At the end of this month, challenger bank Metro Bank is expected to follow in the footsteps of competitors Shawbrook and Aldemore, as it lists on the London Stock Exchange.
However, where Metro notoriously differs, is that while these challengers operate solely online, Metro Bank has gone against the grain since launch in 2010 – opening more than 35 branches across London and the South East. Against a backdrop of traditional banks closing more than 650 branches last year alone, the strategy has raised questions in the industry. Should banks continue to push their online services, or reinvigorate their branches?
The reality is that whether operating an online only service, or a combined digital and (all be it reduced) branch offering, innovative technology and customer experience is key component to the success of a financial institution. Metro Bank’s branches have stood out for changing the nature of the branch. They provide in-person services on Saturdays and Sundays that run until 8pm on weekdays, along with 24-hour phone services and in-branch technologies for speedy services – all with the aim of providing the ultimate in convenience for their customers.
But behind the customer-facing technologies one of the main factors that enables challenger banks to stand out from mainstream high street banks is their ability to side step traditional banks’ core legacy infrastructure.
Traditional banks rely on outdated IT systems that were developed in a pre-internet era. These systems have become a convoluted mess as banks have added on layers of technology in an effort to modernise and update their systems, without addressing the core issue.
Such legacy problems have surfaced in recent years, in the form of a series of IT outages, as banks have struggled to cope with today’s customers technology requirements. On many occasions, computer failures have left customers unable to access their online bank accounts or even remove cash from ATMs. Not only is this leading to further reputational damage for mainstream banks, regulators are also clamping down on such inefficiencies, with the FCA implementing fines to the tune of tens of millions.
For now at least, banks are relying on their heritage as a proof point of their credibility and this is a key factor that has helped them to maintain their dominant market position, despite the rise of new entrants. But as this legacy starts to translate into inefficiencies, banks will have to re-think their IT structures if they are to remain competitive.
A complete IT overhaul is a costly and risky undertaking, but by separating their technology into core business functions, they can make isolated updates. This will enable them to offer customers the innovative service they desire, without causing disruptive and reputation-damaging IT outages.
For this to work on a wider scale, global banks need to collaborate to develop a new industry standard. By identifying the core IT business functions across the board and figuring out how these functions cooperate using a Service Oriented Architecture (SOA), banks can also identify which areas can be managed by a third party.
This would allow financial services to ensure they are competing on the areas that matter to their bottom line – such as offering competitive loan or mortgage rates – rather than competing on the efficiency of their tech.
If the public listings of challenger banks tell us anything, it’s that FinTech is here to stay. Banks should be looking for ways to embrace the efficiencies of FinTech and incorporate their customer-centric technology into their own business models. Initiatives such as the government’s bid to encourage banks to open out their APIs are a key enabler of this cooperation. This is not a case of FinTechs versus the banks. Banks have a lot to gain through opening up their APIs.
By embracing an open platform, banks can simplify the process of adding innovative technology services by piecing together building blocks of flexible technology – outsourced from FinTech players, or even other banks who specialise in a specific service. Gaining knowledge of such an open platform gives the FinTechs an opportunity to widen their scope beyond their traditional payments solutions.
With banks facing pressure from numerous directions at present, they are beginning to understand that competing on core banking functionality will not breed success. Banks should be working together with technology giants, and even smaller nimble FinTech enterprises, to define the future of their core banking architecture and build a standardised model across the industry.
By doing so, banks – whether challengers or traditional providers – can then concentrate on competing in the areas that matter, namely providing an improved service that suits the needs of customers.
Hans Tesselaar, executive director, Banking Industry Architecture Network (BIAN)
Image source: Shutterstock/Oleksiy Mark