UK’s incumbent retail banks must embrace commercial risk

By Alex Hamilton | 28 November 2018

Banks must find their niche and “bloody well deliver” or face losing customers to challengers. according to Alison Jaap, head of change at First Direct. Speaking at an event in London this week, Jaap argued that incumbents need to take more commercial risks as innovative products flood the market.

Banks simply can’t afford to be all things to all customers, she said. Unlike retail giant Amazon, they can't rely on an “unlimited budget”. Jaap was full of praise for challenger banks Monzo, Starling and Tandem, and highlighted the three as examples of how a bank needs to choose its battleground to find success.

Yet calm is needed when approaching new and innovative products, she cautioned. Due to the industry’s propensity to move in high gear, the half-life of a new product “is six months if you’re lucky,” she said. “It may even decrease as the speed of change continues.”

Joining Jaap in the discussion was Stephen Drury, director of new business models at Santander UK. Drury said that the ability to move “very quickly” in the marketplace is now crucial to competing with the challenger banks head on. “There’s been a change to the way banks must focus. It’s no longer the case – as it was ten years ago – where you can get a load of people in a room, throw ideas out there and hope you strike lucky.”

The model of engaging the customer, he added, has “entirely changed”. “It brings with it a whole new set of people with an objective view of where value can be delivered. Consumers know that within five years’ time they will be able to ask Alexa questions about how they spent their money in the last week and be able to receive in-depth answers, not just a robotic voice over a set of speakers.”

Evidence suggests a number of the UK’s incumbent banks have been making developments in-line with challengers: in late November Lloyds, Halifax and Bank of Scotland released updates to their banking apps allowing users to track the geographical location of their purchases. A month prior, the three banks also released a biometric verification system. Moreover, according to a 2018 poll by MoneySavingExpert, apps provided by Barclays Bank, Lloyds, were deemed to be “great to use” and have “lots of features” by more than 40% of their users.

A survey conducted by YouGov in early November also found that 69% of customers would be willing to use a consolidated banking app provided by a high street bank, versus 19% who would prefer to use an app provided by a challenger.

Despite this, Jaap argued that banks need to get to grips with the idea that customers “don’t really know what banking is”. She added that they’re more focused on what is happening in front of their face than worrying about what’s happening with an institution’s technology stack.

A “two-pronged strategy” is required to deal with a bank’s ageing technology, said Jaap, speaking on the sidelines of the conference. “The first is to deal with the ageing technology infrastructure. We have teams working in the background unscrambling the spaghetti and moving us to new platforms.” The process must be a pragmatic one, she added, as “at some point we are all going to have to deal with it”.

 “The second path is realising the core may not be faster enough, so how do we augment it? That’s where we make partnerships with fintechs which can come in and do things faster.” Running these two tracks alongside each other, said Jaap, means that a bank can continue to innovate while dealing with issues that might arise from ageing systems.

Santander UK recently switched out its core banking system, and is now running on a platform provided by Infosys Finacle. Drury took a more laconic strategy when it came to his answer: “Build new. Make the old accessible and kill anything that’s broken. You have to be ruthless, even if it costs money to do so.”

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