Showing posts with label First Direct. Show all posts
Showing posts with label First Direct. 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.

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.

Friday, 7 March 2014

This is not just any fee-free current account, this is a Marks & Spencer fee-free current account

Marks & Spencer have announced that they are to launch a fee-free current account. The account will have no overdraft fees, the first £100 of which is interest free and a (relatively) low interest rate for overdrafts of 15.9%.  For those who transfer their main banking account to M&S they will receive a £100 gift card. A key attraction for M&S customers will be the loyalty scheme where points are earned for debit card spending in M&S stores and online. It also passes the critical requirement of allowing customers to bank online as well as on the phone or in store.

A key differentiating feature is not charging a transaction fee for ATM cash withdrawals made with the debit card abroad. For both Metro Bank and Nationwide the lack of transactions fees when abroad attracted customers; however that feature was withdrawn and both now do charge fees for transactions abroad.

On the face of it this is a competitive offering and should be attractive to to both M&S and non-M&S customers alike.

This is not a new market entry for Marks & Spencer (they launched their fee-charging account with a similar loyalty scheme in September 2012) but rather a change of their positioning re. free banking. M&S claims that their fee-charging account has been successful with M&S customers, so this does raise some questions as to why they should launch a fee-free product and at this time.

One of the dangers to M&S of having similar current account products with one offering a fee and one not is self-cannibalisation. Will customers of the current fee charging account be happy to see that whilst they are paying a fee other customers are not paying one for what seems a remarkably similar product? Will some of those customers look to switch to the fee free product? M&S is allowing these Premium Customers to switch their accounts to the free one and will even give them a £100 gift card if they switch their main account to M&S.

Of course this is not just a current account this is an M&S current account. Except it isn't. It is actually an HSBC current account as it is HSBC that is not only behind M&S Bank but owns 50% of the bank. While M&S may position itself as being good for current account competition in the UK market, with HSBC behind it the impact on the market share of the Big Four banks will be none.

Another question that M&S will, hopefully, have considered is what types of customers will be attracted to this account? With no mandatory minimum monthly amount that needs to be paid into the account, customers may only open this account for the loyalty scheme and maintain minimum balances or, as Nationwide found with its credit card, only use the card for cash withdrawals abroad. For a current account to be profitable for a bank it is important for it to become the primary customer account where the customers salary is paid into and the mortgage and other core regular payments come out of it. Without high current account balances or large overdraft fees (which the account does not charge) current accounts for banks are loss leaders. For M&S they need to demonstrably see the customers of their current accounts spend significantly more in M&S stores and online than non-current account customers for the bank to be deemed a success.

For those championing an end to so-called free banking, the launch in September 2012 by M&S of fee-charging current accounts was seen as setting an example to others that would help to accelerate the end of so-called free banking. For those championing an end of free banking, this recent news from M&S that they are launching fee-free accounts will be seen as a step backwards delaying the end of free banking further.

So why have M&S made this announcement at this time? There are already successful non-Big Four banks, particularly Nationwide, Metro Bank and Santander (with their 1-2-3 account) as well as HSBC-owned First Direct who have been taking advantage of the delays and the problems that other challenger banks have been facing in getting their current account propositions right. Now however with Tesco having announced that it will (finally) launch its current account offering this summer and Virgin Money expected to launch its basic bank account later this year, M&S is clearly keen to get to the potential switchers ahead of the others.

But why have M&S decided to launch fee free products given the issues and risks discussed above? It can only because of the need for volume. Running a profitable current account business with all the investment in infrastructure such as contact centres and IT, in personnel and marketing requires scale. Clearly M&S, despite their protestations, haven't achieved this with their fee charging accounts and they see this as an opportunity to build a bigger customer base which will reduce the marginal cost of running a bank.

It will only be some months after the launch of the both the new M&S fee-free accounts and the Tesco current account that it will be clear whether this move was good news for M&S' beleaguered shareholders and customers or not.

Monday, 27 January 2014

How to be a successful challenger bank


So assuming you have got the capital raised and have got through the regulatory hurdles necessary to be a challenger bank what the critical factors for success?

Pick your battleground. Given that the big five banks (in the UK) or the Four Pillars (in Australia) or the equivalent in other markets are so called because they have the scale and the established track record trying to take them head on at their own game is a sure fire guarantee of failure. To paraphase the Chinese general Sun Tsu in his ‘Art of War’ only attack the enemy head on if you have a three to one advantage.  A bank that wants to take on the banks across their entire retail customer base is setting itself up to fail. The established big players have the depth of capital and the customer base to play the long game and can besiege the challenger bank until they have used up all their capital and their investors patience.

For challenger banks the better strategy is to ‘fragment’ i.e. to pick off part of the established banks’s customer base, preferably one of the more profitable segments.

By not having a clear customer segment strategy but simply competing for business that can be won from the established banks can end up with the so-called challenger winning the unprofitable business that the big five would happily like to exit.  

Handelsbanken have never sought to be a replacement for the big five banks in the UK for all their customers. They have deliberately adopted a strategy that focuses on small businesses in largely market towns where customers like to use branches, have face to face contact and are prepared to pay for that service. The result has been very high customer satisfaction along with high profitability.

First Direct (albeit owned by HSBC) set out to be a bank for customers that weren’t interested in visiting branches, liked to be able to talk to a person, liked a high quality of service and were prepared to pay for it. First Direct is very rarely at the top of the price tables. Equally First Direct has not tried to grow its customer base aggressively with its market share relatively stable and relatively small. What they have ended up with is the highest Net Promoter Score amongst the banks.

Consider competing from a position of better insight. The established banks have the scale, the benefits of a high margin back book and the deep pockets so competing purely on price is not a long term strategy. Neither is competing simply on not being one of them. Some of the legacy problems the established banks have is their data has grown up from individual product systems, there is a culture of not sharing data between organisational silos, their systems have often grown from a series of acquisitions and are based on old technology. This gives the challenger bank a real opportunity. Designing the bank from the start to be based around the customer not the product, designing the data infrastructure around the ability to analyse, model and forecast not only the customer, but the risk, the external environment and the way the business performance will be managed will give the challenger bank a significant advantage. By having better customer insight offers can be better tailored to what the customer actually wants (resulting in a reduced Cost Per Acquisition), pricing can be based on individual or segment risk (not only for lending but also for deposit pricing) and retention of customers can be significantly higher.

A good current/checking account offering is not optional. Without it being a real challenger is impossible. Unless you have a transactional product, one where the customer interacts with you frequently, you are not going to be able to own the customer relationship and whilst you might win in the short term it will only be for that. When you ask any customer who they bank with their first response will be the bank where their salary is paid into and which they use daily to buy goods and services with.

If the basis of competition is around taking  mortgages and savings market shares off the established banks, then effectively regardless of the ownership structure, this is a building society offering. Building societies have been around for over a hundred years and their attempts to be challenger banks can be seen in the demise of the likes of Alliance & Leicester, Bradford & Bingley and Northern Rock.

Nationwide Building Society has shown that by having a good current account offering that they are a real challenger to the established banks. (Nationwide has done more than that as well but the current account has been a key building block to their success).

What’s more the current account offering needs to be designed to attract the customer segment that has been selected as part of the fragment strategy.

Most customers see one current account being the same as another. A lot of customers will also have been made more cynical because of the ‘value-added’ or packaged current accounts that were sold in the run up to the financial crash. These were accounts where it was questionable whether the ‘added value’ was worth the monthly fee. There are very few ways of differentiating a current account but certainly for a challenger bank it needs to be designed for being used on mobile devices such as smartphones and tablets. The established banks, whilst they may have deeper pockets, have old and under-maintained systems which should give challenger banks an advantage (see the comments about IT below)

The danger of coming out with a simple, low function current account is that the challenger bank ends up with the low income, highly unprofitable customers that established banks are obliged by governments to offer to the unbanked. While this may make the challenger bank popular with government it will do nothing to help investors and if that is not the customer segment being aimed for will only lead to brand confusion.

Design the business from the outside in. One of the biggest challenges the existing banks have is their organisation structure which is built around silos, largely product-based and very hard to change. This brings inflexibility and high cost. Challenger banks have a real opportunity to do something different, even if they have come into existence by acquiring an existing player. The way that the bank’s processes are designed should be driven by the experience that its customers, partners (intermediaries, aggregators, suppliers) want and then decide how it can be delivered profitably. Experience doesn’t just apply to getting a customer to purchase a product but also what happens after that. On-boarding is even more important now for retention, profitability and customer advocacy, particularly where business comes from brokers or comparison websites.

What typically happens is that organisations where there is any conscious design are built from the perspective of the bank and how it is easiest to manage, not from the customer’s or strategic supplier’s perspective. The challenger who gets this right will only be able to attract customers at a lower cost (reduced CPA), will reduce customer attrition and achieve higher customer referral rates.

Invest in talent and experience. Everybody thinks they are an expert in retail banking because everyone has a bank account. This is the equivalent of saying that everybody is a doctor because they have a body. If retail banking was really that easy and that profitable there would be no need for challenger banks. It is not only since the financial crash in 2008 that people have looked down on bankers and treated them as of less value than estate agents or tabloid journalists. Prior to the crash many banks employed retailers because they thought bankers were just staff who didn’t know how to sell properly. A probable consequence of the introduction of this retail talent was the PPI (Payment Protection Insurance) and the Structured Investments scandals, where sales techniques borrowed from the retail industry were applied to the banking industry. There is no doubt that the banking industry can benefit from the insights and experience of industries that deliver better customer service and use technology more smartly but that needs to be counterbalanced with deep experience of retail banking. Current account-based retail banking is far from the same as simply attracting deposits and selling mortgages. If retail banking was so easy why have the building societies (Nationwide excepted – see comment above) been so unsuccessful in making a significant dent in the established banks market share? To be a successful challenger bank investment in real expertise of current account banking is not optional.

Just because technology can do something doesn’t mean customers want it. There are plenty of digital gurus out there who are coming up with very imaginative ways of doing banking whether it is different ways of making payments (at least once a day someone somewhere in the world announces a new way of making payments), identifying the customer, wearing technology, and interacting in branches, but just because you can do it doesn’t mean you should. Unless it makes it more convenient for the customer (and many of the novel ways of making payments are cool but take longer than conventional ways of paying) then don’t do it. Being sexy is not a requirement to be a challenger bank.

Start from the goal of zero IT ownership - exploit the cloud, SaaS and outsourcing. The established banks have very expensive and old IT systems which they need to maintain. This comes from the legacy where banks were amongst the first organisations to use IT and therefore had no option but to build up their own expertise. With the maturity of the both the IT and the outsourcing industries there is no reason for banks to own or manage their own IT. Given the problems established banks have had with their legacy systems over the last few years their competency as an IT provider has been seriously tested. Not only does putting IT out to third parties save overall money but it also allows the challenger banks to focus on what is important and that is the provision of banking to their customers.

For many banks using the cloud to provide banking services has been unthinkable. However Commonwealth Bank of Australia (CBA), the former public sector bank, has its internet banking hosted by Amazon. (See http://www.itsafinancialworld.net/2012/12/commonwealth-bank-of-australia-run-by.html) If a traditionally conservative bank has done that why wouldn’t challenger banks adopt that approach?

Metro Bank, one of the challenger banks in the UK, has bought the use of its core banking service on a per transaction basis (SaaS – Software as a Service). Its IT is outsourced. When the time it took to Metro Bank to launch its current account is compared with Tesco Bank (which is building its own platform based on a core banking package) then there is a clear argument for considering SaaS.

 Taking modern technology and commercial approaches should give challengers a great advantage; however it isn’t always turning out that way.  A number of challenger banks are being created by the acquisition of assets from existing players. They would argue that by having existing proven platforms that they can be up and running faster than starting from scratch. This is true in the short term but rather than being able to offer a truly differentiated service what they offer is a smaller but more expensive (due to the smaller scale and, in some cases, having to pay one of the big 5 banks to support the IT) version of the established banks. This is the situation that both TSB (the former Verde Lloyds Banking Group 630 branches) and William & Glyns (the 316 RBS branches) find themselves in.  (See http://www.itsafinancialworld.net/2013/07/can-tsb-be-challenger-bank.html) In the longer term this is not a viable solution for a challenger bank.

Challenger banks who have acquired legacy IT, need a transformational CIO working alongside the bank’s executives, to put in place a plan to get off the legacy and onto modern platforms enabled for mobile and digital as quickly as possible. They also need to be experts in strategic supplier management. The challenger banks need to educate their investors that this is not optional.

Have an exclusive relationship with major investors and get them committed for the long haul. There are plenty of hedge, private equity and sovereign funds who are interested in investing in challenge banks, however a number of them have placed investments in more than one challenger bank in the same sector in the same country. What does that say about their commitment?

To build a sustainable challenger bank will take time particularly given the limited availability of off the shelf banking technology and the time it takes to implement a new business model. Equally getting a return on these investments is not going to be quick, so investors who aren’t in for the long haul should be politely shown the door.

This isn’t meant to be an exhaustive list of what a challenger bank should be looking at but highlights some of the areas where the difference can be between success and failure.