Setting up a bank in the UK is costly, time-consuming, heavily regulated and not easy. As a result, the dynamic, start-up culture that drives innovation in many other sectors is less prevalent within banking and financial services. My article outlines some of the key challenges facing new banking entrants.
While policy-makers will readily tout the respective merits of healthy competition and the drive to encourage new entrants into the market place, the sector is now among Britain’s most closely scrutinised.
Beyond regulation, property and capital requirements, new entrants face high customer acquisition costs and the need for an effective tech platform that meets the demands and expectations of an increasingly web-savvy consumer.
While many tech providers will suggest they have a bank in a box, companies choosing to enter the UK banking sector will have been obliged to revert to tested and proven systems to help get a foothold.
Launching products and dealing with the plethora of mandatory changes hitting banks every year has proven challenging, with retail banking’s core ‘current account’ capability often missing from many new entrants’ product ranges – an issue that has been further complicated by the mandatory demands of seamless seven-day account switching.
Then there was the decision on government-owned EU divestment banks to clone long-standing, archaic systems, rather than invest the substantial separation budgets into developing and establishing more modern technology infrastructure. It impacts the future organic potential of these banks with outdated legacy systems, which will soon cease to be fit-for-purpose and be expensive to maintain for a smaller bank, given the parent banks already find the day-to-day maintenance a challenge.
A far better outcome for all would see the creation of new systems for both parent and offspring, rather than affect the ongoing development of both with legacy back-office systems. The impact of these decisions will be felt for many years to come and may affect the UK tax payers’ returns from the so-called ‘too-big-to-fail’ investments.
Collaboration on a universal banking platform by the financial services industry is also long-overdue. By sharing the investment costs for a new banking infrastructure – which is currently costed at somewhere between £3 to 5bn-plus and likely to take up to five years to complete – means the sector, regulators and legislators alike must all be willing to take a long view.
It’s part of a far bigger picture and is essentially about ensuring UK plc maintains a competitive edge in an increasingly globalised economy. Doing nothing simply isn’t an option. Reliance on ageing legacy systems will further constrain UK banking over the next decade and may prove obstructive and anti-competitive for new entrants. Ironically, the over-regulation and over-reliance on legacy technology may even see further casualties and prompt more consolidation to ensure the survival of some existing players.
On the face of it, it’s really a no-brainer.
But at the same time, it’s worth noting that the speed and direction of development from here on is likely to be shaped by the consumer who is driving change, thanks to the relentless demand for digital services. It clearly offers opportunities for smaller and leaner entrants like the digital-only bank, set to enter the market in 2015.
Right now, there’s a slew of new entrants coming over the horizon – 20 applications for banking licences are in the pipeline at the Prudential Regulation Authority, amid hopes the market could become far more diversified. But of course, the debate over the challenger banks’ access to Bank of England liquidity, more favourable capital rules to help them compete and the related costs incurred in turning their borrowings into cash, will continue to rumble on – and may even determine the fate of more new entrants joining the sector, before they get off the ground.
In the meantime, the challenge for the established banks is, can they transform their businesses, legacy back-office systems and innovate quickly enough to make the most of our rapidly emerging digital world?
It’s evidently a point not lost on some of the banking elite, with tales of investments in digital technologies hitting the £1 billion mark, to help underpin ongoing customer service. The investment is aimed at existing online and mobile capabilities, improving data analytics and ensuring branches continue to be attractive to customers – despite declining footfall. We will no doubt see devices readily available for online banking sign-ups in branch and free wi-fi for visitors – all linking to a more rounded, multi-channel customer experience.
Certain banks are taking the opportunity to become the front runners in embracing new customer-facing technology, with person-to-person payment platforms, cloud-based document tools, the development of mobile cheque readers and online banking platforms that are regarded by many to be leading the UK market.
At the same time, the pace of innovation won’t be slowing down anytime soon. As a result, the combination of demand for digital and competitiveness will call for some very big decisions by our policy-makers.
Through the Experian Banking Moving Forward Series, we’re sharing some thoughts on how the Banking and Financial Services industry faces challenges and changes over the next 3 to 5 years. We hope this offers some food for thought. Visit the site.