Congratulations to the FCA and PRA for lowering the barriers to create new banks. Five new licences have been granted so far and almost 30 new entrants have declared their intent to enter the market. This should be an exciting time for financial services in the UK, writes Ian Benn, as new entrants will be moving fast to build out competence and credibility in this notoriously conservative sector.
PwC says, "Traditional banks won’t exist by 2025". With their fresh thinking, a new perspective on customers, products and finance and free of the burdens of legacy technology, they will be agile, nimble and fiercely competitive. These new players should find it easy to integrate into the connected world. They will also have learned from the challenges afflicting their established rivals and should be better placed to avoid falling into the same traps. The banking disruptors may bring lessons learned from innovating in other sectors.
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Well, maybe. On the other hand, today’s banks have deep-rooted financial services experience. They also have an existing conservative and largely satisfied customer base. Despite what the media portrays, even though many UK consumers distrust the banking industry, the overwhelming majority trust their own bank to deliver a quality service and protect their money.
So what will new entrants do differently? For a start, any new player in this new banking ecosystem will need to invest in technology. It seems likely that most will choose to move away from the legacy model of big, proprietary, or hugely customised old systems running on-site.
Instead they will likely take a fresh approach to the core technology, seeing it not as a source of competitive advantage, but as a utility that can be hosted anywhere, yet still controlled by the business. This will give them a huge edge in cost: income ratios and will free them up to invest IT budgets in the special stuff that can set them apart from the competition – a great customer experience.
On that basis, a new entrant with a strong brand and sufficient capital behind them, delivering a fresh consumer experience and free of the enormous burden of legacy computing costs and compliance can be a genuine threat to the established market.
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By GlobalDataHow? Through technology partners. A processing partner builds one system which can be shared by many banks. The huge cost burden of keeping the system compliant through the myriad regulatory changes which hurtle in from the UK, European and international regulators can now be shared across multiple institutions, slashing running costs. Costs can be linked directly to growth with a simple cost-per-account model. That means minimal capital outlay up front and the opportunity to replace huge fixed costs with a far smaller variable running cost linked to business success.
Unless a bank truly believes that they can gain genuine competitive advantage through the way that they calculate compound interest or post transactions, this seems like a very straightforward decision. This is not radical thinking – it is the dominant model in many other countries, the UK being somewhat anachronistic.
Even a few years ago this idea was attractive in theory but impractical due to the technical constraints of modern systems and the complexity of integration. In today’s cloud-based, web-services driven world, all this is entirely practicable and at dramatically improved price points.
Where does that leave the big banks? Well it is unlikely that a major bank will move to a shared model overnight. Almost all large banks consist of many sub-brands, each of which uses different technology and it is very easy to start with one of those smaller brands. Once the model is proven, expanding out to a wider number of products or services can be a low risk, incremental move to yield very fast returns.
Today, several of the UK’s largest banks employ more developers than the world’s biggest software companies, yet any differences in the end products are very difficult to distinguish. Across the industry, the inefficiency of having dozens of home-grown systems to maintain and upgrade has a meaningful impact on the cost of borrowing and the savings returns of the general public.
How will new UK banks change the economics of the sector? It is too early to see their true impact, but one thing is very likely: they will recognise their strengths and build great products and services and let their IT teams focus on making customer journeys exceptional. They will let processors do the boring stuff reliably, securely and at a fraction of the cost.
The big question is – will the big banks follow suit?
Ian Benn is COO at FIS
