"The ease with which these challenger banks can adopt these new technologies is what gives them their competitive edge over more traditional banks."
Positive regulatory updates have been the driving force behind many of the experimental changes being employed by banks today, not only to maintain compliance, but also to offer customers more innovative and transparent ways to bank. With consumers becoming highly accustomed to researching information online, interacting with brands in real time and preferring automated and digitised services, the digital savvy consumers are significantly impacting the future of banking.
More and more, the line between regulation and customer-centric business models is beginning to blur. This can be seen in schemes such as the FCA’s ‘Sandbox’ initiative, which provides a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms, while ensuring that consumers are appropriately protected. With this approach, not only are consumers’ needs placed squarely at the front of every company’s business model, but newer and more disruptive firms are given the chance to thrive in today’s competitive financial services market.
After a two year investigation, the CMA recently revealed that the Big Four banks – Lloyds, HSBC, Barclays and RBS – still dominate 77% of the personal current account market and 85% of the business accounts market. However, whilst these established players have been dealing with the fall-out from the financial crisis and increasing regulation, they have left a gap in the market for new players to offer fresh, competitive products and technologies which offer consumers a new and improved ways to manage their money.
Unhampered by the legacy IT systems that often hinder traditional banks in their quest for innovation, challenger banks are set to flourish by exploiting new technologies such as cloud-based solutions. As a result, these new banks all have one thing in common: fresh digital offerings that are optimised to help enhance the customer experience.
The ease with which these challenger banks can adopt these new technologies is what gives them their competitive edge over more traditional banks. While more established banks may have formidable and extensive resources available (wrapped in red tape and cumbersome processes), new entrants have the advantage of starting from scratch, allowing them to tailor their systems, processes and procedures to meet the demands of today’s customers.
On the flipside, challengers do not have access to the market data that traditional banks have built up, which can provide valuable insight into the customer base, as well as their behaviours and appetite for new or alternative product offerings. As such, if new entrants are seeking to be more innovative, it is essential that they continue developing in order to level the playing field with more established competitors. With the upcoming Open Banking Standard in the UK, banks will have to share customer data with third parties, facilitated by open APIs (application programming interfaces), making data an increasingly important way for banks to grow loyalty, engagement and revenue.
The key to innovation for both new and traditional banks is the adoption of cloud-based services. These solutions allow lenders to make faster, more accurate decisions for clients, as they provide access to a wide range of data, whilst making it easy to upgrade key systems and processes.
For the traditional banks, cloud solutions make it easy to update their offering and provide greater transparency in their bid to retain their loyal customer base. Challengers, on the other hand, are able to design and rapidly deploy a more attractive product offering as well as incentives based around digital, with the aim of driving people to switch their bank, a historically difficult feat.
A recent survey of 2,000 people revealed that 80% of people would trust a bank if it had the right technology in place, with more than half saying a new bank would have an advantage over rivals if its IT systems were reliable. Clearly, customers are ready and waiting for new options to suit their lifestyles.
The CMA found that nearly 60% of personal customers have stayed with the same bank for more than a decade, but as competition and more diverse companies come to the fore, it may be that customers begin to shift their loyalty. Whilst we cannot predict the direction of the industry with absolute certainty, it is clear that the Big Four’s grip on the industry is loosening, which means that customers may begin to look elsewhere for better deals from competitors.
For all these reasons, digital innovation needs to be at the centre of every bank’s IT strategy and department. To ease some of the challenges of bringing new products to market or turning lagging systems around, firms may choose to outsource to external providers to help. This approach will provide them with the advantage of utilising existing technology and processes, which will make entry simpler and more immediately scalable. At the same time, these businesses will benefit from invaluable advice and experience that will help them to navigate the competitive and regulatory landscape.
Without a doubt, the UK financial services market presents many opportunities and challenges. For organisations that are able to rapidly adopt the necessary processes, systems and controls, there is no reason why they cannot be highly successful. As new entrants continue to shake up the natural order and restore some long-awaited competition to the market, we can expect even more diversity for consumers who are looking for the best products and service to suit their lifestyles.
