UK banks in danger of falling behind warns study
UK banks may lose out to nimbler competitors if they don’t modernise their systems and update their infrastructure, according to a new reporting by research house TechMarketView.
In common with many similar analyses before it, the Modernisation of the UK Banking Sector report suggests that banks should be renewing their technology and systems – but that progress is being slowed by a lack of strategic clarity and the problems of transforming their business culture. TechMarketView warns that banks will lose “significant” market share if they don’t move faster.
“In our opinion, banks have yet to make clear and decisive changes to their scope, or to understand their real generators of value,” said Peter Roe, research director at TechMarketView. “The potential impact of competition is probably under-estimated by the established banks.”
The idea that banks might be disintermediated by quicker, more agile competitors is not new. As long ago as 2005, entrepreneur and financial services blogger Sean Park released the film AmazonBay, which pictured a future in which financial services are taken over by online retailers Amazon and eBay.
Those fears have so far been largely unrealised. But the report highlights new customer demands for new personalised services and better customer experience as well as increasing competition for global brands as competitive pressures that might tip the balance. It also adds that new regulation is impacting existing systems and working practices and prompting change. The TechMarketView report acknowledges that as banks struggle to rebuild balance sheets and meet the regulatory requirements, they may argue that they don’t have the cash or capital available to invest in new systems – a problem exacerbated by the lower margins available in many areas of banking.
However, according to the report, there are several tools available to banks that could help them to counter the danger. Outsourcing infrastructure such as data centres and desktops can help to cut costs, while cloud services are expected to play an important role in making businesses more agile and responsive to changes in demand. Furthermore, although big data projects are currently limited to small initiatives these could bear more significant results in the longer term.
“Building operations in parallel to existing legacy systems may provide a faster route to change,” read the report, adding that cloud services could provide a “useful contribution”.
So-called ‘wrap-around’ transformation programmes are widely known and used in financial services. For example, firms such as ACI Worldwide and others have worked with banks to bring together fragmented retail bank systems onto a single platform using a ‘wrap-around’ system that can offer all the necessary functions and services that a particular legacy system is running, and connect that up to one of the bank’s more modern payments engines. The tech firm then helps the bank move all the transactions from that old legacy system to the newer engine. Once this is complete, the legacy system can in theory be safely turned off. The end goal is to help a large bank move from tens of different systems to just one or two.
Unsurprisingly, the TechMarketView report emphasises the importance of planning before an IT systems overhaul is begun. In particular, a central place should be given to management’s decision about the scope of the bank, and the breadth of abilities that will be provided by in-house IT. The support services and customer-facing systems face the same issue. Success depends on dividing systems and processes into those that create value and differentiate the bank to customers, the operations the bank should keep internally to support these, and the processes which are pure commodity and which could be outsourced.
“By deciding where the bank creates value, senior management can re-assess the scope of the bank and its IT,” read the report. “System renewal is made easier by determining the focus areas and reducing complexity. Critical examination of a bank’s IT system stack and the processes it supports may well unearth many areas where outsourcing, shared services and standardised software can provide a better, cheaper and more customer responsive solution.”