With two of the UK's biggest banks forced to sell off major sections of their business, the face of retail banking in the UK is set to undergo a major facelift, writes Colin Rowland, senior VP EMEA operations at financial services technology firm OpTier.
This move will allow new players to enter the market, dominated for a generation by Barclays, HSBC, RBS and Lloyds, and give it a much needed shake-up. Virgin Money, one of the key new players, entered the retail banking sector last month, with the purchase of the Church House Trust for £12.3m. This strategic acquisition granted Virgin the prize it has been after since it set up Virgin Money in 1996 - a banking licence. But it is not only Virgin that is eyeing the banking sector; Tesco acquired its banking licence earlier this year, while Sainsbury, Marks and Spencer and The Post Office are all potential players.
The government is keen to promote competition and increase consumer confidence in the stagnant banking sector. New banks, through the innovative use of IT, are well placed to take advantage of the tarnished reputation of the four big players. But what should new banks do to distinguish themselves and will their established competitors be able to keep up?
The banking jigsaw
Over the past 20 years, banks have become increasingly complex entities constrained by layers and layers of legacy infrastructure, which has reduced their ability to adapt and implement new technology. Every year, banks invest hundreds of millions of pounds in new technology, yet it can take years before a new product reaches the consumer. This long route to market results from the overwhelming complexity of banking IT and the lack of insight into the banking systems as a whole.
Banks have reached this inflexible nexus as they have been forced into a siloed approach to performance management, through the implementation of partial solutions that monitor individual technology silos, which lacks the holistic, end-to-end picture that IT management requires. Banking infrastructure has become so rigid that IT managers have lost their ability to quickly react, implement and respond to demands placed upon them from the market.
This is where new banks have an opportunity to differentiate themselves. Unlike their established competitors, they will start with a clean slate, unhindered by existing legacy systems. This freedom will allow them to build their IT infrastructure from the ground up and invest heavily in new and emerging technologies. To maintain this advantage they must learn from their competitors and retain the end-to-end control of their infant IT infrastructure.
It is this control that will make them more agile and responsive to changes in the market and allow them to quickly implement new systems such as customer service delivery via Skype and flexible account management via iPhone apps, and to increase their social media offerings. By adopting a holistic approach to performance management, new banks will improve the speed at which new technology enters the market, while securing overall management of their core systems.
The new entrants will also have the advantage gained from their brand's kudos and associated offerings. Tesco has already amassed a deep knowledge of its customer base through the Clubcard reward scheme. By linking this information to its banking division, it will hit the ground running with more customer information than its established competitors could ever dream of. While Virgin, with its cool brand, will appeal to the younger generation, it still has challenges to overcome. It is often said that you change your spouse more often than your bank account, so Virgin will be under pressure to diversify its appeal if it is to secure its future in retail banking.
It's not yet the end of the line for the four big players, however. They will need to overcome their inefficiencies and take control of their IT systems by quickly establishing a comprehensive overview of their IT infrastructure. By simplifying their IT management, into an end-to-end, rather than a siloed solution, they will ensure the robust and resilient delivery of core products, while providing the flexibility to follow new and emerging trends.
Established banks will need to become leaner, meaner and more able to adapt. New banks will have a competitive advantage, starting with the implementation of new technology, but this is not a sprint event. Barclays, RBS, Lloyds and HSBC are unlikely to concede their large market share without a fight. One thing is certain, however, there can only be one winner in this battle and that's us, the consumer.