UK competition authority sets banks a 2018 deadline for digital revolution

The digital transformation of the banking industry has been a common theme here at diginomica over the past three years. We’ve tracked the emergence of the challenger banks and the digital-only generation and noted the struggles that legacy banks have in overhauling their own systems and processes.

It’s a global phenomenon, of course, but in the UK the banking revolution has today been given a major boost with the publication of a long-awaited report from the Competition and Markets Authority (CMA) - Making Banks Work Harder For You - that demands radical changes in a relatively short period of time. The report notes that the industry itself has delivered improvements, but adds: 

There has been entry by new banks with some entrants adopting new business models, offering specialist products and exploiting opportunities offered by new technologies, such as digital-only banks. Mobile banking is now widely adopted and growing fast. New types of payment services, lending and financial management services are now available from providers which are not banks.

Despite these welcome developments, we have found that many problems remain. Essentially, the older and larger banks, which still account for the large majority of the retail banking market, do not have to work hard enough to win and retain customers and it is difficult for new and smaller providers to attract customers.

Now, after a two-year inquiry, the CMA wants to see mobile apps brought in by early 2018 which will enable customers to see which banks offer the best account, based on their own borrowing patterns. The main tech recommendations are:

• Requiring banks to implement Open Banking by early 2018, to accelerate technological change in the UK retail banking sector. Open Banking will enable personal customers and small businesses to share their data securely with other banks and with third parties, enabling them to manage their accounts with multiple providers through a single digital app, to take more control of their funds (for example to avoid overdraft charges and manage cashflow) and to compare products on the basis of their own requirements.
• Requiring banks to publish trustworthy and objective information on quality of service on their websites and in branches, so that customers can see how their own bank shapes up. Whether a personal customer or small business is willing to recommend their bank to friends, family and colleagues will be a core measure, but banks will also have to publish and make available through Open Banking a range of other quality measures.
• Requiring banks to send out suitable periodic and event-based ‘prompts’ such as on the closure of a local branch or an increase in charges, to remind their customers to review whether they are getting the best value and switch banks if not.

Alasdair Smith, chair of the CMA's retail banking investigation, says:

The reforms we have announced today will shake up retail banking for years to come, and ensure that both personal customers and small businesses get a better deal from their banks. Our reforms will increase innovation and competition in a sector whose performance is crucial for the UK economy.

Our central reform is the Open Banking program to harness the technological changes which we have seen transform other markets. We want customers to be able to access new and innovative apps which will tailor services, information and advice to their individual needs.

The creation of open APIs is the most radical recommendation. The report notes:

Open APIs can transform the financial services sector. There is already a very active and growing FinTech community which has been developing and introducing new products using existing digital technology.

Requiring the banks to adopt and maintain a common open standard will accelerate the pace of this change. Without our intervention, the process of developing open APIs cannot be guaranteed and could take a long time, with the effect of denying customers the early benefits of these new services. We are therefore also imposing a challenging, but realistic, timeframe on banks for this process.

The CMA lists a number of new applications that will result from such open APIs, including:

• Apps to allow banking customers, through a single application, to manage accounts held with several providers.
• Apps to allow customers to authorise the movement of funds between current and deposit accounts to help avoid overdraft charges or to benefit from higher interest payments.
• Apps to let customers make simple, safe and reliable price and service quality comparisons tailored to their own usage patterns.
• Apps to monitor a current account and forecast a customer’s cash flow, helping to avoid overdraft charges.
• Apps that use a small business’s transaction history to allow a potential lender other than their bank to reliably assess the business’s creditworthiness and offer better lending deals than they would without this information.

Industry reaction

The report’s recommendations have found favor with the British Bankers Association (BBA), whose Chief Executive  Anthony Browne says:

Customers and businesses have already found digital banking hugely convenient and have taken advantage of mobile technology that is allowing us to bank round the clock…However, we recognise more work needs to be done to create a level playing field by supporting new banks wanting to set up business, as well as helping to grow established banks.

What will be interesting is how easily the legacy banks can meet what is a pretty demanding timetable for innovation when they already have digital transformation challenges of their own making. It was notable last week, for example, that Royal Bank of Scotland’s (RBS) plans to spin-off its Williams & Glyn arm as an independent business has been knocked off course by the main bank’s legacy IT.

RBS has spent a great deal of money on this separation program to date. It signed a reported $300 million deal with Infosys in September 2013, while developing a cloned banking IT platform has reportedly cost in excess of £1.4v billion. Shutting down the project will result in a further charge of £200 million. Chairman Howard Davies explained:

We concluded that the technology risk and the associated implications are now clearer than they were at the end of the first quarter. And that, combined with a more uncertain economic outlook and even lower-for-longer rate environment, undermine the standalone viability of the entity and meant that we could no longer prudently continue with the current plan.

Despite that bad experience, RBS remains committed to digital transformation, says CEO Ross McEwan, with an existing emphasis on mobile solutions:

Digital transformation will help us build a simpler bank, improving customer experience and driving cost reductions. We've seen a year-on-year increase of 25% to 4.1 million active mobile users, with 30% of the logons to our app now using biometrics.

Customers who transferred money using our app on average, six times a second, during the first half of 2016. Since Q1 this year, customers have been able to apply for unsecured products via the mobile banking app, and so far, 69,000 had benefited 10% of our total applications.

My take

A welcome set of recommendations from the CMA and a fresh set of challenges for the UK banking industry. The need for change and reform is evident. How well the legacy providers can meet the objectives remains to be seen.