The raft of new and existing regulations facing retail banks from the Basel III capital adequacy regime to the Know Your Customer (KYC) regulations mean that it is increasingly difficult for new entrants to break into the marketplace, says Martin Dempsey, client director at the Certeco consultancy. Perhaps it is therefore time for a shared service centre collectively run by, or on behalf of smaller banks in the UK and elsewhere, to ease this regulatory burden and its attendant technological challenge.
To say that regulation has been a thorn in the side of the banks in the last five years is to put it mildly. The UK government, in common with many others around the world, is hell bent on avoiding a second financial crisis, so it is striving to create a transparent banking environment, where corporate fraud and dastardly investment banking manipulation a la Libor are picked up immediately protecting the public finances from ‘too big to fail’ toxic banking behaviour.
Regulation is the key governmental way to try to achieve this new stricter banking environment, but it has technological impacts. For instance, the single euro payments area (SEPA) necessitates standardised ISO 20022 messaging technology and International Bank Account Numbers (IBANs) and Bank Identifier Codes (BICs) must all be aligned and KYC regulations for the purposes of anti-money laundering (AML) demand good customer relationship management and data tracking and reporting solutions.
The UK government is also trying to create greater competition in the retail banking sector with HSBC, Barclays, RBS and Lloyds Banking Group dominating the marketplace to an unhealthy degree and its efforts are being mirrored around the world as post-crash many banking names disappeared reducing choice. For new challenger banks, such as the UK arm of the American Metro Bank group, Virgin Money or supermarket banks like Tesco or Sainsbury’s Bank challenging the established players is not easy, however, as compliance costs go up and up, cutting the amount of tech budget available for innovative technology and customer-facing tools.
In my opinion, it may therefore be time to consider a shared service centre in the UK that can collectively provide a technology platform for smaller UK banks and building societies to meet their regulatory obligations at a lower cost by taking advantage of economies-of-scale savings. This already happens in Spain with the CECA confederation of savings banks acting collectively on shared service platforms for regulatory and non-regulatory services such as mobile banking services. The UK should seek to advocate something like this and it is an approach previously advocated by the Building Societies Association (BSA). Anything that can help add extra competition to the retail banking sector has to be a good thing.
New Retail Bank Entrants Should be Encouraged
The benefit of new bank entrants to the marketplace means the stranglehold of the UK High Street banking behemoths will be loosened and consumer choice will soar. It will mean a fairer system, where bad banking practices will not be tolerated as banks compete for an increasingly aware and proactive customer base, with extra competition in many ways doing the job of regulation by keeping banks honest with the threat of lost business hanging over them if they stray.
The UK and European Union (EU) government has wheeled out various initiatives in a bid to increase competition. Forcing UK retail banks to offload branches as a quid pro quo for the bailout rescue packages they received in 2008 was one such move - the diktat to RBS to divest over 300 branches and to Lloyds to do the same with more than 600 branches - has so far, proved unsuccessful however with both Santander and the Co-op Bank withdrawing from the deals over funding and technology integration fears.
So where are the new retail bank entrants going to come from? And how can they hurdle these regulatory, technological and business barriers to entry? We can be clear on one thing - access to a branch network does not even make it on to a shortlist of the principal barriers to entry. Commercial property is cheap and besides, customers of all types are much more likely to utilise online and mobile banking nowadays than they are expending their shoe-leather on visits to their local branch.
Unfortunately, regulation, the tool the UK government and the Financial Conduct Authority (FCA) are wielding to create more transparency and a fairer banking environment is also the biggest challenge for small players. From FATCA to SEPA, Basel III to KYC, the regulatory challenges the banks are grappling with are significant and growing all the time. It is also an inhibitor to innovation in banking as the cost of adhering to regulation is money the banks can’t spend on new products and offerings.
In many cases, these programmes have no business case, in the sense that their delivery is simply the cost of continuing to do business with particular types or nationalities of clients. Regulation is a cost rather than a profit centre. Big banks undertake these mandatory programmes armed with large budgets and even larger teams of regulatory and change professionals. Smaller banks have to achieve the same level of regulatory standards but with a smaller team, smaller budgets and a smaller customer base to justify the cost. And of course, regulatory adherence has no visible benefit for the customer - the customer just wants good service and usability.
Maybe regulators should be thinking more laterally about how to help banks adhere to the regulatory environment. A regulatory shared service centre for the banking industry could be the answer. This could prove appealing to smaller banks and new entrants. They would need to supply compliant data to what effectively would be a regulatory black box - a reporting engine managed by the regulators - which would then process the data and report accordingly to ensure that it is compliant with all current regulatory requirements.
Funding a UK Shared Service Centre
The cost of the creation and maintenance of a UK shared service centre would be funded by an initial bond placed by those banks which choose to utilise the service and then a levy charged against the banks on a utilisation basis. It would allow the regulators to take their place in driving some of the innovation in change that the industry is constantly seeking, as well as heighten their awareness of the impact of constantly moving regulatory goalposts.
There are multiple examples of shared services across many industries including the financial services industry with the aforementioned CECA just one example. The UK insurance sector utilises shared databases; rediATM provides a shared ATM service to multiple banks in Australia as does VocaLink in the UK; and the Landesbank arrangement in Germany offers an insight into multiple smaller banks using their collective might to compete technologically and on cost (albeit in a different structure to the UK banking sector).
A system such as this would help the UK government, the FCA and the Prudential Regulatory Authority (PRA) to understand the challenges retail banks face when responding to regulatory change. It will give them a clear idea of the resources the banks need to throw into the regulatory ring. A regulatory shared service centre would help them to drive down the cost of compliance, freeing up resources which could instead be ploughed into innovation and improving customer experience.
Surely, the time has come for regulators to embark on an era of simplification. The regulatory environment needs to be more receptive to new entrants and small banks and a simpler environment needs to be created for them to navigate, otherwise the regulators risk stifling competition and innovation. A British regulatory shared service powered by the regulator could well be part of the answer.