Showing posts with label Digital. Show all posts
Showing posts with label Digital. Show all posts

Tuesday, 22 August 2017

The Cloud is ready for the Banks but are the Banks ready for the Cloud?


Of all industries banking has been amongst the slowest to migrate core processing to the cloud. There is no doubt that the few cloud providers that started their businesses purely designed for the cloud have sophisticated, complete and secure offerings so what are some of the reasons for banks to consider using public cloud services?
 

Reduce costs

Reducing is always given as the number one reason to switch to the cloud and there are plenty of business cases that prove that to be true. Not least of all the ability to close data centres and reduce the headcount that is required to support IT infrastructure. On top of that is reducing the capital tied up by IT and deploying it in a more effective way for the business.

Agility

The ability to flex and pay for only the resources that are consumed whether it is storage, memory or processor power is a significant benefit for banks as all On Premise banks have very large quantities of redundant capacity both for operational and disaster recovery purposes.

As a simple example, the ATM network needs to comfortably support peak volumes. In the UK this is typically around 1.10pm on Christmas Eve where there is a huge spike in the number of people withdrawing cash for the Christmas period. This capacity is not only required in the operational system but also in the disaster recovery system should failover be required. Customers will certainly remember banks that weren’t able to dispense cash on Christmas Eve. For the rest of the year much of that capacity will remain idle with maintenance bills and licences still being charged.

For Paypal there is nothing to fear from Black Friday or Amazon Prime Day, when enormous spikes are experienced. Paypal uses public cloud services and only pays for the volumes that are used and only for when they actually used it.

Resilience

Scale Public Cloud providers have the numbers of data centres and nodes that banks simply cannot afford. They have the networks and dark fibre because they need them to provide their service. Because providing a resilient service is critical to staying in business and because their businesses were created and designed from day one in the cloud they have the advantage over those who have started from an on-premise mindset and move to public cloud.

It is unheard of that Amazon, Google or Facebook are not available? Public cloud providers do not put out notices to say that there services will not be available for several weekends while updates are made.

Secure

Banks are under constant daily attack from hackers trying to break through their security and steal customer data or hold banks to ransom. As has been seen banks can and have been breached. However the providers of cloud services whose sole business is the provision of secure services to customers have much deeper pockets to hire the best and to invest in providing the most secure Identity & Access Management systems. Because their systems were designed for the cloud from day one and they employ the smartest technical people with the same mindsets as the hackers they have proved in many respects to far more secure than on-premise. If they weren’t why would they be used by the security services?

Availability

With increasing mobility of both customers and employees being able to access systems from anywhere in the world on any device at any time is increasingly being demanded. A public cloud solution makes this far easier than an on-premise solution.

Simplicity

By moving to a standard public cloud architecture, the overall IT architecture is simplified. Most banks have grown over time and so has their banking architecture which has led to a heterogeneous architecture made up of a mix of hardware and software of different ages that requires integration.

Regulator approved

A concern that has been often expressed is that the regulators would not approve banks using public cloud. However that is not correct – Monzo is an example of a challenger bank that is running entirely in the public cloud.

Even in more conservative countries such as the Kingdom of Saudi Arabia the central bank, SAMA (Saudi Arabian Monetary Agency) has approved the use of the public cloud by banks.

Not only that but Central banks and regulatory bodies such as FINRA are big users of public cloud as it gives them the ability to work on large datasets, structured and unstructured data, supercomputing and analytics tools to carry out tasks such as identifying fraud and suspicious trading in real-time and only paying for it when they need it.

Designed for Mode 2 Development

As increasingly banks look to innovate using Mode 2 Development methods then setting up and managing environments and tools to manage this is made much easier when using a public cloud provider. For those providers who have designed their businesses for the cloud from the start Mode 2 has always been the market they have served. All the exponential organisations started out being developed using Mode 2. It is far easier for a Mode 2 cloud infrastructure provider to move to Mode 1 (traditional development) than it is for a Mode 1 organisation to move to the provision of Mode 2 cloud services.

Access to innovation

The large scale public cloud providers have been where the innovation around new technologies has all been taking place whether it is AI (Google DeepMind), Voice (Amazon’s Alexa, Microsoft’s Cortana), Image Recognition (Amazon x-ray), Autonomous Vehicles (Google Waymo), Augmented Reality (Google Tango, Pokemon Go) or Gaming. These are the technologies that banks and other financial services providers need to embrace if they are to be relevant and able to compete.
Public cloud is ready to enable the future of banking. The challenge for banks is to embrace and exploit what public cloud offers.

Thursday, 11 August 2016

The unstoppable rise of robo-advisors

The Financial Times estimates that the market for funds advised by hybrid robo-human services will grow to $16.3 trillion worldwide in the next nine years. According to Swiss financial research company, Myprivatebanking.com, pure robo-advice has jumped from $19 billion in 2015 to $43 billion in 2016. The rise of the robo-advisor appears to be unstoppable and is key to the opening up of wealth management to the mass market. There are a number of reasons why this is happening and why now.
·         Low interest rates
With interest rates at record lows, virtually zero or negative in many parts of the world, savers are looking for places where they can get a return on their money as an alternative to putting it under their mattresses and seeing rising inflation eat away at the value of it faster than the moths.
With cheap funding available from the central banks the high street banks, who have traditionally used savings accounts to fund their lending activities, are no longer interested in competing for consumer savings. The days when the likes of ING Direct were fighting for savings at attractive rates have gone.
·         The disappearance of affordable investment advice
Governments have introduced legislation such as the UK’s Retail Distribution Review that was designed to raise the quality of the advice that customers received from their financial advisors and to make the charges paid to advisors far clearer. This well intentioned regulation has resulted in the disappearance of affordable wealth advice for the mass market from the high street. The banks, many insurance companies and Independent Financial Advisors (IFAs) deciding that the cost involved in training the staff to meet the new standards for the significant reduction in the revenue from selling investment products (as both upfront and trailing commission, largely invisible to customers, was banned and replaced with explicit upfront fees) was simply not worth it.
·         The demise of the star active fund manager
In a rising market it is relatively easy to appear to be a successful fund manager, particularly when your low risk investment strategy is largely to shadow the indices in the markets you are focused on. Even the star performers who have been hugely successful in the past have been seen to be human – the challenges that Antony Bolton had with his Fidelity China Special Situations trust and Neil Woodford has with his Patient Capital Trust illustrate how difficult it is for active funds to consistently perform. Increasingly and particularly during periods of economic uncertainty and turbulence in the markets it has become evident that the majority of active fund managers fail to outperform passive index trackers, even more so when the charges for these funds are taken into account.
·         The emergence of Exchange Traded Funds
In 1993 the first Exchange Traded Fund was launched and there are now several thousand of them. An ETF is a marketable security that tracks an index, a commodity, bonds or a basket of securities like an index fund and because it is traded on a market is priced throughout the day unlike mutual funds. Amongst the reasons that the emergence of ETFs is influencing the rise of robo-advisors is that they generally have very low costs, they have a low entry price (buying one share is possible) and because they operate like an index it is very easy to automate the management of the fund.
All robo-advisors have been built around ETFs as the core funds in the portfolios that they recommend to their customers.
·         Increasing trust in computer generated recommendations
With consumers increasingly trusting personalised recommendations from the likes of Netflix, Spotify and Amazon there is far more acceptance that artificial intelligence can be relied upon. This is further boosted by the considerable loss of trust by consumers in the people within the Financial Services industry following scandals such as the mis-selling of Payment Protection Insurance (PPI), fixing of the LIBOR and FX markets and the 2008 market crash.
·         The low cost and availability of supercomputing and the cloud
Without the dramatic drop in the cost of supercomputing and the ability to deliver it over the cloud the sort of services that robo-advisors can offer would not be possible. The Independent Financial Advisor used to have the advantage of having information superiority and exclusive access to financial models – this has been taken away by the pervasiveness of information and the ability to deliver supercomputing to mobile devices. Algorithms that used to require a Cray to process can now be delivered via the cloud to an iPhone, tablet or android device. This allows the ordinary person through their robo-advisor to take advantage of sophisticated tools such as algorithmic trading.
·         The ability to process structured and unstructured data in real time
With high volatility in the markets and with 24x7 newsfeeds then the ability to process both structured and unstructured data, including sentiment analysis, all in real time reduces the risk involved in investing in the market. This provides the robo-advisor firms using AI to flex the recommendations and portfolios in real time.
Who are the key players?
The market was started in the US with the likes of Vanguard, Betterment www.betterment.com/, BlackRock’s FutureAdvisor www.futureadvisor.com, Charles Schwab’s Intelligent Portfolio https://intelligent.schwab.com/ and Wealthfront www.wealthfront.com/
In Europe the key players are currently MoneyFarm www.moneyfarm.com, Nutmeg www.nutmeg.com, Swanest www.swanest.com (still in Beta) and Yomoni www.yomoni.fr
With the potential size of the market it is likely that not only will the large US players bring their offerings to Europe but others from within Europe will enter the market. This will be thorough a combination of three ways:
·         Banks and asset managers building their own robo-advisors using platforms that can manage structured and unstructured data in real time such as SAP’s HANA, advanced analytics tools, AI and cognitive computing
·         Partnering with an established robo-advisor platform provider. This could either be on a white labelled basis or leveraging the robo-advisor brand. Fidelity originally did this with Betterment until it decided to build its own solution. In the USA BBVA and RBC are both partnering with Backrock’s FutureAdvisor.
·         Fintechs entering the market in a similar way to Moneyfarm or just like Solarisbank www.solarisbank.de has done for banks offer robo-advise as a service to business both within and outside financial services e.g. retailers
 
A significant threat to the relationship with mass affluent and wealth management customers
The low cost to consumers of buying a funds portfolio using robo-advisor technology is significantly increasing the market size for what has traditionally been seen as wealth management. With many banks and insurance companies abandoning the provision of financial advice to the      mass affluent it is also providing a significant opportunity for new technology enabled players to enter the market. This is a significant competitive threat to established players who persist in only using traditional channels. It also threatens the relationship banks have with mass affluent customers and risks relegating banks to simply providing low margin transactional services.
Now is the time to act.

Friday, 5 August 2016

Digital Transformation in Banking is not happening

There is a lot of talk about digital transformation by banks but the reality is that despite what they say they are not doing it. What the vast majority of banks are actually doing is digital enablement. They are simply using digital technologies to do what they are doing today only slightly better. There is nothing transformational about what they are doing.
Fundamentally the products and the services that banks are offering are no different than those they have been offering for the last fifty years, if not longer. They may be offered through different channels like the mobile, tablet and over webchat but they are still fundamentally the same as those offered to your parents when they were your age.
It is not only the big banks that are guilty of digital enablement but also the majority of the so-called challenger banks. For most of them the term ‘challenger’ is not even appropriate. What is challenging about providing free dog biscuits in branches! Their impact on the market share of the big banks is negligible and not growing at a sufficient rate to be a significant threat anywhere in the short term.
The reality is that the majority of the challenger banks are simply competitors offering a subset of the products and services that the big banks provide. However the emergence of a large number of competitors into the market is to be welcomed as the choice for individuals and small businesses as to where they get their bank services from has, and continues, to expand.
When you take the UK market as an example the competitors break down into a number of categories:
Existing Competitors
These are the likes of Co-op Bank, Nationwide Building Society, Clydesdale and Yorkshire banks who have been around for many years with a fairly consistent market share. They are all in different ways and at different speeds enabling their businesses with digital technology. Some are being more ambitious about growing market share of current accounts than others.
The Clones
These banks are the ones that have been spawned from previously existing organisations, been re-sprayed with a new or revived brand and trade on the fact that they are not one of the big four banks. The main players in this category are Santander (Abbey National), Virgin Money (Northern Rock), TSB (Lloyds Banking Group) and Halifax (Lloyds Banking Group). Of course the latter is still owned by one of the big four, but is positioned as their ‘challenger’ brand.
The Clones offerings differ from each other. Santander has expanded the range of products that Abbey National offered with a push into current accounts and SME banking. While the Santander 123 account has shown some innovation it is still fundamentally a vanilla current account. Virgin Money has expanded the Northern Rock offering into balance transfer credit cards, but despite previous announcements is holding back from entering either the current account or SME banking markets for the moment.
None of the clones are leading in their application of digital technologies and, at best, are enabling some of their processes with digital.
The New Traditionals
Into this group fall the likes of Metro Bank, Shawbrook, Aldermore, Oaknorth, Handelsbanken and OneSavings Bank. New banks that are offering an alternative to the Big 4 banks but all of which have a small market share and whilst growing quickly will take years on their current trajectory to be of serious concern to the large banks. Like The Clones they position themselves as not being one of the big four and differentiate themselves on offering superior, personalised service. They have not invested heavily in digital - Metro Bank has only just (August 2016) launched its customer website. In the cases of Metro Bank, Handelsbanken and Aldermore have made their branches and face-to-face service a key point of their differentiation.
The Mobile banks
These are the banks that are being designed with mobile in mind for the Millennials the likes of Mondo, Atom, Tandem, Starling and Monese. While a number of these have been granted their banking licences and a number are in beta testing these banks have not really been launched yet. We have some indication of how they will operate however until they move to full launch it is difficult to judge how transformational in terms of their digital offering they will be.
So if today’s banks are only undertaking digital enablement what is it that they would need to do to be undertaking digital transformation?
Re-imagining the business models for banking
Transformation is about fundamental change – something that the banking industry has not seen since the Medicis created the first bank. This is about changing the business models for banking to reflect what customers want and also how the way industries boundaries are blurring.
Banks that are truly undertaking digital transformation are reimagining the business models for banking
Customers do not want to do business with banks. Customers do not fundamentally want a mortgage they want a home. Customers do not want a loan they want a car. Banks for customers are a means to an end. Banks who get this are recognising that they need to be offering services beyond the banking product. For example some banks are forming agreements with online estate agents so that when a customer is looking at a property online the banks knows this and can tell the customer whether they can afford it and whether the bank is prepared in principle to offer them a mortgage.
Banks have lots of SME customers many who will have offers that are of interest to other SMEs or individuals. The banks know how well those SME businesses are performing so banks are in an ideal position to create a SME marketplace where their customers can do business with other bank customers knowing that the supplier is backed by the bank. Equally the supplier will know that the customer is backed by the bank. In this model the bank operates as the introducer adding value to both the business and the customer.
For those banks that have invested in building a modern banking IT infrastructure they recognise that this is a highly valuable asset and there are opportunities to offer banking as a service to either businesses outside the banking industry such as retailers who want to offer banking services to their customers or to banks in other countries. Two good examples of organisations that already do this, both German, are SolarisBank https://www.solarisbank.de/ and Wirecard www.wirecard.com
The three examples of different business models above are just illustrative of what banks and other organisations are doing to use digital as an enabler to fundamentally change the banking industry.
This is true digital transformation and for those organisations that embrace it the future is positive and full of hope; for those who don’t the future is a slow decline into obscurity.

Monday, 31 August 2015

What makes a challenger bank a digital challenger bank?

Let’s face it challenger banks are nothing new they have been around for a long time. In the UK there has always been a large number of challenger banks – the Co-op, Yorkshire Bank, Clydesdale Bank, Alliance & Leicester, Bradford & Bingley, Abbey National, Nationwide Building Society to name just a few past and present challengers. In Australia you would look at the likes of Bendigo, Bank West, BoQ as examples. However despite there being the challengers in the market, the share that the Big Four (in the UK) or the Four Pillars (in Australia) have not fundamentally been impacted by the presence of the challengers.

Over the last few weeks in the UK a number of the new challenger banks have been reporting their results. The UK’s Sunday Times produced the chart below: 
 
This shows just how the share price of some of the challenger banks has risen despite the stormy market conditions due to delivering a good set of results. Whilst the market share all three of these banks have picked up is good considering where they have started from, it is still tiny in comparison to the share of the Big Four banks. Even if they continued at the rate that they are growing at it would take years for them to have a significant share.
What each of these challenger banks have in common is that there basis for competition is entirely traditional and they are competing in exactly the same way, albeit providing a marginally better service, that the Big Four banks go to market, so why is there any surprise that their impact is so little?
Some of the other challengers will argue that they are providing customers with a better experience by providing customer lounges, opening longer hours, providing a debit card immediately in branch on opening an accout, offering drive through services or putting edgy images on credit cards. However these are cosmetic changes and are not fundamentally challenging the way that banking services have been procured for the last two hundred years.
For the challenger banks to make any significant impact on the incumbent players they need to become digital challenger banks.
What is a digital challenger bank?
The terms ‘challenger bank’ and ‘digital’ are continually bandied around with little common agreement as to what they mean.
For the purpose of this argument a digital challenger bank is one that fundamentally changes the way that customers experience and procure banking services, that acts in real time based on customer insight and demand, is available 24x7 and is accessible across any channel and most importantly is agile being able to rapidly adapt to changes in the way that the customer wants and needs to do business.
Taking each of these parts of the definition what does that mean for a bank wanting to become a challenger bank?
Being truly driven by the customer
For too long banking has been operating on a push model where the bank is in the driving seat pushing its products, operating its processes. While many banks talk about being customer centric they still take an inside out view of customers that asks the question what can the bank sell/do for a customer rather than an outside in view which is answering the question what does the customer want of its financial services providers. Without this fundamental change in thinking it will not be possible to be successful in the long term.
Real Time
The whole banking system is still upon a branch based architecture, even those without branches. The fundamental philospohy is that branches hold accounts (hence the sort code that each account has), that at the end of the day branches tally up their accounts (which is why they traditionally closed at 3pm so the branch staff could do this before going home) and then post those accounts to Head Office. Overnight the transactions between branches and other banks are reconciled and at the beginning of the day the cycle all starts again. However in the digital ages consumers expect their service provider to not only to be available 24x7 but also the information that they share to be absolutely current and accurate. While most banks simulate real time to more or less an extent their IT architectures are batch-based and historical. Hours of every night are spent reconciling accounts and establishing at one moment of time the financial position of the bank.
With the arrival of mature real time, high performance supercomputing platforms true real time banking has finally arrived.  This means that it is possible at any time to have a real time financial position.
Customers have grown used to expecting real time. When they search Google they don’t expect to see only search results as of last night. When they go on Facebook they expect to see their friends’ latest updates not as of two hours ago. They expect the same from their banks.
Without using supercomputing realtime platforms the digital challenger bank will not be able to deliver the experience that customers are demanding.
Driven by customer insight
Customers do not expect to have to repeat the information that their banks should already know about them every time they interact with their bank. When they go onto Amazon, Spotify or any other digital native business they expect tailored recommendations and therefore they should be able to expect the same from their bank. Underpinning the recommendations that these digital native organisations make is real time analytics.
Many banks have large and sophisticated analytics teams, however they are almost exclusively working offline i.e. not based on current, real time transactional data let alone the masses of amount of data that customers generate from their use of social media.
The digital challenger bank will be driven by real-time customer insight and predictive analytics that has drawn on structured and unstructured, internal and external, transactional and social data. This will allow them to provide a far better service than the incumbent banks can.
Available 24x7 365 days a year
Customers do not want to do their banking when the bank says they can. They want to be able to do it whenever they want to do it from wherever they are in the world. This means that banks need highly resilient, high performance IT infrastructures.
The costs to own, manage and run such an IT infrastructure is likely to be prohibitive for almost all challenger banks except for those with the deepest pockets. However the smart challenger will not look to own this, but rather give responsibility for delivering this to organisations whose core competence is delivering this type of service.
You only have to look at the hundreds and thousands of small businesses that rely on Amazon Web Services to host and manage their websites allowing the SME to focus on their customers to realise that ownership of IT is no longer an essential part of running a successful business.
Omnichannel
An ugly word and one that doesn’t encapsulate the full meaning of what customers want, however as it is in common usage the one that is used here. Customers wants to be able carry out their financial services transactions using any channel whether it be in a branch (yes some customers still want to use them despite what every Fintech evangelist says), Apple Watch, mobile or tablet. Not only that they want to be able to move around channels during a financial transaction seamlessly without having to re-enter data or waiting for one channel to catch up with another. The way that the experience of interacting on the channel is presented must be in the context of that channel. Too often banks believe they have achieved this when they have simply automated a form on a mobile device.
Without offering a functionally rich mobile experience a bank cannot be a digital challenger.
A digital challenger bank should have a contextual presence on all the channels that their customers want. However some digital challenger banks, for instance Atom (mobile banking), will choose to support only some channels  and so will dictate the customers that they will attract.
Agile
The one certainty in banking is that there is no certainty. Who could have predicted five years ago that largest taxi company in the world would own no taxis? The pace of change means that no one can predict how financial services will be delivered in five years let alone any longer than that. This means that for the digital challenger bank the most important competence is agility. Agility is a core weapon that a digital challenger bank needs to have to overcome the incumbent banks many of whom are saddled with legacy processes enforced by legacy IT.
One significant way of addressing agility is by the use of standardised software operating in the cloud. The reason that this aids agility is that whereas typically on premise software is updated once very eighteen months by half of customers, cloud software providers are able to automatically update the software as frequently as once a quarter or whenever needed. This means that a challenger banks that uses standardised software can adapt its customer proposition far faster than a similar organisation with an on premise solution.
The need for agility has a fundamental impact both the way that the business is run and how it is supported by IT. A unified, simplified business and IT architecture provides an advantage for a digital challenger bank. Picking best of breed solutions without the context of an overall architecture brings the danger of building a new inflexible legacy. Even with the benefits of an overall architectural framework it still means that there will be high amounts of integration effort.
CRAMS
The IT and consultancy industries are full of acronyms, but for a digital challenger bank to be more than a nuisance to the incumbent banks then it really needs to adopt Cloud, Real time, Analytics, Mobile and Social technologies.
While the incumbents can also adopt these for the digital challenger bank to succeed it must be a master of agility.

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, 19 March 2015

Why TSB/Sabadell is no Abbey National/Santander



When news of the Sabadell, the Catalan bank, bid for TSB broke it was inevitable that parallels with the 2004 acquisition of Abbey National by Santander would be drawn. After all both banks are Spanish, have global footprints despite having started out as regional banks and are run by family dynasties.

However the two situations and players are quite different.

Sabadell is no Santander

Abbey National having made the transition from building society (savings & loans/community bank) to listed bank, at the time of the acquisition was struggling to decide what its role in the banking market was to be. With its launch of co-branded branches/coffee shops with Costa Coffee and its partnership with Safeway, the supermarket, it was not clear to its customers what it was. Santander came along to change all that.

Through its close relationship with RBS, including non-executive director roles, Santander had been observing the UK retail banking market for some time and understood the opportunities that were there.

Banking platform was key to Santander business case

The case that Santander made for Abbey National was that as leading global retail bank with a strong track record in successfully managing integrations and a world class technology platform that had been at the core of all their acquisitions, Santander could significantly reduce the costs of running Abbey National by replacing Abbey’s multiple banking systems with Santander’s Partenon banking platform, implementing Santander’s  best practice retail banking processes and Santander’s formidable disciplined approach to cost management.

It is interesting to note that despite Santander's assertion that the Partenon platform would be able to work for the UK market it took far longer and was more expensive to implement than originally envisaged.
Santander is quite unique in that as part of its journey from a small regional bank to one of the world’s largest banks IT has been at the heart of everything that they do and they even have their own IT company, Produban. Santander has set out not only to be a world class bank but also a world class IT company.

The situations for both TSB and Sabadell are quite different from that of Abbey and Santander.

TSB is no Abbey National

TSB has a very clear idea of the role that it wants to play in the UK retail banking market. It has strong leadership. As a result of the EU forced separation from its majority shareholder, Lloyds Banking Group, TSB is sitting with an infrastructure and balance sheet too big for the customer base and products that it currently serves. It is also using a legacy set of IT systems that Lloyds Banking Group runs for it. TSB has two main requirements that it needs to fulfil. Firstly it needs a significant increase in its customer base particularly in terms of lending to be able to make a profit. Secondly it needs a modern, agile IT platform that will both be able to deliver the fantastic customer experience that is so core to its strategy and at a significantly reduced cost than it is charged by Lloyds Banking Group today.

Sabadell due to its lack of a presence in the UK market will not directly bring the increase in the customer base or the additional lending, that a UK merger could bring TSB. Sabadell does not have its own IT company neither does it have a track record of building a modern banking system to manage businesses in multiple countries.

Digital excellence

What it does bring is excellence in the application of digital. Under the leadership of Pol Navarro, Head of Digital Transformation at Sabadell the bank has been a pioneer in digital banking and has demonstrated how banks can embrace digital. This is certainly something that TSB would want to exploit.

In addition Sabadell would bring to TSB deep experience in business banking something that inevitably TSB will need to offer to both meet it customer needs but also its shareholders’ profitability requirements.

£450m IT sweetener

Should Sabadell complete on the acquisition of TSB then Lloyds Banking Group will pay it £450m to assist it in getting TSB off the legacy Lloyds platforms. Should Sabadell get this then it should use this as a significant down payment to replace its group wide banking platforms, starting with the UK with a new platform architected for the digital age - agile enough to be able to quickly adapt to the inevitable and continuous changes in the financial services industry.

A Sabadell/TSB tie up would be good for Lloyds Banking Group (and UK tax payers since they are still shareholders), however the case for the deal going ahead is nowhere as easy to make as it was for the acquisition of Abbey National.

Friday, 30 January 2015

Why mobile isn't the digital answer for banks

Hardly a day goes by without another bank somewhere in the world announcing its new mobile app. For many bank executives it appears that when they are asked about what they are doing about digital they whip out their smartphone and point out their mobile app as if that is the answer; it isn’t. They really couldn’t be more wrong.

How many of these apps have come about often follows this scenario.

One of the banks executives may have been on a silicon valley tour where they have visited the likes of google, apple or one of many other digital native companies or they may have had a great dinner with other bankers who have been boasting about how advanced they are in digital. The next day they haul in one of their trusted executives – possibly the CIO but more likely to be the CMO and challenges them to demonstrate quickly that the bank is serious about digital. This executive in turns calls in one of his team and asks him/her to pull together a task force to create a mobile application. The team leader doesn’t want to be polluted by existing thinking so they create a team of young people who haven’t been at the bank for any length of time, adopt a new dress code to show they are different and work in a separate office away from those who could constrain their thinking. Because they have been told that the bank executive wants something quickly and because they have heard all the cool companies use them they use fail fast, agile/scrum methods to get the app out there. The result is a standalone app that is added to the thousands of other programmes that IT has to support.

As a recent detailed study has shown most of the banking apps out there are not simple to use and provide a poor customer experience, but even if that wasn’t the case the new customer interface is almost exclusively being served by legacy processes and systems.

This was similar to what happened with telephone banking when HSBC first launched First Direct. The customer got to speak over the phone to friendly, helpful and very enthusiastic call centre staff who were using green screen systems that had been designed in the 1960s details, print them out and then have to rekey them into green screen terminals. While First Direct may have been delighting their customers rather than reducing costs it was adding costs to the running of HSBC.

There are three critical business issues that banks across the globe face are regulation, going digital and reducing costs.

The way that most banks are going about mobile banking is paying lip service to digital and increasing short and long term costs and doing nothing to address the regulatory pressures.

Banks that go digital in a coherent and end-to-end way can address all three critical business issues and at the same time grow revenues. What this means is that when addressing their digital solutions they need to:

Redesign the end to end processes – a lot of the costs that banks incur today occur in the back office. By automating the processes not only will significant costs be taken out but the speed and the quality of the customer experience will improve and the compliance to regulation will be far easier to enforce

Design for omnichannel – rather than designing purely for the mobile channel recognise that customers may want to start in the mobile channel and during a process either concurrently or sequentially continue in other channels in a consistent and usable way. For instance they may wish to start a mortgage application on their smartphone, when they have a question launch a webchat, book an appointment online in a branch, have a meeting with a mortgage advisor and finish the application back on their smartphone. They should be able to do all of this with their mortgage application seamlessly progressing across the different channels.

Design for change – just because a process is executed one way today doesn’t mean that changes in the way customers want to do things or in regulation means that that is the way it will always be. Inevitably new technologies will come into common use.  Process need to be designed to be able to be adaptable.

Adopt a unified architecture – Many mobile applications have introduced new technologies and software into an over-crowded IT estate. Digital should be used as a catalyst for simplification and rationalisation. By spending time defining the bank architecture costs can be significantly reduced and agility greatly increased.
Mobile banking is increasingly important for customers as that is the way that many want to interact with their banks. However quickly getting a mobile banking app out there is not the answer. It is the equivalent of painting lipstick on the pig. Banks that want to be there for the long term for their customers and to retain, grow and engage with their customers while increasing their profits need to adapt a more strategic approach to digital.

Monday, 22 April 2013

Are drive thru branches really relevant in the 21st century?

Metro Bank has announced that it will open in May the first drive thru branch in the UK this century. The branch will be alongside a dual carriageway in Slough the town that was the setting for Ricky Gervais' 'The Office'. It will consist of its own dual carriageway - one for ATM and automated deposit services and one for access to a teller for day-to-day transactions.

The UK does not have a history of drive thru bank branches with only three having been recorded - the first in 1959, the second in 1966 and finally one at Hatton Cross near Heathrow Airport in 1998. Given that there has been so little success with drive thru branches in the past the question has to be asked why not and what is different this time?

Most banks  are increasingly trying to drive transactions out of the branches rather than through them encouraging their customers to carry out routine transactions online either through internet or mobile banking. Along with this and the use of cash declining, this  move on Metro Bank's part seems counter intuitve. However Metro Bank was launched on the basis that it did not want to be like other banks.  Vernon Hill, the American founder of Metro Bank, is not someone to follow the herd. Hill grew Commerce Bank, the successful banking business in the US, based on his experience of running McDonald's franchises. He sold TD Bank before coming to the UK and based on that experience launched the first new bank in the UK.

Metro Bank has focussed on providing a different, louder, more US-styled experience for customers with features such as 'magic' coin-counting machines that look like Vegas slot machines, lollipops and free dog biscuits.

Metro Bank proudly does not compete on price but on the customer experience it provides. The launch of the drive thru bank is part of this differentiated experience. It comes ahead of the launch of seven business day switching that all UK banks will need to adhere to from October 2013 and in anticipation of increased competition from other new entrants such as Tesco, Marks & Spencer and Virgin Money.

Banks for many years now have actively attempted to re-purpose branches from transaction processing to retail outlets where the customer is encouraged to spend the time required to open more complex products such as current accounts and mortgages.

The Metro Bank drive thru branches will clearly be servicing not sales centres, however they will be paired with a more traditional branch where sales can be carried out.

However the more recent trend in retail banking is very much towards omni-channel where digital is integrated into the whole customer experience irrelevant of which channel is used. This is where the leading banks are investing. This includes bringing internet and mobile banking into the branches and through digital bringing the contact center operative and the banking advisor into the home or onto the smart phone or tablet.

Tesco another new entrant into full service banking is investing heavily into digital and omni-channel banking prior to its full launch. Metro Bank does have an online banking service but does not major on this or reflect that in their current seventeen branches.

It is unlikely that the launch of drive thru banking is going to be the breakthrough strategy for Metro Bank that takes them from being a small but attention-grabbing player to being a significant threat to the big 5 banks, but it will certainly get them some free publicity.