Showing posts with label retail banking. Show all posts
Showing posts with label retail banking. Show all posts

Monday, 31 August 2015

What makes a challenger bank a digital challenger bank?

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

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

Friday, 29 May 2015

Why banks should see ring fencing as an opportunity

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

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

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

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

Implementing a culture that results in market leadership

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

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

Use the opportunity to replace legacy IT with architecture driven solutions

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

A chance to significantly drive down cost while improving customer experience

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

Ring-fencing is an opportunity to be welcomed

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

Wednesday, 22 April 2015

Why HSBC should relocate its Head Office outside the UK

While the question is usually posed as will HSBC move its headquarters from London the question should be why wouldn’t they?
Though it is continuing a process of reducing its global presence (with the businesses in Brazil  and Turkey likely to be the next two to go), HSBC is still a global business. The UK business, particularly the retail bank) is a decreasingly significant contributor to group profits. The logic of the UK being the largest part of HSBC an
Biggest contributor to UK Bank Levy
HSBC is the largest contributor to the UK Bank tax having paid more than a third of the £2.2bn raised since the levy was introduced. It paid $1.1bn (£750m last year and will pay $1.5bn (£1bn) this year. This is despite having smaller UK operations than the other big 4 banks (RBS, Lloyds, Barclays). This tax has risen seven times since it was first introduced. At that time it was said to be a one-off reparation payment for the role that the banks played in the 2008 financial crisis. However with the unpopularity of the banks (largely driven by the politicians in collusion with the media) the banks have been seen as a soft touch for raising further tax revenues by both Labour and Conservative governments.
Anti-bank sentiment
The Conservatives winning an overall majority in the General Election has not made the argument for remaining head quartered in the UK stronger. It was after all the ‘business friendly’ Conservatives who have just raised the Bank tax once again in the last budget. There is nothing to suggest that they won't raise it further when they need more money to either invest or pay off the deficit.
Time zone argument
One argument that has been made for why it makes sense for HSBC to locate its Head Office in London is because the UK time zone is ideal for both working with Asia (in the UK morning) and the US (in the UK afternoon and evening). However with HSBC shrinking its retail operations in the US, after the disaster that was Household, the need to be in the UK only becomes a necessity for the investment bank. Having the investment bank based in London does not mean that the Head Office has to be.
Ring fencing
A further argument for moving the Head Office out of the UK is ring fencing. Ring fencing is a way to structurally separate retail banking activities from wholesale and investment banking activities. It is due to be implemented by 2019 and is a UK regulation which differs from both the way that the US and the European Union intend to de-risk structurally significant banks. HSBC intends to only put its UK retail bank within the ring fence and the rest of its business outside. It is estimated that ring-fencing will cost banks in the region of £1.5bn - £2.5bn to put in place and then a further £1.7bn - £4.4bn per year to operate. This will be yet another significant rise in the cost of doing banking business in the UK. Since the element inside the ring fence for HSBC will be exclusively UK activities and relatively small, it would make sense, reduce costs and be less disruptive to at the same time as setting up the ring fence move the Head Office out of the UK. Not only would it reduce the overall set up costs (of separation and relocation), but it would also reduce the running costs of operating the ring fenced business.
Welcome back Midland Bank?
Of course once the UK retail bank is separated from the rest of HSBC by means of the ring fence it will not only make it far easier but more obvious for HSBC to sell off the UK retail bank given the inevitable decline in profitability in the UK business brought about by the changes to banking that the UK government (of whatever party or party combination) already plan to and will plan to introduce. HSBC have already announced that its retail bank head office will move to Birmingham in the heart of the Midlands. A cynic might think that the combination of the separated bank and the move to the Midlands will be steps towards the reversal of the 1992 acquisition by Hong Kong-based HSBC of Midland Bank. Good bye HSBC, hello Midland Bank?
Footnote: Should Labour get into government and abolish non-dom status relocating the Head Office back to Hong Kong would resolve that particular problem for HSBC CEO Stuart Sullivan (but of course there are a lot of far cheaper ways to do that!)

Thursday, 19 March 2015

Why TSB/Sabadell is no Abbey National/Santander



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

However the two situations and players are quite different.

Sabadell is no Santander

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

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

Banking platform was key to Santander business case

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

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

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

TSB is no Abbey National

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

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

Digital excellence

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

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

£450m IT sweetener

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

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

Friday, 30 January 2015

Why mobile isn't the digital answer for banks

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

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

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

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

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

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

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

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

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

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

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

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

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.

Wednesday, 19 November 2014

Why Big Data and analytics aren't the answer for banks

‘Big Data’ and ‘analytics’ are amongst the most over-used and abused terms currently in the business world. They are often sold as the panacea to all known problems by snake oil sellers across the globe. Banks should focus on true insights and consequential actions to differentiate themselves and take an industrial view to data and analytics.

Big Data and analytics have generated lots of revenue for hardware suppliers, software providers and consultants. They have also created lots of jobs for people with skills ranging from basic statistics to advanced mathematical modelling skills. What is highly questionable is whether all this expenditure has generated value for the banks that have invested in them?

Like many new business philosophies and technologies the approach banks have taken to adopting them is to build them in-house. Just like when computers first emerged and individual departments took it on themselves to buy their own computer, hire their own programmers and write their own code to address their department’s specific requirements (as an aside, It is one of the reasons why so many banks still today have such dysfunctional IT departments and systems), banks don’t appear to have learnt the lessons from the past and are adopting the same approach when it comes to data and analytics. Functions such as risk, mortgage underwriting, card product management, marketing, finance and treasury are creating their own local data marts, hiring their own data scientists and modellers and buying their own query and advanced analytics tools. They are building models, sometimes in inappropriate tools, with inadequate testing that the bank’s executives are making critical decisions based on the output from them.

The fact that individual departments are doing their own thing is very cost inefficient is the least of the problems with this approach. Even for banks that have elected to go for a Centre of Excellence operating model for data and analytics whereby a central pool of data and analytics experts provide services to whole bank there is a fundamental problem with this way of addressing data and analytics.

Building models in-house is predicated on the basis that every bank is so unique that the models will provide differentiation from the competition. However banking, and particularly retail banking, is based around standardised products with standardised ways of underwriting those products, standardised ways of funding the products and very largely standardised way of moving the customer’s money. Therefore spending large amounts of money hiring expensive data scientists and modellers and then lots of time building models when there are standard models available to either buy or pay for the use of from the likes of Experian, SAS and other data and analytics specialty firms makes no sense. Not least of all because true data scientists need to be continually fed interesting and challenging problems to crack (something few banks will be able to consistently provide enough of while specialty firms will be able to) otherwise they get bored and stressed – a bit like caged lions that are fed raw meat rather than having the excitement of the hunt.

Unfortunately the peddlers of Big Data and analytics solutions don’t point out to their customers and the IT users who buy their solutions don’t acknowledge the critical fact that:

Data and analytics without context and insight is of no value to a bank.

Insight is an unfortunate word because many banks take it to mean having a better understanding of what is going on inside their banks. However that is only the half of it. As critical is to have an understanding and the context of what is going on in the environment that the bank is operating within. What are the competitors doing, what is happening and could happen in the macro economic environment and how would that impact the bank’s customers are just some of the potential questions that need to be answered to create insight. If there had been a better understanding of some of these questions then it is possible that the financial crisis of 2008 could have been avoided.

However insight of its own is not enough. A number of banks across the globe could rightly claim that they have teams of data scientists who like the PreCogs in the Tom Cruise film ‘Minority Report’, who were able to predict crimes before they were carried out, know so much about their customers that they can predict what they will do next. However having that knowledge but not having a means of sharing it in a simple and usable way with the banks’ systems and the people who use those systems means that it is of no value at all.

Insight with the ability to know the ‘Next Best Action’ and execute on it is what will define the banks that will emerge as the winners.

This ability to apply data and insights to bring about great outcomes should not be limited to use with customers but should also be applied to other areas of the bank such as pricing models to allow personalised offers, to fraud detection, to identify money laundering activities and to make better funding decisions. The list of areas where this could be applied to banks is almost limitless.

However what it requires is a very different approach to data and analytics then is largely adopted today. It needs to be driven down by the desired business outcome with the data required being seen as the very last thing. It needs to be driven by the business executives not from IT or worst still technology vendors. It needs to be driven as an industrial process rather than as a cottage industry. Banks need to understand that where they will be able to differentiate themselves from their competitors is on their insights and how well they execute on those. For the rest they should look for best in class products and services for data and analytics from organisations that are truly expert in those areas.

Thursday, 30 October 2014

Why shared branches could be the answer to avoiding closing the last branch in town

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The announcement by Lloyds Banking Group that it would stop honouring the promise to not close the last branch in a town at the end of 2015 caused some furore amongst politicians and those representing rural communities. Lloyds having the largest number of branches of the major banks in the UK and partially owned by the tax payer has in many cases been left as the last branch in town as competitors have closed their branches knowing that Lloyds were obligated not to close theirs.

The response by Vince Cable, the UK Business Secretary, to the Lloyds announcement was to give all the major banks yet another rap across the knuckles in a sternly worded letter stating that this was unacceptable. However unacceptable it is what is the answer? While the banks may point to the many transaction services that the Post Office offers on behalf of the banks, a better answer is for the banks to get together and have shared branches for those villages and towns where they cannot justify the costs of having a single dedicated branded branch.

This joint branch would allow customers to perform transactions with their bank either with the help of a teller or by using self-service machines. If there is a teller then they would need to be trained in using each of the banks’ technology for the transactions covered by the branch. The simplest implementation would be for the branch to have one teller device for each brand sharing the branch and similarly for self-service machines, however this would have the disadvantage of requiring a larger branch than each of the individual branches will have required. The smarter option would be to have single devices which allowed the customer to say which brand they wanted to deal with when they first signed in and then the appropriate screens for that bank to appear. This would keep the size of the branch down.

The shared branch could include one or more meeting rooms where customers could meet with advisors from the appropriate bank by making an appointment in advance, allowing the opportunity for the advisor to service multiple branches and therefore maximising their productivity. The advisor would not even necessarily have to be physically in the branch but could converse with the customer via videoconferencing. This way a branch could remain open in low populated areas at a relatively low cost to each individual bank.

This service could even be provided by a third party or the local community under a different overarching brand.

This is not a new idea and is one that was first floated (by me amongst others) at least ten years ago. However that was at a time when the banks were making larger profits, there was less regulatory pressure and the technology to easily and cost effectively deliver these types of solution was neither mature nor available. While there was some initial interest from the major banks it was the idea of collaboration amongst the banks that was unthinkable even though it provided a benefit to the customer.

Maybe as the big 5 banks look to reduce their number of branches and rebuild their reputations this could be the right time to look to shared branches as a means of not being seen as the bank who closed the last branch in town.

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.