Lloyds Bank plans £1 billion spend to secure a digital future

With immaculate timing following on from Derek’s stress testing digital banking piece earlier in the week, Lloyds Banking Group, the UK’s largest retail bank, has cited a massive migration to delivering digital services as the reason for slashing 9000 jobs and 150 branches.

Still 25% owned by the UK taxpayer following government intervention during the financial crisis, Lloyds turned in a pre-tax profit Tuesday of £751 million in the three months to 30 September, reversing a loss of £440 million for the same period last year.

But with £1 billion now to be spent on the digital re-invention (on top of a further £1.6 billion on its ongoing Simplification program to rationalise existing IT and customer-facing systems), jobs and branches are to go as well as existing planned.

The objective: spend £1 billion to save £1 billion over the same period. The spend will go on enhanced services, online, telephony and mobile capabilities, better analytics and greater personalisation.

Lloyds own figures suggest that it has around 10 million customers who regularly use digital services while mobile banking users grew from 3.3 million in 2012 to over five million today. At the same time, in-branch transactions have fallen 9% over the past 12 months.

António Horta-Osório, Lloyds chief executive, says:

We have delivered substantial improvements to profitability while at the same time continuing to address historical legacy issues. The business is performing strongly and we are well positioned to continue to support and benefit from UK economic growth.

Over the next three years, we need to adapt to the changes in financial services brought about by technology, changing customer behaviour and increasing regulatory requirements, at a time when traditional competitors’ strategies converge and new entrants compete for customers.

This strategic shift has been some time in the making, he explains:

Late last year, we launched digital as a separate standalone division whose head reports directly to me and is a member of the executive committee of the bank. This has provided the necessary focus that will enable us to extend our digital capabilities throughout the group and to ensure we develop propositions that are at the forefront of our customers' evolving needs across all of our divisions.

To achieve this, we will invest in new mobile applications; a new platform for commercial banking; online sales and servicing; videoconferencing capabilities; and an enhanced self-service technology, increasing overall spending over the next 3 years to GBP 1 billion, so 1/3 higher than the previous plan period.

We have already made good progress in building our digital capabilities. In the last 3 years, we have invested more than £750 million in digital, achieving a 20% digital market share with over 10 million active digital customers, 5 million of which are active mobile banking customers. And GBP 1.5 trillion of commercial client transactions have been conducted through our digital platforms. Our digital propositions are also receiving industry recognition, with our consumer and SME apps achieving a top iOS rating earlier this month.

He adds:

Over the next three years, our focus will be to adapt to the changes in financial services brought about by shifts in technology, changing customer behaviour as well as the evolving competitive and regulatory environment. Our strategy through to 2017 has three priorities; creating the best customer experience, becoming simpler and more efficient, and delivering sustainable growth.

We will create the best customer experience by continuing to rebuild trust with our customers, providing a reliable, consistent and convenient service. We will transform our digital capability, providing customers with simpler, seamless interactions across online, mobile and branches, and improving the efficiency of products and services.

With branch closures clearly a hugely emotive issue, Horta-Osório was quick to emphasise that offline banking will remain an element of the future strategy:

In contrast with market trends, we recognize the value in maintaining a significant branch network as part of a multibrand and multichannel approach to serving customers, but we will adapt by evolving the role of branches to reflect our customers' changing preferences, integrating the role of branches with digital and telephony as part of a seamless multichannel approach.

As our customers continue to value the convenience of branches, we remain committed to maintaining a wide-reaching multibrands branch network, where over 90% of Lloyds and Bank of Scotland customers will continue to have a usable branch within 5 miles, while the Halifax network is maintained.

Challenges ahead

Lloyds general direction is to be welcomed, but it must be careful about how it implements the specifics, warns Peter Roe of analyst firm Techmarketview:

Lloyds talks about building “new capability in digital and IT” and reducing third-party spend, but it must not waste money on replicating commodity (or soon-to-be-commodity) operations internally. Greater use of utility services would be welcome. Also, real customer service improvements require significant changes in the way data is captured, stored and utilised and this is not a trivial task.

Management talks about the £1bn of investment over the past 3 years and of “building a resilient, secure, digital infrastructure”, but the problems of legacy systems are deep-rooted and all the new customer demands will bring additional stress and risk to the bank’s core systems.

The bank is saying many of the right things, but has much to do. To succeed it must focus its IT resources on the areas that matter and in our view place greater reliance on its SITS suppliers.

Lloyds planned transformation is of course part of a wider global transformation in the banking world. This in turn represents a threat to legacy IT providers, but an opportunity for the cloud and digital tech suppliers.

At the recent Dreamforce conference in San Francisco, I caught up with Simon Mulchaey, VP FInancial Services for Salesforce.com, told me that retail banking is seen as a

big area of excitement for us, especially in the context of a lot of financial services firms walking up to the fact that customer centricity is not there. Customer expectations have been fundamentally reset by the use of innovative services such as Uber.

But the finance industry is turning the corner. Customers are coming to us and saying they’ve done research internally and say that we’ve made technology deadly easy. Meanwhile they’ve got a ball of IT spaghetti over there.

What this typically means for existing banks is the need for a co-existence strategy between legacy systems and new tech, advises Mulchaey:

Banks don’t want to build fresh. They do want to build out of the box.

There are also demographic and geographic challenges to be faced, he adds:

The expectation of German banking customers is not the same as the UK and the US. It’s not just national demographics though, it’s age demographics. Wealth management customers are currently typically 65 year olds served by other 65 year olds.

But there will be a massive transformation underwayas wealth transfers to the digital generation so you’ll start to see wealth advisory services aimed at then younger demographic.

My take

I'm a customer of Lloyds in the UK and find dealing with the bank to be tremendously frustrating with an almost total lack of joined up processes and systems. For example, it took them 2 months to get my online banking working properly, while trying to pick your way through the morass of call center people is a soul-destroying activity that means setting aside a considerable chunk of your day.

In contrast, dealing with First Direct is relatively painless, dealing with an efficient telephony operation and a working online proposition. But First Direct was built that way from the get go. Lloyds - and most of the big high street banks - was not. There's a massive cultural challenge as well as a technological one that will need to be tackled over the next 3 years.

It's a bold roll of the dice though and the ambitious objectives are to be applauded. But there's a huge difference between a good theory and good execution.