Digital banking - Lloyds Banking Group saddles up public cloud, machine learning and advanced analytics for its next transformation phase

Stuart Lauchlan Profile picture for user slauchlan February 25, 2021
Lloyds Banking Group put down a £3 billion digital marker in 2018 and it looks to have paid off to date. Where to next as the pace of transformation hots up post-pandemic?

Lloyds Banking Group
(Lloyds Banking Group)

While there’s been a lot of focus on the shift to online in the retail industry during the COVID crisis, other sectors have seen a similarly marked acceleration of the drift to digital, not least the retail banking sector. 

With lockdowns in place and concern about physically standing in line in branches, online banking has become more of a norm for a greater constituency of customers than it was a year ago, while the use of contactless payment cards has come to seem less like a bold innovation and more like a sensible health and safety precaution. 

All of that means that digital should be right at the top of corporate agendas for leading retail banking institutions. It should have been anyway, given the rise of challenger digital banks such as Atom, but the pandemic has provided that extra push that should shake up the intentions of legacy rivals. 

Three such traditional UK banking groups provided insight into their ongoing digital transformation this week - Lloyds Banking Group, NatWest and HSBC Holdings. All turned in some grim COVID-hit quarterly numbers and both testified to the need to future-proof their operations for the so-called ‘new normal’. All are also setting a digitization standard for others around the world to follow. We'll pick up NatWest and HSBC's stories tomorrow, but for now it's Lloyds in the spotlight. 

Back in 2018…

It was back in 2018 when Lloyds Banking Group, which owns Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows, made a headline-grabbing commitment to spend £3 billion on digital transformation, a key plank of post-financial-crisis strategic initiative called GSR3. That’s now reached its conclusion and it’s time for another iteration to take its place, with Strategic Review 2021 building on what’s been achieved to date. 

As to how much that is, the answer is, really rather a lot. In the event, cumulative tech spend between 2018 and 2020 came to £4 billion, but there have been enough sound metrics delivered up to justify that outlay. The Group now boasts 17.4 million digital active users, 30% up since COVID kicked in. Its 12.5 million mobile app users are up 60% during the same period, with the average customer logging in 26 times per month.  

Meanwhile behind the scenes, a move to cloud tech has resulted in a 30% reduction in the time it takes to deliver new features, while more than 50% of customer transactions are now being enabled using machine learning tech. 

For CEO Antonio Horta-Osario, the results are a vindication of the GSR3 strategy's bold goals: 

We have the largest digital bank in the UK…We have been able to effectively respond to changing customer preferences and we believe that the key component of our competitive advantage is our differentiated multi-brands, multi-channel model, supporting our segmentation strategy, alongside the largest branch network in the UK. The growth in our digital channel also provides the Group with capabilities to effectively compete with new digital-only challengers with a marginal cost to serve of just £15 for those customers who opt for a digital-only offering.

Beyond 2020…

That being the case, the question now is, where to next? The answer to that is ‘more of the same’, but with a focus on three main areas of investment:

  • Further broadening of self-service capabilities through digitization.
  • Proving and leveraging public cloud to create the foundations of the future tech architecture.
  • Simplification of the legacy IT estate through tech optimization. 

Executive Director and CFO William Chalmers talks about upping the pace of transformation in the post-pandemic phase: 

We will continue to improve our digital offerings to both personal customers and commercial clients, increasing self-service capability. This includes doubling the volume of releases on our mobile app in 2021, while investment in cloud will allow us to create new features for customers more quickly and more efficiently.

During 2020, Lloyds Banking Group signed deals to use Google Cloud and Microsoft Azure as part of its planned multi-cloud strategy. Chalmers explains: 

We're investing in the foundations of transformation by further proving and leveraging our public cloud capabilities. This is a precursor to simplifying our legacy estate. While I must stress we're currently at an early stage, significant opportunities exist. Around 60% of our technology estate is currently targeted for migration over the longer term, with a significant proportion of this to be achieved over the next three years. We're now looking at the significant impact the next generation technologies could have on our organization by delivering a step change in customer propositions and efficiency.

At the same time, there will be an emphasis on becoming an ever-more data-driven organization with a 2021 goal of seeing a 50% increase in personalized customer interactions.  This is made possible by existing assets within the Group, says Chalmers:

We operate one of the largest databases within the UK. We see this as a unique asset that should allow us to deliver huge value-add to our customers. Our investment to date significantly improved our use of data. Today, 20% of customer needs are met by date-led marketing where we're able to more effectively communicate with our customers and to deliver solutions that matter to them. This number is a start, but it also offers significant upside.

In Strategic Review 2021, we're therefore prioritizing investment in data capabilities to deliver more effective outcomes for our customers and for our colleagues. Through better integration of and access to data, we will be able to meet customer needs more rapidly and more effectively and enable more personalized propositions. This will unlock opportunities in identifying meeting more existing personal customer banking and insurance needs.

Expect also to see further expansion of the use of machine learning to underpin and enhance operations, he adds, while investment in advanced analytics is expected to deliver a first year ROI of 50%:

We're investing in materially extending machine learning and advanced analytics capabilities across the organization to support customer and business outcomes. For example, by widening the use of machine learning, we will deliver at least a 10% reduction in fraud.

In advanced analytics, we have a number of use cases under way across multiple products. For example, we're targeting a 20% increase in home insurance needs met through our direct channels. There's then obvious scope to extend these capabilities to a broader suite of products across the group over time. Advanced analytics will also be used to deliver early insights into financial vulnerabilities, particularly important as our personal customers and business clients recover from the effects of the pandemic.

My take

On the face of it, £4 billion well-spent since 2018, but now it’s time to dip into the corporate coffers for yet more. How will the success of all this be measured? Targeted milestones for 2021 include moving hundreds of thousands of customer accounts to the new cloud-based tech architecture and a hefty reduction in apps running on the old legacy platforms. It’s an ambitious program and the pace of transformation in the post-GSR3 world will be determined by the success of meeting those metrics. As Chalmers puts it: 

We are undertaking a pilot to safely migrate around 400,000 back book customer accounts to a new bank architecture to test these capabilities. We expect this to deliver around a 40% reduction in the applications associated with the legacy architecture of this portfolio, giving us insight into possible broader benefits. Our experience in 2021 will determine the pace and scale of further rollout.

Based on the digital wins notched up since 2018, the direction of travel looks sound. Is the same true at NatWest and HSBC? 

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