Barclays’ Harte: Alibaba and the forty fears of bank transformation

Michael Harte: long-term planning is key

Michael Harte, chief operations and technology officer at Barclays, says the growth of Chinese online e-commerce business Alibaba is the threat that keeps him awake at night – and that major banks could be in danger of losing touch with their own customers.

Speaking at a financial services event hosted by SAP in London, Harte drew on his experience prior to March 2014 as former CIO of Commonwealth Bank of Australia, which embarked on a massive bank transformation project that has since become widely-known in the industry as an example of core bank transformation. Before it began its technological transformation, he says, the bank had lost touch with customers. The majority of spending was allocated to maintaining systems, rather than innovating and providing better products and services.

“This spending added no benefit and conferred no advantage,” he said. “The move from a focus on systems to a focus on customers was vital, and to do that we needed systems to work in real time and we needed the data to support that. The more your data system can recognise the total value of the customer, the easier it is to price appropriately for that person’s holdings, relationships and needs. Without real time systems and data, you can’t do that.”

While banks are struggling are to get to grips with their own internal organisation, which is often complex after years of acquisitions and mergers, the rise of alternative players has raised concerns of disintermediation by newer players. Alibaba has been likened to a Chinese version of PayPal, but it also contains e-commerce businesses similar to eBay and others. The company also acts as a lender to individuals and corporations.

For Harte, this represents a real threat, because Alibaba and companies like it have collected a huge amount of customer transaction data, customer purchases and behaviour, and they also hold the loyalty of millions of consumers. Founded in 1999, Alibaba has 85% market share in China and is currently seeking to IPO at $155 billion, which if successful would make it the largest IPO in history. “They have all this data, and they use it to provide services for individuals and corporations? That sounds like a bank,” said Harte.

The entrance of alternative providers such as supermarkets and telcos into financial services in recent months has contributed to the debate about the role of banks on the high street. For example, in June Tesco Bank launched its first ever current account in the UK. Two other supermarkets also operate a bank, including Sainsbury’s and M&S. Harte joked that he has no idea why the supermarkets would want to get into financial services – a gambit which raised a laugh among the audience at the SAP event in London. He also questioned whether a supermarket could be trusted. But trust should not be overlooked by the banks themselves, he warned – instead, rebuilding it should be every bank’s priority.

“I believe that we in the banking industry lost people’s trust,” he admitted. “The only way we can rebuild that trust is through using information, privacy and security to create value. Banks need to know about customer spending so that they can help the customer to spend wisely, the ways the customer can save money so they can build wealth, and the investments they can make to gain the best return. Millennial customers are fickle, so you’ve got to be compelling. The days of the large monolithic buildings are over – they are not fit for the digital era. You need digital goods and services on demand.”

One of the core lessons of reforming a major bank’s IT infrastructure is the need to ensure a solid reference architecture, according to Harte. Defining this as the processes and data that provide the source of the company’s competitive advantage, he suggests that a bank’s data architecture needs to be customer-centric and based on financial relationships. Reference architecture, he says, is about protecting and growing the bank’s business model over many years, using quarterly reviews. The dangers are that boards can lose patience in large transformation projects lasting eight years or more, so patience and resilience are needed to see it through. He also points out that it is sometimes necessary to protect the reference architecture against “unnecessary innovation” from senior individuals within the bank.

“People come and go in the life of a corporation,” he said. “Chief executives and CIOs – they all suffer the temptation to change the formula. But if you don’t have discipline and constrain the unnecessary creativity, it can get out of control and lead to complexity and failure of what was once a strong business. The reference architecture protects the competitive edge and informs how to invest.”

Finally, he urged bank executives to take a long term view when planning a bank transformation project. While shareholders may demand short-term results, only a long-term view of the investment required can work, because systems will have to open up, change over time and align with adapting the business to fit the competitive advantage. A single strategy may not reduce risk or save money – instead, a bank must be courageous about how it changes its business model to adapt.