks created from former banks:

One Savings Bank (Kent Reliance Building Society)

TSB (Lloyds Banking Group)

Virgin Money (Northern Rock)

Williams & Glyn (RBS) – still to be launched

These are all banks that have (or will) relaunch themselves and have existing customers, branches and IT infrastructure. What this means is that in terms of offering a true alternative to the Big 5 banks they are limited by the legacy technology and cost bases they have inherited when they were set up. In the case of TSB and Williams & Glyn both of these were compulsory disposals by their parent banks following the 2008 financial crisis, however both of them have significant shareholdings by Lloyds Bank Group (TSB) and RBS (Williams & Glyn) so whether they can really be seen as challengers when they are still owned by one of the Big 5 is questionable.

One Savings Bank does not offer a current account and is focused on the specialty lending sector. Virgin Money does not currently market a current account.

Camp 3: Banks owned by larger organisations

Handelsbanken

Tesco Bank

M&S Bank

These three are each quite different.

Handelsbanken which has more than 175 branches in the UK has its parent company in Sweden. It is primarily focused on SME banking but does offer a personal current account. It is building a presence and has very high customer satisfaction but is still sufficiently subscale to not be a threat to the market share of the Big 5. However it is picking off customers that the Big 5 banks would rather not lose.

Tesco Bank has only relatively recently launched its current account so it is difficult to judge how successful it will be. With the size of the Tesco customer base and the insight it has into its customers from the Clubcard it has the potential to be a serious challenger however achieving sufficient scale will be beyond 2015. There is also a possibility with the woes of Tesco that the bank could be a candidate for disposal which could change significantly Tesco Bank’s market position.

M&S Bank while it does offer current accounts cannot be seen as a challenger as it is owned by HSBC, one of the Big 5 Banks. 

Camp 4: Greenfield challenger banks

Metro Bank

Aldermore

Shawcross

Atom Bank

Charter Savings Bank

Hampden & Co

These (and there are more) are the genuine upstarts the ones that are doing or planning to do something different in the market. The last three are still to launch. They are all primarily Private Equity funded.

Of those listed on Metro Bank offers a personal current account and Atom has a stated intention to offer one.

What each of these Greenfield challengers does not offer is scale and will certainly not bother the Big 5 banks in 2015.

Big 5 bank executives can sleep easy in 2015
When an examination is made across the four Camps as described above the inevitable conclusion is that while there may be some headlines and excitement about the number of potential challengers in and coming into the UK banking market there can be no doubt that in 2015 there will be very little dent in the current account market share of the Big 5 banks.

Friday, 3 October 2014

The FCA is wrong to focus on account portability

The news that the FCA is to explore the move to full account portability as part of a review of current/checking account switching is disappointing as the FCA appears to be rushing to a solution without having really understood why customers are not switching their account providers at the levels that politicians and consumer lobbyists would like to see. The reason that these parties wish to see higher levels of switching is that they see this as an indicator of competition in the current account market which is dominated by the big five banks – Lloyds, Barclays, RBS, HSBC and Santander.

Customer switching has gone up by only 19% since 7 day switching was introduced

The FCA have been triggered into action by their disappointment at the low increase in the level of switching following the introduction of seven business day current account switching service introduced in October 2013. Despite the investment of $750m by the large banks in creating this guaranteed switching service levels of customer switching has gone up by only 19%.

The large banks have been the beneficiaries of switching

The irony is that the biggest beneficiaries of the account switching services have been Halifax (part of Lloyds Banking Group), Santander (one of the world’s largest banks), Nationwide Building Society and TSB (a Lloyds clone and still partially owned by the bank). With the exception of Nationwide, the account switching service has done little to change the market share of the major banks and even Nationwide has hardly changed the percentage.

The parallels between mobile phone numbers and account numbers are not valid

However for the FCA to jump to the conclusion that this is down to customers being reluctant to change their bank account number and therefore account portability will change this is both bizarre and illogical. Parallels are often made with the mobile phone industry where phone number portability has encouraged customers to switch between providers. However the use of phone numbers and bank account numbers are quite different. Whereas in order for telephone customers to be able to keep in contact with the hundreds and even thousands of people who have their number programmed into their phones keeping their mobile number when changing suppliers is essential the same cannot be said for bank account numbers.

Most bank customers have not memorised their bank account numbers. Once access to internet and mobile banking is set up a customer very rarely needs to know that number. When paying bills, transferring money, checking their balances, setting up or changing direct debits or standing orders there is no need for customers to know their bank account number. With the seven day switching services direct debits are transferred and guaranteed that if a problem occurs that the customer will be refunded for any charges occurred during the transfer process. With the increasing availability of P2P (Person to Person) mobile banking applications such as Pingit customers only need to know the mobile phone number of the person that they are transferring the money to (which is very likely to be stored in their phone) and don’t need to know the bank account details of the person that they are wanting to transfer money to. It is a fallacy to say that the reason people are not changing their bank accounts is because they don’t want to change their bank account number.

Customer interest in switching accounts is far lower than politicians and lobbyists

One of the primary reasons that is quoted despite the Seven Day Switching Service making it far easier for customers to switch current accounts is what politicians refer to as ‘customer apathy or inertia’. The reason that customers aren’t bothered is because for most customers banking really isn’t that interesting (until it goes wrong or they have a financial crisis), that the actual amount that they would save by switching from one bank to another is so minimal that it isn’t worth the effort and that they see one bank account much the same as another. To most customers banking services are a commodity and a largely undifferentiated one. They have better things to do with their lives than monitor whether one bank account is better than another.

There are significant numbers of providers of current accounts

The fact that the main beneficiaries of account switching have been the larger players is not because there is not a lot of choice in the market. Examples of organisations offering personal bank accounts include Nationwide Building Society, Tesco Bank, Marks & Spencer Bank, Metro Bank, Co-op Bank, Yorkshire Bank, Clydesdale Bank, Bank of Ireland (via the Post Office) and Handelsbanken.

The reason that Halifax, Santander, Nationwide, TSB and Metro Bank (though on a lot lower scale than the other four) have been successful in getting current account customers to switch to them is because of their attractive propositions whether it be paying interest on current account balances, discounts on utilities and other bills, convenience of branches or even offering dog biscuits. The fact that some of the most attractive propositions have come from the larger banks is because for most banks most personal current accounts are either loss leaders or have very low margins and therefore to be profitable in the current account market you need scale. That is very difficult and takes a lot of time to build from scratch as Metro Bank is finding.

Many of the so-called challenger banks e.g. Aldermore, Shawbrook, OneSavings Bank and Handelsbanken are not even attempting to engage in the personal current account market because of how unattractive it is financially. They would rather focus on the mortgage market or SME banking where the margins are higher and the cost to enter the market are far lower. As Virgin Money comes to the market it is based on the profits from mortgages and credit cards that the value will be attributed not current accounts.

The FCA is not focusing on the real issue

If the FCA is really interested in seeing greater competition in the current account market then rather than investigating a solution to a problem that doesn’t exist (customer only don’t switch because they don’t want to change their bank account number) then they should look at how to make it more attractive for the existing sub Big Five and new players to engage in the market with customer friendly banking propositions. It is only when there is significant differentiation between bank accounts in customers’ minds that switching volumes will become significant.

Wednesday, 17 September 2014

Where have all the global retail banks gone?

Where have all the global retail banks gone? The banks that had the ambition to become truly global retail banks. What happened to HSBC and ‘The World’s Local Bank’? (see HSBC goes back to its roots ) It isn’t only HSBC that has lost the appetite to be a global retail bank but also Citibank, Standard Chartered, Barclays and RBS amongst others have made it clear that they no longer have that aspiration. Each of them has and continues to be in the process of selling off or closing down selected retail banking operations across the globe.

So what made some of the largest banks in the world consider becoming a global retail bank?

Myth 1: Banking is the same all over the world

For a long time the myth has been actively peddled by consultants and banking applications salespeople that retail banking is the same the world over. After all a loan is a loan, a mortgage is a mortgage and a savings account is a savings account wherever they are in the world – aren’t they?

On the surface this appears to be true. The definition of a residential mortgage is fundamentally the same wherever you are in the world. However the process to take out that loan, the regulations that must be complied with and how the bank treats the mortgage asset is unique to each country. For example in the UK most loans are not securitised whereas in the US Fannie Mae or Freddie Mac play a role in almost every mortgage. The role that notaries play in the sales process in Spain is quite different from that which solicitors perform in the UK. Santander found this out to their cost when they replaced Abbey National’s banking platforms with Partenon, the Santander European retail banking platform. Significant parts of the banking platform had to customised to meet the different way that business is conducted in the UK compared to Spain. The ease with which Partenon could be implemented was a core part of the business case for the acquisition of Abbey by Santander. It turned out to be a lot more expensive and took a lot longer than envisaged.

 Likewise Bradford & Bingley and Barclays both found out separately that implementing a US mortgage application in the UK market was nigh on impossible with both writing off the complete cost of the implementation after many years and millions of pounds being spent trying to modify the applications to meet the local requirements. They had wanted to believe what the mortgage platform sales person had told them.

Both Citibank and HSBC decided to address the problem a different way by building their own custom global retail banking platforms. Neither of them succeeded in delivering a single core banking platform that has been rolled out to all their retail operations but hundreds of millions of pounds (if not billions) were spent trying to achieve that. Neither programme was completed.

As has previously been mentioned, Santander has come the closest to achieving this is. The Santander Partenon platform has been implemented for their European and parts of their US operations. For their South American operations Santander recognised that bending and force fitting Partenon was not going to be a viable option. Instead they needed to develop a different platform Altair but even this needs significant customisation for each new implementation.

Even when looking to implement in only one different country and with more modern architectures than HSBC, Citi or Santander were working with, one of the world’s largest platform vendors, SAP, has found it far more difficult and expensive to implement a core banking system than was envisaged as has been illustrated by the troubled programmes at Commonwealth Bank (Australia), Postbank (Germany) and Nationwide Building Society (UK). Commonwealth Bank has achieved the implementation and is now reaping the benefits (see CBA proves case for core banking replacement)  

Myth 2: Retail Banking is highly profitable

Politicians and consumer lobbyists across the world continue to complain that banks make excessive profits. When the total profit that the large banks make is looked at the numbers can seem very large but when you look at the margin being made it presents a very different picture. Retail banking is only really profitable when operated at scale. It is for a very good reason that in most countries the retail banking market is dominated by a small number of large banks. The costs of capital, of meeting global and local regulations, setting up branch and back office infrastructures, of putting in place the IT systems, of either creating or joining the payments infrastructure are huge. The risks and returns for large banks entering a new market and building a customer base from scratch are very unattractive. This and the myth below are two reasons why the large global banks have been selling or closing their operations in many countries – they simply didn’t have the scale and couldn’t see a way to get to the scale to make the business attractive.

Myth 3: Global brands matter to retail customers

The global banks that have entered local markets have been under the misapprehension that the power of their global brand would be sufficient to make local customers change their primary banking relationship to them. HSBC is the bank that spent the most money in trying to make this true with their ‘The World’s local bank’ campaign. Despite all that money being spent they discovered that it wasn’t true and have and are withdrawing from countries where they could not build enough scale. Citi discovered this to their cost in countries such as Spain, Germany, Poland and Turkey where they could not get local customers to move to them. (see Citi in Europe). The reality is that the majority of customers want to bank with local banks with all the perceived benefits of local and national regulation and the knowledge that the bank is not going to disappear if Head Office decides that the operation in that country is not making enough money.

What of the future of global retail banking?

So does all this mean the end of global retail banks? In terms of a Barclays UK customer walking into an Absa branch in Capetown and transacting as if they were a local customer or a Santander UK customer walking into a branch in Sao Paulo then that is not something that the banks are willing to invest in, nor do they see sufficient demand to justify it. In terms of banks having significant retail presences in other geographies then there won’t be too many banks that will do that – HSBC and Santander being the exceptions.

Santander stands out as the leader in global retail banking particularly given that it is a  Spanish bank where the profits from its retail bank in the UK exceed those of its local market. Despite the death of Emilio Botin it doesn’t appear that that strategy is going to change with Ana Botin fully supporting the direction he set with ambition to expand further globally particularly in the US and Poland.

Monday, 18 August 2014

CBA proves the case for core banking replacement

CBA (Commonwealth Bank of Australia) has delivered record profits of $8.6bn AUD (£4.8bn, $8.0bn USD) for the year to June 2014. With a return on equity of 18.7% (versus typically 5-7% for US/UK banks and less for European banks) and a cost:income ratio of 36% for the retail bank (42.9% for the bank overall), this puts CBA amongst the most profitable banks in the world. It is also one of the banks with the fastest growing profits. This is despite fees paid by customers going down. The profit is being driven a combination of growing the revenues outperforming their competition and by increases in productivity. The CEO, Ian Narev, is clear that a major factor in the high performance of the bank is due to the major investments in technology, including the replacement of their core banking platforms.

For many banks the idea of replacing the core banking platforms is the equivalent of performing a full heart and lungs transplant while running a marathon. However, whilst most banks have not had the courage to embark on such a challenging endeavour, in 2006 CBA decided to. CBA made the task even harder by rather than choosing to replace their old legacy systems with proven technology they chose to be one of a very few pioneers with the new SAP Banking platform that, at that point, was largely unproven.

CBA have not been risk averse in adopting new technologies. They were one of the first banks to outsource their internet banking infrastructure to Amazon Web Services (AWS). See CBA and Amazon

The journey to their new banking platforms was not straight forward, bumps were found along the way and the costs rose above original estimates but there were releases along the journey which released business benefits and they have succeeded in delivering a completely new set of platforms to drive their business from. This has given them significant competitive advantage.

One consequence of simplifying their IT landscape has been a dramatic decrease in the number of high impact system impacts from 400 in FY2007 to a mere 44 in FY14. Considering the number of major outages that some of its competitor banks have had and the damage to the brand this is a significant achievement. It will undoubtedly have contributed to why CBA is #1 for customer satisfaction amongst Australian banks.

Among the benefits that the bank and the customers have experienced is a dramatic reduction in the time it takes to get innovations into production – two recent examples of this are Lock & Limit (allowing customers to block and/or limit the size of transactions) and Cardless Cash (customers being able to withdraw from ATMs using their mobile phones) which came to market in May 2014 ahead of competitor offerings.

CBA has also seen a significant increase in self-service with the percentage of deposits completed via an Intelligent Deposit Machine going from 10% to 37% over a twelve month period. With the launch of online opening of accounts (savings and current accounts) customers can now open accounts in less than 60 seconds.

None of the big UK banks has embarked upon a core banking platform replacement programme. Lloyds has consolidated and simplified its systems based on the legacy TSB platform. Santander has a single platform, Partenon, which is based on a banking package but it is legacy technology.  HSBC embarked on developing a single system for the Group, One HSBC, but that programme was stopped after a number of year. Nationwide Building Society is some way down the journey of implementing SAP Banking and is beginning to see the benefits with reduced times to launch products and propositions.
One of the key architects and sponsors of the technology transformation programme at CBA was Michael Harte. He is shortly to take up the role of COO with responsibility for IT at Barclays. There can be little doubt that his experience at CBA was the major attraction for his recruitment. The benefits that CBA is reaping following this six plus years journey are clear to see. The question is with all the challenges that Barclays faces, the size of the investment and the length of the return on that investment, the decreasing margins in banking and the amount of work needed to keep up with the regulatory burden whether Barclays will have the appetite and the staying power to embark upon what can be a highly rewarding but hazardous journey

Wednesday, 6 August 2014

Creating competition in retail banking

With the recommendation by the UK CMA (Competition and Markets Authority) to conduct a review of competitiveness in the current account banking market, what are some of the areas that they may consider to increase competitiveness?

Breaking up the banks. This is the Labour party’s big idea - creating a set of competitor banks by splitting the big banks. The primary focus for this would be the Royal Bank of Scotland and Lloyds Banking Group. However this isn’t a new idea and is already being tested with the creation of TSB from Lloyds Banking Group and Williams & Glyn’s from RBS. However already there are lessons to be learnt from this process.

While there was initial interest from a number of players the list of serious bidders rapidly shortened when the complexity, the capital required and the price being sought became clear. The initial two successful bidders the Co-op (Lloyds) and Santander (RBS) after lengthy negotiations and detailed planning withdrew their bids.

Separating the bank’s technology whether cloning (TSB) or migrating to a new platform is proving to be enormously complex and very expensive.

The payback period is very long and without the subsidy and support of the selling bank would be even longer. TSB for instance does not expect to break even for many years and that is despite being helped by Lloyds lending the new bank a book of loans.

While breaking up the banks will mean that there are more places to have a current account there is no guarantee that this will ensure better deals for customers, particularly given that the easiest option for the broken up banks is to be clones of the original banks just simply without the scale advantages. With little to differentiate them having more players in the market doesn’t result in real consumer benefit.

Creating a payments utility separate from the big banks. One of the often heard complaints from new entrants is that the big banks have an advantage because they own the payments infrastructure and the cost for new entrants to use that infrastructure is a barrier to entry. One option would be to create a separate payments utility not owned by the banks. However that does not mean that it will necessarily be cheaper for new entrants. For a start there is the cost of acquiring and separating the infrastructure from that of the banks that currently own it which would need to be paid by customers of the utility. There is also the question of how to charge for the use of this utility. The charge would need to reflect the significant cost of running, maintaining and investing in modernising the infrastructure – it is not simply the cost of using the infrastructure because otherwise what is the incentive for whoever ends up owning the infrastructure to invest in it to make it not only continually available but also suitable for new innovations as they come along? Commercial reality dictates that for banks with high transaction volumes that cost per transaction should be lower.

Portable bank account numbers. Many of the challenger banks are supportive of the concept of portable bank account numbers. They look at the mobile phone industry and see the way that customers can take their phone numbers with them. However before recommending this change the CMA needs to research just how big an inhibitor to switching bank accounts for customers is the change of account number. Given the Seven Day Switching Service where the banks guarantee no interruption to direct debits and standing orders and given the limited numbers of times customers actually have to know their account number in order to transact, would portable bank account numbers really open the floodgates of customers switching bank account numbers?

Ending ‘free when in credit’ banking. In the UK customers have got used to so-called ‘free banking’ where as long as a customer remains in credit, whilst they get little or nothing for the balance that they retain, they don’t pay charges. A number of the challenger banks have complained that this gives the incumbent banks an advantage as it is difficult (but not impossible) to compete on price and because it gives banks offering current accounts a distinct advantage over those who don’t in terms of the low cost of all those balances when it comes to lending. It will take a brave politician to move to compel the end of free banking. Of course to attain transparency then the cost of each transaction e.g. cost of an ATM withdrawal, the cost of paying in a cheque, the cost of a direct debit, etc, would need to be made clear to customers and, the challengers would argue, that that would enable customers to choose between banks. However looking at a market where this is the way banking is conducted, Australia, then not only is there a greater concentration of current accounts held with the Four Pillars (Nab, Westpac, CBA and ANZ) than with the equivalents in the UK, but Australian banks are amongst the most profitable retail banks in the world. Despite that there are not lots of new entrants fighting to get a slice of the pie. For customers Australia is also one of the most expensive countries to bank. It would appear that ending ‘free banking’ alone would not solve the perceived competition problem.

Set a maximum market share for current accounts. On paper this would appear to be the solution. The big banks could be given a period of time over which they must reduce their share of the market to for instance to no more than 15% of the market each leaving the challenger banks to fight over the remaining 40%. The banks would need to be told the mix of customers they must dispose of, just as Lloyds was instructed for the disposal of TSB. However what does this do for consumer choice? Not all customers were happy to be told that they were moving from Lloyds to TSB without an option. Given that the CMA investigation is about creating competition and making it easier for customers to switch banks this does not appear to be the solution.

Make it even easier for new challengers to enter the market. Measures have already been put in place to reduce the capital required, shorten the process and allow challenger banks time to grow into being a full scale bank. The benefits of this are already being seen with the likes of Atom Bank being announced. It is difficult to see what more could be done in this area.

Make retail banking more profitable to encourage more new entrants. There is little chance of this being one of the recommendations of the CMA. The reality is that with increased regulation, increased scrutiny and rising costs for compliance retail banking is becoming less and less attractive a sector for investors. As JC Flowers have recently remarked with Returns on Equity going from double to single digits there are more attractive sectors to look at investing in.

Is the CMA looking to solve a problem that customers don’t see as a priority? With the advent of Seven Day Switching the number of customers changing banks has risen – over one million customers have chosen to do that. The biggest beneficiaries have been TSB, Santander and Nationwide Building Society. There more than a handful of challenger banks out there – Tesco, Marks & Spencer, Metro Bank, Co-op Bank, Handelsbanken, Aldermore and others with current accounts on the way – amongst them Atom Bank and Virgin Money. Despite that the market share of the large high street banks hasn’t changed significantly. The question is why aren’t customers changing banks? Is it simply because they see banking as a utility, that each of the banks are pretty much the same, that for most customers (unlike bankers, politicians, financial journalists and consumer champions) banking doesn’t enter their consciousness unless they have a bad experience. In the grand scheme of things for most customers they have far more important issues to think about than whether they should switch their bank accounts.

Perhaps it is time that the CMA focused on something of more day to day importance to consumers.

Thursday, 12 June 2014

Tesco Bank launches a current account - finally!

The news that Tesco Bank has finally launched its current/checking account six years after its split from RBS was announce must come as a great relief to Benny Higgins, CEO, and the rest of the team at Tesco Bank. Like expectant fathers they have been pacing the corridors of the maternity ward far longer than they would have liked. The delays have been numerous but principally down to getting over the regulatory hurdles and, more recently, ensuring that the IT systems fully work the way that they are meant to before being unleashed on real customers. Delaying the launch of the current account until the systems were thoroughly tested, while it was frustrating for those anxious to see Tesco Bank becoming a real challenger to the sector, should be recognised as absolutely the right decision for the CEO to take. The embarrassment and reputational damage caused to banks such as RBS and National Australia from having serious outages in their core banking systems far outweighs the benefits of launching earlier.

The announced current account is paying 3% on balances and only charging a monthly account fee of £5 if less than £750 is paid into the account. This is a competitive offer. There are added advantages for Tesco customers who will also receive loyalty Clubcard Points on all spending using the Tesco debit card.

Marks & Spencer beat Tesco out with a current account, having both free and fee-charging versions of their accounts. As with Tesco there will be benefits of being both a customer of M&S and its bank in terms of rewards. There will be some overlap between customers but the big difference is that Marks & Spencer Bank is owned by HSBC and therefore cannot really be seen as a challenger bank.

The launch of the current account by Tesco Bank should represent a real challenge to the big five banks (Barclays, Lloyds, HSBC, RBS and Santander). As an aside, Santander likes to position itself as a challenger but being owned by one of the largest banking groups in the world, coming from the consolidation of building societies (Abbey National, Alliance & Leicester, Bradford & Bingley being the main ones) and with a less than perfect reputation for the service it provides it quite rightly deserves to be clumped in with the other big 4 banks as being just another legacy bank.

There are many reasons why Tesco Bank should be seen as a real challenge to the established players. For starters it is not a small bank – it already has over 6 million customers using its insurance and lending products. All of these customers are potential customers for their current account offering. It also already has a large physical distribution network through its supermarkets. As they are available to savers today customers will be able to make deposits in 300 stores. However this account has been designed to be opened online and customer support will be available on the phone. The bank being designed for digital differentiates it from the likes of TSB, Metro Bank, Virgin Money and Williams & Glyn, which have all come from a traditional branch centric design.

Not only has Tesco Bank been designed from the start with digital in mind, Tesco also has many years experience of running large scale digital operations through its own website as well as operations like Tesco Mobile. This gives it a much better chance of delivering a reliable good customer experience than other challenger banks, particularly the small scale contenders such as Metro Bank, Aldermore and Atom.

Tesco Bank also has the added advantage that through its Clubcard programme it not only has vast amounts of data on both its existing and potential customers but it also has years and years of experience of using that data to drive business. Unlike the new start ups and the established banks so-called ‘Big’ data is not a new topic for Tesco. This should give it significant advantages given its customer insight in terms of providing customised propositions to its customers.

Tesco Bank is also not weighed down by legacy. They don’t have the reputational problems from the mis-selling of PPI and the high levels of complaints which the Big Five banks have. They can position themselves as truly a new entrant. While TSB and Williams & Glyn may have the liability for the past retained by their parents (Lloyds and RSB respectively) many of the executives who made the decisions to sell PPI, set the aggressive targets and the staff who delivered them are working for these ‘challenger’ banks.

They are also not weighed down by legacy systems unlike the Big Five banks, those spawned from the Big Five (TSB and Williams & Glyn) and those challenger banks who have been created by the acquisition of former building societies such as One Savings Bank (Kent Reliance Building Society) and Virgin Money (Northern Rock). While it may have taken Tesco Bank longer to get to market with their current account it is being delivered on (at least relatively) modern systems.

What the launch of Tesco Bank’s current account means is that there are now two sizeable challenger banks that are not tainted with the legacy of the financial crisis and that are serving their customers using modern technology platforms designed to work in the digital mobile world – Nationwide and Tesco.

Does this mean that the Big Five banks are quaking in their boots worried about their future? Clearly any bank executive should be aware of and taking into account what the competition is doing. The reality though is that for most customers banking is not that interesting, it is a commodity not worth spending a lot of time thinking about and that despite Seven Day Switching making it easier, they have better things to do with their time than switch bank accounts. This means that there will not be a flood of customers leaving the Big Five banks to sign up with Tesco or Nationwide.

The launch of the Tesco Bank current account is to be welcomed as a new force in the retail banking market, but no one should think that this is going to bring about a seismic change to who customers bank with.

Friday, 16 May 2014

RBS forced to sell Citizens ending the most successful UK retail banking foray into US market

British businesses don’t have a great track record in breaking into the US retail market. You only have to look at the disastrous foray that the Marks & Spencer acquisition of Brooks Brothers was, Tesco’s humiliating and expensive attempt with the Fresh & Easy brand and, most recently, the failure of Yo Sushi! to realise how difficult it is for firms with strong brands in their domestic markets to make it across the pond.

The retail banking track record is no better with Barclays, Lloyds and Natwest all quitting the US in the late 1980s and 1990s. Losses from the acquisition of Crocker drove Midland Bank into the arms of HSBC. Even HSBC has not been immune to the problem with the disastrous acquisition of subprime Household continuing to hurt the bank to this day.

It is quite ironic then that RBSG is being forced to exit the one reasonably successful move into retail and commercial banking that British banks have made in the US. Whilst Fred Goodwin, the former CEO of RBSG, has been criticised for much of the way that he ran the global banking group (particularly paying over the odds for ABN Amro just as the wholesale markets were closing down) his strategy for building a presence in the US retail and commercial banking sector should be heralded as one his smarter moves.

Rather than trying to take on the large US retail banks where they were, at that time, competing aggressively with each other in New York, California, Texas and Florida, Goodwin decided to build his beachhead in the Mid-Atlantic by the acquisition of Citizens Financial Group. A series of small but strategically significant acquisitions followed that expanded it into New England and the Midwest. Citizens is now the 15th largest commercial banking organisation in the US. Whilst there have been challenges including writedowns following the acquisition of Charter One and recent issues with the way that capital is planned, overall Citizens is a highly capitalised and profitable bank. Yes its capital is under deployed but that is addressable. Indeed its reputation with its customers is far better than RBS’ in its own domestic market.

It is a great shame then for RBSG that due to having to take state intervention and becoming largely nationalised, primarily due to the acquisition of ABN Amro and the disastrous business in Ireland, that RBSG is being forced by the EU to dispose of its ownership of Citizens by the end of 2016.

As the first step of moving towards this in January 2014 Citizens sold off 103 branches in the Chicago area to US Bancorp.

 It has been announced that the next step will be to float or sell 20-25% of its share of Citizens. A flotation is more likely as there have been few signs of interest from potential buyers. However for Canadian, Japanese or Spanish banks that want to significantly grow their presence particularly in the Midwest and given that it is a forced sale it could be an interesting opportunity.

The flotation will help to rebuild its balance sheet, but the sale is what is really needed as that could release more than $3bn of capital, which would help RBSG reduce the government holding in the bank.

This is all a sad ending to what could have been had RBSG scaled back its ambition to be global investment bank.

As a footnote, British banks should not give up on being able to build a presence in the US retail and commercial banking market. RBSG has shown that it can be done. Barclays is having success with its Barclaycard US operation building scale to take on the other cards providers, however this is a monoline not a full service retail banking offering.

The British banks can also look to the Spanish banks, Santander and BBVA which with respectively the acquisition of Sovereign Bank and Compass Bank, are demonstrating that it is possible for Europeans banks to build a presence in the US retail banking market. It takes time, patience and recognition that whilst both the US and European markets have the words ‘retail banking’ in their names that they are quite different.

Tuesday, 25 March 2014

Should the CIO be on the Executive Board?


The news that the CIO of Co-operative Group (which has a minority holding in Co-operative Bank), Andy Haywood, is to move off the Executive Board but to remain Group CIO brings a further spotlight onto what is the role of the CIO going forward and, whilst not directly related to the demotion of Mr Haywood, specifically what is the future role of CIOs in banks.

The reporting lines of CIOs have evolved with the increasing use of technology in organisations. Even the title of the person responsible for IT has evolved alongside the technology.

When computers were first introduced into banks their sole purpose was to act as a giant calculator and move what was held in physical ledgers onto computers so that the bank’s financial position could be calculated. The person responsible for making that happen would have had one of a few titles including EDP (Electronic Data Processing), MIS (Management Information Systems) or simply Computer Manager. The role would have reported to the Finance Director or Chief Accountant as that was the department that was primarily serviced by computers. Indeed today in many organisations today IT continues to report to the CFO.

As automation started impacting the back office operations of the banks and IT started being used outside of Finance, the Head of IT or CIO may have found the reporting line moving to the Chief Operating Officer. For many banks today that continues to be the case.

However with the rise of digital, IT has increasingly permeated beyond the back office and accounts departments and an increasingly large proportion of IT expenditure is being consumed by Marketing.

Banks in particular, where fundamentally the vast majority of their commercial, money-making operations are conducted electronically and not in the physical world, IT is increasingly seen as the lifeblood of a successful business. You only have to observe how little a bank can actually do when its IT systems crash and customers cannot access their bank accounts or their card transactions are not processed to see how important IT is to the operation of a bank.

There have been some interesting experiments in terms of what the right organisation structure for IT should be.

For instance at Barclays when Shayghan Kheradipir was Chief Operating and Technology Officer, he had a model where the COO and CIO of each business unit jointly reported to the CEO of that unit. (See CIO/COO joined at the hip). This meant that IT had a voice at the table for the key strategic decisions for that business unit rather than merely being represented by the COO.  With Mr Kheradipir leaving Barclays to be the CEO of Juniper Networks, it will be tempting for Barclays to revert to the more traditional model.

Commonwealth Bank of Australia has gone further than Barclays did by having the CIO reporting directly to the CEO. It is interesting to note that subsequent to that organisational change Commonwealth Bank has spent significantly more as a proportion of overall costs than other banks on refreshing its IT but as a consequence has one of the most advanced IT architectures and platforms of any retail bank of size globally. It is now being able to exploit that new platform to launch new products and services far faster than its competitors.

However with IT increasingly being outsourced, (whether it by the traditional route of selling IT assets to an outsourcer and buying back services or through the use of the cloud), the demands of digital and increasingly Business Intelligence and data analytics, there is a bigger question as to whether there is a role for the traditional CIO at the Executive table? If it isn’t the traditional CIO then who should be providing the strategic input of the role that IT can do to both lead and serve the bank? The skills are far more aligned with a business savvy enterprise architect who has no vested interest in building an internal organisation but is more interested in providing a pragmatic solution, wherever it is sourced from, who knows how to form strategic alliances, both within the bank and outside and who is driven by the desire to use technology to deliver the best value to both internal and external customers.

That doesn’t appear to be what the latest announcement from the Co-op regarding the role of the CIO is saying, indeed the organisational change sounds like a regressive step. But then the Co-op has far bigger problems to address than how to more effectively exploit IT.

Thursday, 20 February 2014

Challengers salami slice away at established banks dominance

The news that Paragon Bank (with an initial capital of only £12.5m) has become only the second new bank to be launched in the last one hundred years (Metro Bank being the first one), the first one to be authorised by the PRA (Prudential Regulation Authority) and to take advantage of the move by the regulator to simplify the process of setting up a new bank, is hardly going to have banks such as Barclays, Lloyds and RBS quaking in their boots. But is this just one more step in a trend that the big banks cannot afford to be complacent about?

The primary reason that Paragon has decided to apply for a banking licence is not so it can take on the established banks with a full offering of consumer current accounts and mortgages. It is so that it can take consumer deposits as a means of funding loans for the existing Paragon Group business. With interest rates low but expected to rise this should mean a lower cost of capital for the loans that they make than going into the wholesale market. With the experience that Richard Doe, the former ING Direct UK Chief Executive, brings from his former employer the new bank should be a success in competing for deposit balances. The low cost direct model for deposits has already been proven by the likes of the now defunct Egg and ING Direct. Whilst the press release from Paragon may talk about offering loans and asset finance it is clear from the recruitment of Richard Doe that the new bank will be initially focussed on raising the all important deposits.

Paragon Mortgages specialises in the Buy To Let (BTL) market for the residential market and has been very successful at this surviving during the crisis where the likes of Bradford & Bingley and Alliance & Leicester failed. It is this focus on a specific customer segment that gives it the advantage over the Big Five UK banks - Barclays, RBS, Lloyds, HSBC and Santander. It has taken the opportunity to build deep expetise in Buy To Let and are front of mind for mortgage brokers looking to play BTL business.

Competition in the BTL sector was decimated following the financial crisis with many small players and building players going out of business. However competition is picking up again with all of the Big Five, Nationwide and some of the other building societies increasingly attracted by the bigger margins that the Buy To Let market attracts over owner-occupied residential mortgages. Paragon is, to many extents, the incumbent that the other banks have to shake. It should still be able to succeed in this market because it isn't just another business for them it is the only business segment they are in. Paragon does not have the cost of running expensive branch networks distributing either directly or via brokers. As long as they can continue to excel in the service they provide to brokers and to landlords they should be able to continue to punch above their weights against the larger generalist players.

While the politicians champion the idea of a few large challenger banks coming into the market to take on the Big Five banks and reduce their market shares in deposits, current accounts and lending, with the Labour Party suggesting that they will break the banks up should they come into power, a different reality is going on in the market. The likes of TSB (still owned by Lloyds Banking Group but due to float), William & Glynn's (owned by RBSG and, again, due to float) and Tesco Bank attract the most attention from politicians and the media, but in the background smaller niche players have quietly gone about picking off rich segments of the traditional banks market share.

Handelsbanken with its 170 branches, largely in market towns, has targetted SME customers and private customers with above average earnings who appreciate having a local branch with a local manager who is empowered to make decisions rather than leaving it to the computer or Head Office has quietly gone about building a sizeable, highly profitable and satisfied customer base. Aldermore launched in 2009 focussed on SME customers has lent more than £3bn pounds. Metro Bank has focussed on customers in urban areas that like both visiting branches and having extended hours. There are other focussed challengers either already out there or preparing to launch.

Competition to the dominant banks from challenger banks is already here, it may not always be head on and obvious but rather by quietly salami slicing away the better, more profitable cuts from the market share of the established players, while the big banks are left with less desirable segments. It is for this reason the launch of Paragon Bank should be welcomed as just one more step forward towards a more competitive banking market.

Wednesday, 29 January 2014

Back to the future - a return to supermarket banking or the end of banking for all?

The report on the BBC News website that Barclays is looking at potentially closing 400, or a quarter, of its UK branches which was subsequentally retracted and replaced with a statement that Barclays is 'considering closing branches to reflect the that more customers are now accessing financial services online and via mobile devices',  reflects the sensitivity the big 5 banks have to announcing branch closures and comes on the back of a statement in November 2013 that in August 2014 it is to open four branches within Asda (the UK arm of the US supermarket behemoth Walmart), closing the standalone branches in the same towns. The model of putting bank branches into supermarkets brings back memories of the wave of supermarket banking experiments that took hold in the UK at the end of the last century with the launch of Sainsbury’s Bank (backed by Bank of Scotland), Tesco Personal Financial Services (backed by Royal Bank of Scotland) and Safeway Banking (backed by Abbey National). At that time the supermarkets were seen as a serious challenger to the established banks (despite being backed by them) and the world of banking was going to fundamentally change. It was also the time of the tie-up of Abbey National with Costa Coffee to create new and destination branches – very much building on the revolutionary Occasio branches that WaMu (Washington Mutual) launched in the US.
 
So what happened to all these new visions of banking? Abbey National was taken over by Santander who quickly took the axe to the partnership with Costa, Safeway was acquired byMorrisons who closed down the financial services arm and the remains of Washington Mutual following the financial crash of 2008 were acquired by JP Morgan Chase who effectively bulldozed the Occasio branches returning to a far more business like branch format.
 
Tesco Bank (as it became) with its 6.5m customers continues to make significant investments into becoming a full service retail bank. Sainsbury’s Bank bought out the Lloyds Banking Group share (that Lloyds inherited when it took on HBoSfollowing the financial crisis) in May 2013, however it made it clear that it has no intention of becoming a full service bank and is not planning to offer mortgages or current accounts.Sainsbury’s appear to have no intention of turning its supermarkets into bank branches.
 
In the meantime Marks & Spencer launched in late 2012 M&S Bank operated by HSBC offering a fee-paying current account. With Marks & Spencer continuing to struggle with their fashion lines the retailer is increasingly being measured principally as a supermarket. The jury is still out on how successful M&S Bank but there are no indications that it has been a runaway success.
So why is Barclays trying to re-visit the supermarket banking model? The reality is that it has very little to do with wanting to be in supermarket banking and much more to do with finding a way to reduce their costs by closing their branches. Barclays will benefit from the ability to sell or end the lease on the branches and will have significantly lower costs fromhaving an in store branch than a standalone one. It is also true that this move should make it easier for customers to visit their branches. As high streets increasingly become parking unfriendly through the use of parking restrictions combined with prohibitive parking costs where parking exists bank branches are becoming harder to just pop into or even to access (Metro Bank with their drive through branch opened in the mecca that is Slough would beg to differ). Typically supermarkets have large amounts of parking which will make it easier for customers to visit their banks if they are within a supermarket. It is not only the difficulty of parking that is reducing the number of visits by retail customers to banks. The increasing comfort and acceptance by consumers of all ages of carrying out activities online and the increased penetration of smart phones and tablets means that there are increasingly few reasons for customers to visit branches – cash withdrawals, making payments, getting foreign currency, paying in money into accounts no longer require a physical visit to a manned branch. Increasingly it is only at those key life moments such as buying a house, getting married, getting a loan, opening a bank account that a visit to a bank branch is necessary and some of that is driven not by the desire to talk to someone or to get advice but by the continued legal requirement to provide a physical signature on documents.
 
For those important financial transactions such as arranging a mortgage or a loan it is highly questionable how conducive a branch within a supermarket will be to have a meaningful discussionExchanging confidential information over the sound of the tills ringing and the promotional announcements over the loudspeakers is not what customers are looking for. Neither is taking out a mortgage or a loan one of those spontaneous purchases that supermarkets rely on to increase basket size. As a mother pushes her trolley around with her two screaming toddlers in tow she is unlikely to suddenly decide that she would like to talk to her banker about a loan.
 
However Barclays might have liked to position the opening of branches within ASDA supermarkets as for the convenience of their customers, with the review of their branch network (and the denied closing of 400 branches) with no confirmation that all closed branches will re-open in Asda stores, Barclays are making a statement of intent about the role of branches going forward.



Had the report of the potential for 400 branches being closed stood, Barclays would have been credited with the courage to be the first of major high street banks to make its intentions clear. This would have made it easier for the remainder of the big five banks to annouce their own closure plans. The other banks have hinted at their desire to close branches but none have been bold enough to say how many. They will eventually have to do this because it is an undisputable fact that less and less customers visit their branches. Many of those that visit their branches only do so because there are not currently convenient alternative ways to carry out transactions such as paying in cheques. However with the increasing penetration of smartphones with cameras built in even paying in cheques may soon no longer require a visit to a branch.



The future of branch  base banking is at a cross roads where the big five banks must decide whether they wish to continue to support customers who want to use branches or whether they should encourage those customers to move to banks that see branch banking as fundamental to what they do such as Metro Bank, Handelsbanken, Umpqua Bank (in the US) and Bendigo Bank (in Australia). It maybe that the end of the universal bank serving all segments of customers is in sight.