By John Lunn, Partner, Moorhouse
The noise surrounding the so-called challenger banks has been steadily rising over the last 18 months. New entrants have joined the market, becoming a significant competitive threat to more established players through the seemingly simple expedient of offering a better customer service. In extreme cases, particularly for small- to medium-sized enterprises (SMEs), this amounts to providing any service at all since the traditional banks have withdrawn their services. Ratcheting up the pressure still further is the ever-growing level of attention all the big banks must devote to working through how to react to the increasing focus on regulation – and what this means for their technology platforms and sourcing strategies.
Over the last ten years, big banks have focused on reducing their cost bases, which has included offshoring their app development and maintenance. Whilst they achieved cost and flexibility, the challenger banks now coming into the market are doing so with lower costs because they are able to take advantage of newer technologies. They have no legacy infrastructure to upgrade, to rip and replace, since they are building theirs from scratch. These more modern architectures allow the challengers to promise a better user experience for their customers by affording them far greater agility in terms of channels, user interface, stability, and customer segmentation than their older counterparts.
To remain competitive, therefore, the big banks now need to transform their legacy platforms – and in relatively short order. Though they are aware of both this competitive threat and what they can do about it, most larger players have avoided initiating such a large IT project, as it is hard to do, expensive, and risky. But with just one aspect of the risks exemplified by January’s online banking fiasco at HSBC, the risks of not doing anything are finally now being realised as greater. And HSBC is far from alone in its technology woes: Barclays, NatWest and RBoS have all had headline-grabbing IT problems in the past year; in the case of the latter, a string of technical glitches led it last June to promise to spend hundreds of millions on its computer systems.
Running along side these themes, security is a mounting concern: as more and more businesses move into the cloud to take advantage of software-as-a-service, all eyes are on security breaches like the recent one at TalkTalk. The loss of customers, revenue, impact on its brand and cost to rectify do little to warm the cold feet on banking boards.
Still, if that seems like so much doom-and-gloom, it’s important to remember that for all the attention the rise of the challenger banks receives in the media, the actual market share they have secured amounts to barely five per cent (the big five still hold the overwhelming 95 per cent of the market). Despite the fact that it is now easier to switch banks than ever before (whereas previous difficulties covered the gap that customer service could not), when such bank hopping occurs today it is mostly from one legacy bank to another. And, finally, there is the awkward truth that the challenger banks rely on the traditional ones to process core payments (often referred to as ‘riding the rails of existing technologies’).
It’s far from too late for legacy banks to up their game, but it would be a very brave one indeed that gambled on this happy confluence of circumstance remaining the same over the next few years. We need only look to other industries to see the potential perils in doing so: Myspace saw its client base of 100 million users move to Facebook almost entirely, en masse, practically overnight. There is a deadline involved here, and while putting an exact date on it may be guesswork for the moment, it’s not a guess anyone wants to get wrong.
A clear leader that appears to be betting on that deadline coming sooner rather than later is Goldman Sachs, which is investing up to nine per cent of its revenues in technology (ca. $3.2bn). Its CFO recently summarised the focus of its investment as being both a defensive and an offensive play. It is defensive in that the investment helps the bank adjust to the new era of tougher regulation, delivery of new technology services, and the threat of TalkTalk-type cyber attacks, and offensive in terms of the innovative capabilities it will bestow.
The way in which the traditional retail banking establishment views its legacy IT infrastructure has begin to shift – slowly, but with the sort of unstoppable momentum you’d expect such giants to generate. Where once the plan was to employ a strategy that would see service delivery made as cheap as possible (because it was deemed too complicated, expensive and disruptive to effect wholesale change themselves), to one of acceptance. Most banks today are starting to recognise that they must transform or else risk extinction, and are correspondingly ramping up spending as they try to keep up with the offers from challenger banks.
John Lunn leads the financial services sector team at Moorhouse. He joined Moorhouse in 2011 following a journey across the telecommunications, automotive and consulting sectors, and is a member of the leadership team. John also leads the firm’s strategy into action service offering, which aligns the strategic goals with portfolio management, the integration of business as usual activities and the programme delivery activity. This includes establishing a one page strategic view. Outside of work, John enjoys travelling and is aspiring to be Capability Brown in developing a small cottage garden in Lewes, Sussex.