Building societies could compete more effectively with banks
and other larger competitors by sharing IT services.
Chancellor of the exchequer Alistair Darling last week published
the Reforming Financial Markets white paper, which set out the
government's proposals for the financial system.
The government wants to explore a model similar to that in many
European countries, where financial organisations share back-office
functions. It plans to report its findings in the Pre-Budget
Report.
Ralph Silva, analyst at TowerGroup, says the proposals could be
the saviour of UK building societies.
Building societies traditionally compete by providing good
levels of service. But when the economy is struggling, customers
just want best price. "When times are good people buy for service
levels but when they buy on price, building societies go out of
business," he says.
Building societies cannot compete with high street banks on
price because banks have economies of scale. But sharing IT can cut
costs and help them compete on price when times are bad, he
says.
"Technology such as core banking systems do not offer
competitive advantages to building societies. But technologies that
support their services, such as CRM, do."
The Building Society Association says there is no legal barrier
to societies sharing back-office facilities. There are several
examples of such arrangements working well.
"It seems very unlikely, though, that we will see shared
services on the scale of those on the continent, where mutuals
operate on federal lines rather than as wholly independent
entities," the Building Society Association says.
Skipton Building Society's Mutual One arm has offered IT bureau
services for 15 years. Some 17 building societies use its audit
services and more than 20 are working together on compliance.
"We are very supportive of collective action in principle as
this, after all, is the whole raison d'etre of Mutual One," says a
Skipton spokesperson.
"It makes a lot of sense for building societies to take a fresh
look at their current cost base and consider how adopting a shared
operating model like this might help them raise standards and gain
access to valuable additional knowledge, skills and expertise - as
well as achieving the kind of cost savings and economies of scale
which the government is seeking in the current environment to
strengthen the mutual model."
Loughborough Building Society is one of Skipton's Mutual One
customers. "Outsourcing to another building society offered comfort
in terms of shared priorities and a belief that the supplier fully
understood our business," it says.
Newcastle Building Society also provides IT services to other
financial services companies.
The society recently increased the capacity of its Strategic
Solutions business, which provides computer systems and
services.
Bradford & Bingley is among the Newcastle's customers for
technology, processing capability and administrative support
services.
Shared IT services like these can offer any business economies
of scale and savings. The building society sector looks set to use
the idea increasingly to compete in the tough times ahead.