The retail banking sector is going through a period of regulation-driven change and IT is playing a key role.
The credit crunch of 2008 that brought economies across the world to their knees has resulted in more regulation and an unhappy public venting their anger at the “bad banks”.
Regulators are fining banks for misdemeanours they might, in the past, have chosen to overlook. The £56m fine imposed on RBS by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for an IT failure is a case in point.
Regulators have also forced banks to prepare to separate their investment banking arms and retail arms, through what is known as “ringfencing”.
But perhaps the most powerful tool regulators have at their disposal is the ability to stimulate competition. If consumers have a real choice of where to bank, they could demonstrate their anger in the most powerful way – by taking their money elsewhere.
In 2013, another of the financial services regulators, the Payments Council, introduced a system that enables consumers to change current account providers in seven days, rather than the 30 it took previously. This system will be more useful once consumers have good reason to change accounts. Currently, there is little point changing current account suppliers because there is little difference in what they offer.
But that could change. Regulators want competition and have changed the rules associated with setting up a bank. It seems to be doing the trick.
Digital banks challenge the status quo
Recent months have seen a spate of new banks granted licences, with others going through the process of getting approval.
This is significant when you consider that when Metro Bank opened its doors in 2010 it was the first new company to be granted a banking licence in 150 years.
One of the forces behind Metro Bank, Anthony Thomson, is currently launching a digital bank known as Atom. His recent comments that the bank will use its low costs to offer consumers higher interest rates on savings and lower borrowing rates could be the key to success in a sector dominated by giants such as RBS, HSBC, Lloyds Banking Group and Barclays.
And if research from CBI and PwC is anything to go by, finance firms have been shaken. A survey conducted by the organisations found that UK finance firms are increasing spending to “increase efficiency and to reach new customers as competition and technology change the nature of the sector”.
There is more reason for new banks to believe there is an opportunity. A recent survey of 2,000 people by banking software supplier Fiserve revealed 80% of people would trust a bank if it had the right technology in place. More than half (56%) said a new bank would have an advantage over rivals if its IT was reliable.
Computer Weekly looks at six of these challenger banks and their use of IT to differentiate.
1. Atom Bank
Atom Bank says it is building a bank with “none of the baggage of the past”.
The bank will be digital only and plans an online-only current account. Founder Anthony Thomson said the low operating costs at the bank – which will launch in 2015 – may result in financial benefits for its customers. These might include lower interest rates on loans and higher rates on savings.
The bank’s website reads: “We think customers want value for money, with service at the touch of a button. A bank that’s fair and transparent, that acts in the best interest of its customers. One that really doesn’t act like a bank at all.
“And we’re digital, because we believe technology makes life easier and puts you in control. It can even bring people closer together.”
Ovum analyst Rik Turner said if Atom can offer a current account, high savings rates and low borrowing rates, it could provide the first genuine challenge to traditional banks.
“All the iPhone and Android apps in the world are meaningless unless these new banks have attractive products,” he said.
2. Fidor Bank
Fidor Bank is a social media and Web 2.0-based bank. It uses social media to overcome the cost and complexity of traditional banking, while increasing customer trust through an online community.
It currently operates in Germany (since 2007) and Russia, and is going through the process of getting a licence in the UK. It also plans to launch in the US.
The unanticipated financial crisis that arrived in 2008 provided a unique opportunity for Fidor Bank. The timing of the bank’s creation was more to do with the momentum of Web 2.0 technologies and the advent of social media but, by co-incidence, it arrived at a time when people were more likely to consider switching banks.
“We were born at a time when trust in banking was going down to zero, so we thought, if not now, when? Web 2.0 gave us the chance to set up a new bank, then the financial crisis and the behaviour of the banks involved said to us that setting up a new bank was a must,” said CEO Matthias Kroner.
Financial Services Club chairman Chris Skinner said Fidor Bank is growing in Germany.
“It seems to be doing pretty well in Germany in terms of growth, although it is still insignificant compared to traditional banks. It could appeal to customers because it’s cool and funky, which are not words I would normally associate with banks,” he said.
Starling is a digital bank being set up by ex-Allied Irish Bank banker Anne Boden, who hopes to gain the first part of the licence in late spring 2015, before raising the capital needed and getting a full licence at the end of next year.
Boden is aiming to change banking in the same way Amazon changed retail and Apple changed music.
“The same simple services traditionally offered in branches have just moved online and into apps. Empowered, tech-savvy consumers want and deserve more from their banks – they want easy, intelligent banking, not just mobile versions of paper statements.”
Boden said consumers refrain from moving their accounts because it makes little difference: “Most customers aren’t switching because they see little difference between the big banks that all offer the same old-fashioned services.”
But this could change. “Finally, the technology behind all the best internet platforms can be brought to banking, allowing us to create a digital banking service that’s truly personal to each customer,” she said.
Charter Savings Bank has been awarded a banking licence, meaning it can now target customers of traditional UK banks.
The new bank, which is part of Charter Court Financial Services (CCFS), will focus on savings and plans to launch an online savings account early this year.
Like other challenger banks, new technology enables Charter Savings Bank to compete with existing banks without the need to invest heavily in bricks and mortar, through online services.
It also has the advantage of being able to adopt modern technology, unlike traditional banks which are held back by legacy IT infrastructures that are costly to maintain and not designed to work with modern technologies.
“The online and telephone-based proposition, which removes the cost associated with a physical presence on the high street, is set to launch in early 2015 and will be a UK bank for UK savers,” said a statement from the bank.
Hampden is a private bank based in Edinburgh. It will start operating in the first quarter of 2015, following its decision to use a cloud-based banking platform from Oracle.
Previously known as Scoban, it is using Oracle Flexcube and cloud services for its digital banking operations.
Oracle’s software will manage Hampden’s core banking, as well as direct and mobile banking operations. It will be provided from Oracle’s UK datacentre, based in Linlithgow, Scotland.
The managed service from Oracle aims to aggregate data from different sources to allow the bank to better understand customers and offer personalisation.
Hampden CEO Graeme Hartop said: “We view delivery of outstanding client service as a priority, which in today’s world needs to be supported by the best technological core banking platform available.”
6. Lintel Bank
Lintel is about to embark on the process of applying for a banking licence. It is currently getting feedback from the PRA.
Through online and telephone services, a few branches and “state-of-the-art IT”, its founder – former IT professional Nazzim Ishaque – plans to offer a current accounts, mortgages, loans and more to small and medium-sized businesses.
Lintel describes itself as: “A helpful, different and better bank, currently in the process of applying for authorisation from the Prudential Regulatory Authority and Financial Conduct Authority.”
The bank promises to open an account for a British citizen in just two minutes.
Ishaque told Computer Weekly that the company plans to use an off-the-shelf core banking system form a third-party supplier, with “user experience a priority”.
He said the bank plans to work with retailers to link accounts to loyalty programmes. “We want to enable automatic discounts at the point of sale.”
Lintel bank cards will have digital displays to provide additional security.
Ishaque said the bank will be platform agnostic and will link to a new wave of finance firms, such as new payment providers, and provide them with a back end.