Google, Apple, Facebook and Amazon (GAFA) could pose a significantly greater threat to traditional UK retail banks than existing ‘challenger’ banks and fintech start-ups.
A report “Retail Banking IT – Turn to face the change”, published by Peru Consulting, finds that more than half (57%) of retail banking senior technology leaders surveyed forecast that it is likely or very likely that GAFA companies will enter the UK retail banking sector in the next five years.

But, the report adds, the potential risk posed by GAFA innovation is seriously underestimated by banking IT leaders.

Report author, Ian Robinson, principal consultant at Peru Consulting, tells RBI: “Consumers increasingly expect to receive a highly personalised service from their retail banks in line with their positive experiences with online retailers.

“GAFA companies have already harnessed the power of big data analytics and algorithmic programming to provide targeted offers to individual customers and retail banks will need to be aware of the power that this brings.”

The suggestion that we might witness a Bank of Google or Facebook is not a novelty.  As long ago as 2013, Francisco Gonzalez, CEO of BBVA, told the FT:

“Some bankers and analysts think that Google, Facebook, Amazon or the like will not fully enter a highly regulated, low-margin business such as banking – I disagree.

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And in 2014, respected commentator Jim Marous wrote that “Google, Apple, Facebook and Amazon should terrify banking.”

The standard arguments, regularly advanced at conferences, roundtables and the like by many, including this writer, is that the GAFA outfits will not become fully fledged banks because of regulation.

Yes, the GAFA firms have become active at the fringes in payments and money transfers. Amazon has launched a credit card and lent increasingly to SMEs.

But can you really see Google, for example, going from state to state, country to country, gathering banking licences on its way, to enable it to accept deposits and become an outright competitor to existing banks?

A report “Why Google Bank Won’t Happen”, from Forrester concluded that due to costs, strict regulation and the important ad revenue from banks, internet firms are better placed to take on a support role in financial services than to become a provider.

“These firms can improve the relationship between banks and their customers by offering payment services, financial advice, and product comparisons,” said Forrester.

The Peru report finds a surprisingly high (some including this writer would argue an implausibly high) willingness to switch banks in the next 12 months, among its sample of 1,000 UK consumers.

Current switching rates, despite the successful roll out of seven-day –switching, are running at around 3%, with about 1.3m adults switching their main current account provider in the past year.

Peru reports that “38% of 18 to 24 year olds and 41% of 25 to 34 year olds set to change the bank that provides their main account, with 26% of 45 to 64 year olds planning to take the plunge and switch providers.”

When consumers were asked why they might consider switching to GAFA companies, the main reasons they gave were an increased likelihood of better technology and more innovative products and services.

Adds Robinson: Consumers told us switching to GAFA companies would be for better technology and more innovative products and services; senior IT leaders thought this was the least likely reason to switch. This could be a dangerous blind spot for banks.”

The report is on firmer footing discussing the introduction of Open APIs, identifying that this will “increase the pressure on traditional banks and their technology teams. At a business level, they must respond with the development of new services and improved user experiences.

“At a technology level, they will have to ensure that open API’s do not create increased security risks to either their own organisation or customer data.”

The report concludes with five steps that traditional banks can take to adjust to a fast-changing business environment:

  • Have a clear purpose

The technology strategy must fully support the business strategy and be clear and simple enough to everyone in the team to embrace and deliver. Everyone, both in-house and outsourced, needs to understand their role in minimising the time and money-sapping demands of unforeseen operational events.

  • Security is everybody’s objective

Good management, user education and governance can help mitigate security risks. Our research found that there is plenty of room for improvement: a third of retail bank senior technology leaders believe their organisations don’t review cybersecurity policies regularly or don’t know if they do or not. More than half (55%) don’t know or don’t believe banks refresh IT policies regularly enough.

  • Keep it simple

A periodic review of the number of systems, networks and partners can reveal enormous inefficiencies in any organisation. Reworks can be expensive but they can either result in a reduced cost base or create the space to invest in growth.

  • Winners have strong partnerships

Truly successful technology teams build deep and enduring partnerships with their supplier base. KPIs must be appropriate and measured, contracts and commercials must be fit for purpose. Our research shows that only 60% of IT leaders believe banks undertake regular reviews of IT and telecoms supplier contracts, leaving a substantial proportion un-reviewed.

  • Build the right team

Where there are skills gaps it’s important to consider all of the options in addressing the problem. There are critical skills shortages in the market due to a reliance on legacy technology and the perceived attractiveness of alternative employers. The situation is unlikely to become any easier, but incremental gains can be achieved through a review of the overall talent management strategy, a refresh of the organisational design.