Can legacy banks get their digital act together before the challenger pureplays take over?

Stuart Lauchlan Profile picture for user slauchlan July 2, 2014
A tale of two banks which illustrates the damage that digital is doing to traditional incumbents in the sector. RBS tries to play catch-up while Atom looms in the wings.

A tale of two banks which illustrates the damage that digital is doing to traditional incumbents in the sector.

This week the Royal Bank of Scotland (RBS), which owns NatWest, committed itself to spending £1 billion ($1.7 billion) on a digital first strategy after experiencing a 200% jump in customer usage of online and mobile technology in the last three years. Between them, RBS and NatWest have around six million active online customers.

The bank now expects to see around half of its customer transactions to come from mobile applications in the next four years, up from about 40% last year, Over the same period, in branch banking is expected to account for only 5% of total business, down from 13% in 2013.

RBS, which is 81% owned by the UK taxpayer following a £45 billion government bailout during the financial crisis, is shifting its focus primarily to the British retail and commercial market. In 2013, it turned in a £8.2 billion loss.

The bank is a classic example of an institution with ageing tech infrastructure that has seen a number of online outages, most notably a 2012 crash which saw the group having to pay out £175 million in compensation. Last December, a major IT glitch on “Cyber Monday” resulted in customers of RBS and NatWest being unable to use credit and debit cards for three hours.

So upgrading the underpinning IT is a top priority. As part of the digital first push, new features will include:

  • The ability to view and amend regular payments, and track their Cashback Plus reward balances, on their mobile without using online banking.
  • Integration of the personal and small business banking mobile apps so customers with both types of account can see and make transactions in both via one app.
  • More intuitive online banking with tailored content.
  • More than 400 branches will be upgraded across the UK, fitted with new technology, including iPads, to register for and access Online Banking.
  • Customers will also be offered free Wi‐Fi access to use their own digital devices in branch.
  • Almost 100 new ATM locations will be introduced across the UK, including in railway stations, to increase the number of places customers can access their cash.
  • Nearly 600 new Cash and Deposit machines (CDMs) will be placed in branches for customers, enabling quick and easy paying in of cheques, cash and coins.
  • Improved systems will allow staff to see all of a customer’s interactions with the bank.

Les Matheson, CEO of Personal and Business Banking, said:

Our customers’ needs are rapidly changing: they want to bank day‐to‐day in the most convenient ways available. We must respond to their needs and continue to improve on the service we offer both online and on mobile.

Our branch network also plays an important role in delivering a great service for our customers. We’re investing in branches to make it easier for customers to have good conversations with our staff when they need our help, and in our processes so banking with us is simple and straightforward.

A bank that customers feel they can trust is a bank they look to when they need to make bigger financial decisions, such as buying their first home or starting a business. My business challenge is simple. I need to make changes to the way we do business so that our customers do more business with us.

Cometh the challengers

But while RBS tries to play catch up, challenger banks are springing up with no legacy dragging behind them and a focus on exploiting new technologies hardwired into the corporate DNA. There are 28 banks currently applying for licences to operate in the UK, for example.

Anthony Thomson

Some are further advanced than others. Next year will see the launch of Atom Bank, a self-proclaimed digital-only bank offering a full range of banking products for both retail and business customers.

The new bank will be headed by Anthony Thomson, founder and former chairman of Metro Bank, itself a disruptive player offering instant credit or debit card issuing in-branch, and long opening hours covering seven days a week. Metro also outsources its entire IT infrastructure on a ‘pay-as-you-grow’ basis, retaining only a handful of in-house IT personnel.

Announcing Atom earlier this year, Thomson said:

We will be the first retail and business bank in the UK which is totally digitally delivered. The use of branch banking has fallen off a cliff and even telephony banking is in decline. The explosive growth is in digital and particularly mobile banking.

We are going to offer everything you would expect to get from a traditional bank. However, we'll aim to be number one for customer service and satisfaction.

That’s going to be made possible, he added, at least in part by not having to deal with:

legacy IT systems that don't work. The difference is, we will be able to offer exceptional front-end service plugged into a state-of-the-art back end platform.

While Atom waits to open - or go live? -, the bank has beefed up its digital credentials further by teaming up with software firm Fiserve to launch a cloud banking platform which would help other challenger banks to avoid IT infrastructure investment.

Dubbed Agiliti, the cloud platform supports branch, call centre, back office and ATM operations, as well as mobile and online banking, delivered through Fiserv's Mobiliti service.

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Thomson said:

It is great that there are 28 applications with the regulator to become banks but they all face one insurmountable hurdle, the creation of IT infrastructure to support a bank.

Essentially, this technology will mean that new providers can enter the market without exposing themselves to the lengthy implementation times, risk, and the often prohibitive cost associated with a conventional IT set-up.

The ability to pay on a ‘pay-as-you-grow’ basis means that organisations from very large to very small can come into the banking market. We are going to see more new banks like Atom, and new credit unions, and this is what will facilitate that change.

New entrants in particular benefit from the fact that the business model allows them to align costs with business success. Additionally, a technology solution that could have previously taken two to three years to build could now be implemented in as little as six months with Agiliti.

We expect a significant number of new banks to open in the UK within the next three years, and Agiliti is ready to help them get up and running quickly, with an economic model that makes good business sense.

Travers Clarke-Walker, Fiserv’s EMEA managing director and former head of digital at Barclays, said that challenger banks have an advantage of being able to focus on banking rather than running IT:

Although there is a lot of talk about differentiation in the banking market, a lot of that differentiation happens at the customer experience level.

What Agliti allows banks to do is focus on the job of banking, and that is the quality of the service and the layers of innovation you have above the banking part – such as bringing other services like loyalty and reward.

My Take

As someone who despairs of the inadequacies of the existing retail banking industry, I’ve taken a great interest in the success of Metro Bank and eagerly await the arrival of Atom.

I’ve just tried to open a new bank account with Marks & Spencer and the process has been horrendous - and ground to a halt by the need for me to deliver reams of proof of identity physical paperwork to a real world branch in order to be use their online services! This in part because their databases apparently can’t confirm my postal address - although they do seem able to send me promotional material and store card bills with confidence.

The ‘banking-as-a-service’ Agiliti cloud platform strikes me as a splendidly expedient move by Atom and Fiserv. With more and more challenger banks taking shape, there’s a fantastic opportunity here to create a new generation of banks that are flexible and responsive to customer needs and not locked into out-of-date processes by an IT infrastructure permanently on the point of collapse.



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