The UK banking industry is set for a year of change in 2010, as several new banks from Tesco and Virgin to Metro Bank attempt to enter the sector. Traditionally a stronghold of the Big Four, these new movers and shakers will need to work extremely hard to make a significant impact on the UK retail banking landscape. However, there is a great opportunity for the new players to leapfrog the competition through the use of more sophisticated and agile technology. The ability to implement systems and processes with a technological ‘clean slate’ gives these banking start-ups a huge potential advantage – if they can capitalise on it.

So as these new banks come onto the scene, what do they need to consider from a technology infrastructure point of view?

The customer comes first
A priority for financial institutions must be on understanding their customers better. By setting up an environment that enables them to get a complete ‘customer view’, new banks will be better placed to track customer activity, prevent fraudulent transactions and encourage increased customer use and activation of bank products. In order to win the confidence of disaffected customers, institutions need to offer added-value, and if appropriate, tailored services to their customers to help build their relationships. New entrants from the retail space, such as Tesco, will have a highly developed understanding of these techniques. The industry will be watching with interest to see how they apply their existing customer knowledge to their retail banking offering.

For corporate customers,  better reporting of their payments from all channels and offering dashboards and trend analysis services will prove popular. On the retail banking side; there is much focus on innovative new technologies, such as contactless, NFC and mobile, but the number of transactions generated by these emerging channels is still low. It is the traditional card-based payments that continue to account for significant transaction volumes and revenues. While it is important that banks can use new technologies where relevant, they must also ensure that their current products remain competitive so that they bring in that important core payments revenue.

Back to the future
Most new banks will start off with relatively small UK operations, depending on how they have entered the market. However small they are to start with, it will be crucial to their future success that they build scalability into their processes to effectively future-proof their technology. For example, banks may initially choose to offer a limited selection of cards to their customers, with a view to extending this further down the line to include a wider offering and multi-application cards.

When making early technology choices, it is important to ensure that systems are agile enough to react to the changing market place. This will be particularly important to the brand new banks that are likely to adapt their plans over relatively short time frames as new opportunities become apparent.

Another consideration will be the increasing movement towards agile payment systems or more integrated systems that are capable of handling payments from any channel, whether consumer or corporate, from start to finish – with no redundancy of technology, or duplication of processes and labour. These agile systems will enable financial institutions to manage transactions quickly and effectively, with less need for manual intervention and costly interfaces between different systems.

Buyer beware
It is important to differentiate between those financial institutions that have chosen a strategy of organic growth, and those that have acquired smaller players to gain a foothold and the beginnings of a branch network in the UK.  For instance, in January 2010, Virgin announced the acquisition of Church House Trust to “provide the platform from which [to] develop a retail banking business in the UK offering a full range of products to consumers under the Virgin Money brand” (Times Online, 8 Jan 2010, ‘Virgin Money buys minnow for retail bank launch’). Banks that decide to take this strategy must carefully consider whether they should utilise and adapt existing technologies, or if it would be more effective to start from scratch from an IT perspective.

Conclusion
While the Big Four are likely to retain their dominance of the UK retail banking market in the short-term, any increase in competition will certainly cause concern for banks that are dealing with dissatisfied customers and public anger at recent scandals surrounding the financial crisis and bankers’ bonuses. These smaller, more reactive competitors could certainly shake things up through the use of innovative and agile technologies, and this in turn can only be beneficial for customers.

Andy Brown, ACI Worldwide

Article originally published by Financial World / ifs School of Finance

Image copyright: Flickr

Over the past year, the media has been full of terrible news about the availability of credit to most companies, especially SMEs. Many lenders, even relatively healthy ones, seemed to have tightened credit standards considerably.

This has often made life, already difficult in a weak economy, even more challenging for many companies. On this background, it is illuminating to look at the lending practices of Svenska Handelsbanken (also familiar to readers of the news because they just topped customer satisfaction polls.)

The common approach to lending is illustrated by the first graph which shows lending to corporate customers in the Eurozone. Most banks influence their lending decisions top down depending on their views on the economy and their outlook for loan losses. This can reduce the influence of the loan officer handling an individual case. The loan officer might have performed a thorough quantitative and qualitative analysis of the prospective borrower. But in this system, a loan that would have been approved a year ago is now declined. This is illustrated by the chart: at the beginning, when the economy was still recovering from the dot com bubble, banks were still fairly strict in their lending standards. But as the economy started growing nicely and steadily from quarter to quarter (the blue line), lending standards (the green line) were relaxed more and more. The result: loans to corporate customers were growing faster and faster (the red line). The moment lenders see signs of a weakening economy, lending standards are reined in and loan volumes fall as a result. This approach seems rational only for five seconds because drastically cutting off lending exacerbates the economic contraction that lenders were afraid of in the first place. And this policy generally leaves banks with loans made on wafer thin margins in good times when quality can really only get worse, but they do not make loans on much better margins at the trough of the cycle when credit quality could arguably only get better.

Figure 1: Eurozone GDP growth (quarterly), lending to corporates and bank lending standards

Handelsbanken, by contrast, does not change its credit policy over time. It does not believe in GDP or other macro forecasts. It rather believes in sound credit analysis of an individual customer. Hence no need for the bank headquarters to tell the loan officer at the front line how to do his or her job. In addition, the bank believes in Warren Buffett’s insight that “it’s only when the tide goes out that you know who is swimming naked”. In other words: during good times both good and bad credits look similar, but in tough conditions like today’s it is fairly easy to spot the good customers you want to continue lending to. Handelsbanken’s bankers have a much more satisfying and intelligent job where they can use their expertise and judgement to come up with their own best credit decision.

As a result of this policy, Handelsbanken’s lending to corporates is highly counter-cyclical. When everyone else is competing to lend, Handelsbanken’s market share drops, and when no loan is to be had from any other bank, Handelsbanken keeps lending happily and increases its market share again.

Does it work? By following this very simple and common sense approach, Handelsbanken has achieved a twin goal of having higher margins than their competitors AND loan losses that are consistently about 50% lower. The bank follows the same approach with the same results in other countries such as the UK. The loyalty to their customers even in bad times may be one of the reasons behind their stellar customer satisfaction.

Unsurprisingly, many other banks are looking at the Handelsbanken model today. Experienced loan officers should be in for a bright future.

Figure 2: Sweden, lending to corporates

Article contributed by Niels Kroner, author of ‘A Blueprint for Better Banking‘

Article cover image copyright: Flickr

Aldermore is the new name in British banking which will provide a range of competitive asset finance facilities for small and medium sized businesses.Borne out of the recent merger of Ruffler Bank and Base Commercial Mortgages, Aldermore is shunning the ‘big is best’ approach adopted by larger banks, in favour of a ‘specialists succeed’ strategy adopted by successful companies in other market sectors.

Phillip Monks, Chief Executive of Aldermore, explains: “Small and medium sized enterprises have had enough of dealing with banks which do not understand either their markets or needs. Aldermore intends to address this issue head-on, by providing a service which is unashamedly specialist.

“We will only operate in markets where we have a real understanding of their requirements. We believe that if we can construct financial deals based on a detailed understanding of the needs of specific market sectors, then we can succeed in areas where bigger banks have failed to show any real interest.”

The business banking services offered by Aldermore will include commercial mortgages, asset finance and leasing facilities, which will be funded via retail deposits raised via a range of fixed rate bonds, notice accounts and ISAs.

Monks said: “Being small and specialist has proven time and again to be a successful strategy for many thousands of British businesses and I believe banking is no different. It is time for banking to get back to its roots and that is what Aldermore is setting out to do.”

Small and medium sized businesses can get further information about the services being offered by Aldermore by going to: www.aldermore.co.uk or by phoning 01733 404515.

Phillip Monks, CEO, Aldermore

Phillip.Monks@anacapfp.com