Retail Banking Simmers with Technological Promise

By Jay Patani for Finextra

Since the financial crisis, the major UK retail banks have primarily been keeping their head down, averting or avoiding scandals and dealing with changing government regulations or mandates.

What they’ve failed to account for is the incoming tide of technology that is about to sweep over the world of retail banking. The staid oligopolistic world of retail banking has been rattled by new breed of banks that are now setting up shop. These digital ‘challenger’ banks are breathing life (and technological innovation) into a market currently dominated by 5 big banks in the UK (HSBC, RBS, Barclays, Santander and Lloyds Group) along with a few large mutuals such as Nationwide.

The Latest Wave of Banking Newcomers

In many ways, Metrobank – which opened its doors in 2010, set the precedent in the new more digital model of retail banking.  As the first bank to be granted a licence in the UK in 150 years, Metrobank paved the way for a smoother banking experience with 15-minute account openings as well as a leaner back-end IT infrastructure.

The UK’s new wave of fast-expanding online banks are becoming exclusively digital – stripping retail banking of its unnecessary and undesirable trimmings and streamlined operations both from a technological and user experience standpoint.  The four key rising stars are Atom Bank, Monzo (formerly Mondo), Starling and Tandem. All four have secured their banking license only within the last 2 years.

Lowering Barriers to Entry

But let’s get back to the hard reality. The Big 5 banks command a staggering 80% of the current account market. The natural question would be why has it taken so long for these new banks to take even a sliver of the PCA pie? The answer is twofold. Firstly, in the aftermath of the financial crisis in 2013 The FSA and the Bank of England decided to relax the liquidity and capital requirements for new banking startups in an effort to inject competition into the market. This meant that it was easier (and less costly) for banking startups to actually obtain a license. Secondly, UK became a hub of Fintech activity. Between 2008 and 2013, venture capital deal volumes in Fintech increased at an average of 74% per year compared with 27% globally. This provided a more fertile investment environment for banking startups to flourish.

Are we willing to switch?

Are we ready for the market being shaken up? According to the Competition and Markets Authority (CMA), 57% of consumers have have held on to their current accounts for more than 10 years, and 37% for more than 20 years.  These numbers, at a cursory glance, indicate an apathetic body of consumers who is fairly satisfied with the status quo. But on second glance, a consumer might rightly ask: “Why bother?” Retail banks, after all, have embraced technological innovation at a snail’s pace. While all UK banks have have successfully entered the internet and mobile age by offering online and mobile banking, core banking processes such as setting up a bank account are still stuck in the analogue age of excessive form filling and long waiting times.

Banks also too often capitalize on their opaque set of rules by levying unanticipated hidden charges at unsuspecting and sometimes vulnerable customers.  The unnecessary complexity underlying many current accounts today has left consumers not knowing what they are actually getting when they set up an account. This makes it very difficult to accurately compare different banks’ products (even with the wealth of online comparison tools around).

Banking’s more human face

The new challenger banks have built their brand identity on a bedrock of transparency and simplicity. There are different ways that the challenger banks are achieving this. An important foundation is having a transparent business model and avoiding imposing unnecessary fees on customers.  For example, Monzo (formerly Mondo) has promised not to have any hidden charges and instead plans to make money from its future lending business.  Monzo has taken its commitment to transparency further by actively engaging with feedback on itscommunity forum as well as publicly displaying a product roadmap to inform people of future features to be released.  This is a small yet effective way of breaking down barriers between consumers in a sector where people are usually distrustful of the inner motives of banks.

Banking in an age of instant gratification

The internet age has brought about increasing levels of customer expectations.  Driven by the demands of millennials, banks will need to deliver real-time customer service on digital channels.  Instant gratification rules supreme on the web and customers are no longer willing to be left listening to the irksome tunes on a customer service hotline. It’s unclear exactly how challenger banks will gain a distinct competitive edge with customer service but better use of data and Artificial Intelligence will likely be key.  Atom Bank has claimed to be introducing AI algorithms to automatically respond to customer requests.  The machine learning technology will assess the context of a customer enquiry and respond. If the algorithm is unable to identify a suitable response the enquiry will be forwarded to the human support team. In theory this would mean instantaneous relevant responses to customer enquiries. In practice, the actual relevance of the responses may be questionable at least in the early phase. Machine learning algorithms work best when they have ‘learned’ from historical input data. A new bank may not have enough input data from customer enquiries to provide relevant responses.

Moving beyond the simple bank statement

A key area which the challenger banks can differentiate themselves is customer personalization.  An obvious option would be to bring personalised budgeting functionality. Tandem bank, which recently raised just over £1.6 million on crowdfunding website Seedrs, is working on features to help users to budget based to their spending habits and also to motivate users to save.  There are already many apps on the market which pull data from bank accounts to analyse spending, however it makes more sense to integrate it directly into the banking app.  One interesting case is the company the the Silicon Valley chatbot startup myKAI, which uses natural language algorithms to understand simple user questions like “How much did I spend last month?” This attempts to reposition banking admin into more of a natural social activity rather than a separate chore that one must simply endure.

Building a banking ecosystem

Openness, in a technological sense, will also be critical for the new breed of banks.  Just as Apple has built its App Store ecosystem, the new banks will need to open up their technology so that other companies can use the bank’s data to offer ancillary services. This will create a modular banking service where consumers will not only have access to core banking application but can opt for other services. Munich-based Fidor bank is a leader in technical openness. With a comprehensive set of APIs, the bank has been enthusiastic about partnering with other companies, for example its white-label partners.

The Battle Begins

Overall, the battle is far from won by these new technology companies.  Securing a banking license, raising awareness and getting early sign-ups is only the first stage.  The next stage is to build a sustainable business, which will involve convincing large numbers of UK consumers to switch banks.  Having convinced these consumers, how will the challengers retain their customers in an increasingly modern banking landscape where user experience and better rates supersedes unwavering brand loyalty.  It’s clear that the newest challenger banks face an uphill struggle in an increasingly competitive environment.

Equally, the big retail banks can no longer hide behind high barriers to entry or rely on consumer apathy.  Millennial consumers will be increasingly turned off by hidden charges and languorous service.  Years of stale digitally backward company culture, lack of customer-focus and unmanageable legacy software have left traditional banks structurally resistant to change. There are two painful elephants in the room that will need to be addressed in the coming years.  Firstly, banks have their work cut out to replace or transform all layers of their technological stack with newer and better technologies that are easier to maintain. Secondly, large banks have to maintain an expensive network branches that pose high overheads.  Banks will need to successfully scale back their bricks and mortar operations to only provide important advisory services.

All in all, the way we bank is changing. While by no means revolutionary, the new ‘challenger’ banks will definitely cause a stir in the market, which can only be a boon for consumers who want a more transparent, personalised banking experience.

First appeared at Finextra