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 may be less prevalent within banking and financial services.
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.
Bank in a box
Beyond regulation, property and capital requirements, new entrants face high customer acquisition costs and 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.
But even more surprising is the baffling 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. In essence it further hampers the future organic potential of these banks with outdated legacy systems, which will soon cease to be fit for purpose and be massively expensive to maintain for a smaller bank given the parent banks already struggle with day-to-day maintenance.
A far better outcome for all would see the creation of new systems for both parent and offspring, rather than blight 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.
Relentless demand for digital
Right now there’s a slew of new entrants coming over the horizon. Metro – like Atom – has already arrived, while another 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 whether they can 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 the Royal Bank of Scotland, which recently announced a £1 billion investment in digital technologies to help underpin its ongoing customer service. The investments is aimed at existing online and mobile capabilities, improving data analytics and ensuring its branches continue to be attractive to customers despite declining footfall with iPads readily available for online banking sign-ups and free wi-fi for visitors.
Other big-names like Barclays have also been investing heavily in digital. During the past two years it has now – arguably – become Britain’s most advanced bank to embrace new customer-facing tech, following the launch of a range of services including the PingIt person-to-person payment platform, cloud-based document tools, the development of mobile cheque readers and an online banking platform that is regarded by many to be leading the UK market.
Banking Moving Forward
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. To find out more, take a look at our insight paper Banking Moving Forward.