Showing posts with label Nationwide. Show all posts
Showing posts with label Nationwide. Show all posts

Tuesday, 20 March 2018

Will GDPR inhibit or enable Open Banking?

Image result for "customer apathy"
GDPR is not the biggest threat to open banking, customer apathy is a far greater one. Banks and Fintechs have been pouring money into getting ready for open-banking, creating open APIs and new services and offerings for customers. However if there is one lesson that the seven-day switching service has taught us it is that the majority of customers are simply not interested in banking and see all banks as the same. Most customers would like to spend the absolute minimum amount of time thinking about their finances and see banking as a means to an end not the end itself. The volumes for seven day switching have been disappointing with an average of 75,228 per month in 2017. The expectation that there would be a mass move away from existing primary current account providers has not happened.

Even when customers have switched, it hasn’t been to either the neobanks (Monzo, Atom, Starling) or the challengers (Metro Bank, Clydesdale Bank, Yorkshire Bank, etc). With the exception of Nationwide Building Society, the net beneficiaries have been the large, global banks – First Direct (HSBC), Santander, TSB (Sabadell) and Halifax (Lloyds Banking Group). The neobanks are becoming secondary banks for the majority of their customers not the customer’s primary bank.

If seven-day switching hasn’t got customers excited about banking, will the offer of open banking be enough to get customers spending more with their existing banks or switching their primary banking relationship away from their current provider? If so, which banks are likely to be the winners?

Open Banking is intended to create more competition in the banking industry and to encourage better services and more innovation to improve the customer banking experience.

One way of improving the experience is  to provide a single place where a customer can see all of their banks accounts regardless of which bank provides them. This is not a new idea. Yodlee, the best known player in the aggregator market, has been around for over 17 years providing services to over 1,000 financial institutions and fintech providers. Account aggregation, which sounds like a good idea, has not taken off in the mass market. Apart from the customer apathy described above, the screen-scraping technique deployed by many aggregator tools involves the customer breaking the terms and conditions that they had agreed with their banks. This is where GDPR, Open Banking and PSD2 (which use open APIs) jointly provide a regulatory framework to give consumers the knowledge, should they wish to take up such services, that they are legally protected.

GDPR is about putting consumers back in control of how their data is used. GDPR from a customer’s perspective is a pre-requisite for open banking as it will give them the confidence that their personal data will only be used for the specific purposes that they have had to explicitly agree to when signing up for the service.

Account aggregation is not the only new service that banks, fintechs and non-banks are beginning to offer to customers. Real-time spending analysis, the ability to split restaurant bills and lower cost foreign transactions are among the services that both existing and neo-banks are offering.

A question that the banks must answer is whether the current open banking offerings are providing an experience that is sufficiently differentiated from the competition that it will make customers actively switch to them.

Neobanks being built using cloud first, modern technologies have advantages in both complying with GDPR and offering new services as a result of open banking. They have had been able to build from the start a single view of the customer in real time using open APIs and microservices. However, they lack scale in terms of both the numbers of customers and the depth of resources.

The existing big five banks have all the advantages of the size of their customer base and IT budgets. However they are hampered by the complexity of the legacy infrastructures, customer data is spread across multiple legacy systems designed for batch-processing makes building a real-time view of a customer’s relationship with the bank a significant challenge. This is why a number of the major banks have either elected to work with Fintech firms to help them address this or have designed new digital banks using modern technology.

For banks and non-banks (since the legislation was drawn up to encourage challengers from other sectors such as telcos, retailers and fintechs) GDPR increases the potential financial and reputational risks of entering the open banking market. While most people know little about the detail of GDPR almost everyone seems to know about the fines of up to 4% of global revenues for a breach of the regulation. The regulation goes live on 25th May 2018 and no organisation knows how strictly it will be enforced and certainly don’t want to be the test case for the first fines.

Given the risk of fines and the cost of meeting regulation, the revenue upside of entering the open banking need to be significant. Providing an aggregator service or a breakdown of expenditure in real time are good customer experiences but don’t directly bring in additional revenue as the neobanks are finding. Open banking is of course about more than just providing aggregation and PFM (Personal Financial Management) and the revenue growth is forecast to come from the provision of additional financial and non-financial services. All of the neobanks have realised that offering current accounts alone is not a profitable business. To be successful they need to be able to offer other services and are positioning themselves as marketplaces. One of the most successful organisations operating as a marketplace has been Moneysupermarket, but even they are finding that competition is driving down their margins and the barriers to entry (helped by the intervention of regulators) has significantly impacted their profitability.

A key criteria to be a successful marketplace is to have scale – amazon, ebay and Ariba (in the b2b world) demonstrate this. As open banking becomes a reality then the winners will also be the ones that have the scale. For the moment that advantage lies with the incumbent banks.

The success of open banking will neither be enabled or inhibited by GDPR. The success of open banking in the retail segment will be measured by the level of switching activity significantly rising.  This will only happen by providing an offering that so engages the customer that it overcomes the disinterest that most customers have about banking.

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.

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

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, 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.

Sunday, 2 March 2014

Why 0% BT cards and teaser rates have no role to play in customer centric banks

The announcement by Ross McEwan, RBSG CEO, that RBS and Natwest will remove teaser rates from savings products and scrap 0% interest credit card deals is another step on the road to recovery for RBSG. RBSG is not the first banking group to identify the unfairness for existing loyal customers when these types of offers are made to new customers. It is however the first of the Big Five UK banks to make this stand.

Banks that scrap short term special introductory rates on products for customers, while they position this as for the benefit of existing customers are not simply being altruistic. They are doing this because they know that by adopting a customer- rather than a product-centric approach to running their bank there can be a significant improvement in the long term profitability of their businesses.

Over the past few years there has been a significant price war in the 0% Balance Transfer (BT) credit card market. As one competitor has extended the length of the 0% interest period by one month the next has extended it a further month. Six months ago the market thought that no one would go further than a 28 month (2 years three months) period but it has now got to the point where Barclaycard is offering a 31 month interest free period. It could be argued that this is really good news for customers as fierce competition is driving better deals for consumers. However what is interesting to note is that the top three places in the BT card table are all being offered by one of the Big Four banks - Barclays, HSBC and Lloyds Banking Group. With their very large deposit and current account bases they have large amounts of low cost money to lend which they, it could be said, are using to keep other competitors out, particularly the smaller players who have to resort to the wholesale markets to fund these loans. By extending the periods so long it makes it too expensive for smaller players to compete.

But why are the big banks so keen to lend customers money apparently free for so long? There is of course an up front a fee based on a percentage of the balance being paid - in the case of Barclaycard it is 3.5% which is reduced to 2.99% by a refund (nothing like simplicity!). What this gives the banks offering these products is short term fees, which, with interest rates being so low, fee income is particularly important for short term profits. None of the banks that offers these products has a competitive APR (Annual Percentage Rate) for additional transactions. The banks also know that these are customers who do not pay off their credit cards every month otherwise they would not have got a balance to transfer in the first place. Until recent regulation came into place forcing banks to pay off the most expensive debt first (in this case the new transactions not the 0% balance) this was almost a licence for banks to make money as every payment customers made was used to pay off the 0% balance meaning every new tranaction that was rolled over the month end would continue to rack up high interest rate charges. Even with the change in legislation, whilst these cards are positioned as a way for customers to pay off their debts, the banks concerned are certainly hopeful that their customers will continue to use their credit cards accruing the bank interchange and other fees for every transaction as well as building a large balance for when the 0% interest rate expires.

The problem with BT customers is that they have had the nous to transfer the balance for a 0% period. This means that they are likely to be price conscious and therefore when the next good deal comes along or when their free period ends some of them are likely to be off again to the next bank or credit card company offering a good deal. Others are likely to rack up debts that they cannot afford and go into arrears. For a bank that is looking to develop long term mutually profitable relationships with its customers the majority of these are the wrong type of customers. These are not customers who are looking to or have the money to take out other products from the bank. Banks who offer these types of products are, on the whole, product-centric. Banks who the only credit card they offer is a Balance Transfer is not customer centric.

Moving onto the removal of teaser rates from savings products. The primary reason banks offer short term attractive rates is to build volumes of deposits in order to be able to lend the money out to other customers in the form of a loan or mortgage. It is also a way of raising the brand of the bank by getting it into the best price tables, on the first screen of the aggregator websites such as Moneysupermarket.com and getting it mentioned by Money Savings Expert Martin Lewis. However being successful at doing this can have at least two downsides. Firstly the bank can end up with more low or no margin deposits than it has the demand to lend which leads to losses and secondly it attracts price sensitive customers aka, price tarts. The problem with price tarts, as the name implies, is that as soon as the introductory rate expires they will be off taking their money and giving it to the next bank that has decided to get offer a teaser rate. Just like the with Balance Transfer Card these are not the types of customers that a long term profitable bank should be built upon. With both product strategies it is a case of quantity being sacrificed for quality and taking a product perspective over a customer one.

However  it would be wrong to think that there are no downsides to a strategy that strictly adheres to the principle that existing customers should never be disadvantaged over new customers. In 2001 Nationwide Building Society, under the previous CEO, introduced a policy that all its mortgage offers would be made available to both new and existing customers. It resulted in retaining a higher proportion of its mortgage customers than other banks but with significantly impacted profitability. Nationwide has moved away from that purist implementation to a more pragmatic approach. It doesn't seek to be in the top of the price tables for its products but rather it seeks out customers that are looking for a long term relationship with the building society as its Save to Buy offering for first time buyers illustrates. The result has been a very significant growth in profitable business.

Ross McEwen sees the turnaround of RBSG as taking at least another five years. The announcements of the changes to the retail product strategy will potentially have a negative short term effect for the retail bank, but in terms of moving RBSG towards being a customer centred bank these are sensible steps as long as the shareholders and other interested parties have the patience to see them through. What he has recognised is that 0% cards and teaser rates have no role to play in a customer centric bank.

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.