UK banking—a tail of woes and increasing foes
It’s all very quiet. Almost too quiet for my liking. The UK banking system is under more stresses and strains than it has ever faced, but yet it is seemingly business as usual for many.
Since 2008, banks have been through the ringer. In the UK, we have seen government bailouts, more than £50 billion in fines for one reason or another, customer trust hitting all-time lows, technology meltdowns and regulators turning up the heat through making it easier to start up a bank as well as giving watershed directives, such as those in PSD2 (the new Payment Services Directive).
Twenty-seven plus new UK banks such as Mondo and Atom, with technology powerhouses such as Apple, Samsung and Google at the doors, branch networks in sharp decline in terms of usage and profitability, and technology investment requirements hitting all-time highs….
Literally trillions have been spent by global banks chasing digitisation of processes and platforms. That’s trillions with a “T”, and most are at best in the middle of that process.
Lastly, almost no banks have put any meaningful dent into changing the culture of their organisations to one that can attract, retain or develop people capable of rising or leading them through this challenge.
With all of these factors considered, we are now firmly sitting slap bang in the eye of the storm, I believe.
The time is now upon us. Fundamentally, the decisions banks make in the next 24 months and the changes they implement in the next five years will define the industry’s winners and losers—period.
Pop quiz—the UK bank board’s key questions
Many have attempted one thing or another to change their fates and direction with little co-ordinated efforts across groups. Banks have now become, arguably still are, too big to fail, but also too big to change.
Bank board of directors sitting around a big table somewhere in the rooms with the thick carpets need to closely think about what they need to do next and ask themselves the following 10 questions:
- Do we understand the challenges ahead of us well enough?
Do we have the right insights into the markets, new entrants, new technologies and regulatory changes that are all set to shake up our market? Moreover, do we really understand our current performance, capability and capacity for performance and change?
- Do we have the right leadership in place to make it happen?
When we consider our challenges, do we feel our current CEOs are up to these challenges? Do they possess the necessary personal and intellectual skills for these challenges and this period in our transformation? With the increasing importance of technology, are our CEOs digital natives, or people who possess the ability to make these changes happen? Have they done it before? Moreover, do their direct reports deserve to be here?
- Do we have the right culture in place?
How does our culture reinforce our beliefs? Do we have the right fit of this to define how we want people to act, think and behave? Does our current culture defend the company, or enable it?
- Do we have the right operating model in place?
Is the company left to itself to define how it works following a restructure? Is this the best way to ensure a high-performing operation with people, technology and processes geared towards reducing operating costs and increasing the performance of the company?
- Do we have the right skillsets of people in place?
Have we recruited the right people with the right skillsets, mindsets and toolsets to do the jobs we need today and tomorrow? Do we carry as many legacy people as we do technology? What can we do about this?
- Do we have the right technologies to allow us to compete?
Do our core technology platforms enable us, or harm our potential? Have we faced the core legacy platform issue, or have we avoided the problem now for long enough?
- Do we have the right business models in place to make money in the future?
Given the regulatory framework changes, do our existing revenue models still make money firstly, and secondly establish a position of trust with our customers? How do we create a sustainable benefit to our shareholders, our customers and ourselves equally.
- Do we have the right operating cost levels to compete?
If we are to become “utilitised”, then do we run a tight ship? Does our operating cost reflect a lean and agile organisation? (Think hard about this one, as the answer is “no”, so please don’t try to convince yourself otherwise.)
- Do we have the appropriate investment to change?
If every bank board is investing a billion, then are we treading water doing the same? Do we need to rethink our investment approach to who we work with, buy and/or partner with? Equally, do we have the proper cost controls in place to break misspending. Have we seen the impact we wanted from our investment? Why?
- Do we want to change?
This one is pretty simple; do we want to change, or are we going to ignore the wolves at the door and hope they go away?
Any UK bank board that answers more than four of these questions with “yes” is at best deluded and at worst a real danger to shareholders’ investments, in my view.
UK banking organisations, from the top down, are just not ready for this battle. They are ill-equipped and are mostly in denial about the scale of change we will see in the next five years.
Let me paint a picture for you….
To try and paint a picture of the precipice we are standing upon today, let me paint you a picture.
With the imminent rise of Apple Pay in the UK, PSD2 regulatory changes and the likes of Nutmeg, eToro and Funding Circle, banks could be facing the complete decimation of their customer-engagement experience, the total exposure of their inability to operate efficiently and the destruction of their business models.
It has already been seen this year that those who place themselves into the consciousness of customers through marketing can become successful. Funding Circle’s increase in above-the-line spending has cemented them into the ecosystem of lending to the public, and they are now a real threat in that space, albeit a small one at this stage.
If Apple wants to market themselves as a payment provider, then it’s big news. When was the last time you saw someone from a bank on Sky News for something positive? Apple mentions their release of Apple Pay in the UK and have wall-to-wall news coverage for a week.
Similarly, the major aggregators in the UK have shown with their marketing spending and unique branding that they can make a significant dent into the value chain of insurers and banks. PSD2 could allow an aggregator to become a full intermediary for customer engagement providing an aggregated view of their banking and inline full-market product offerings to tempt customers away from sitting on poor products.
Both of these scenarios—both of which are not only possible but imminent—leave banks exposed. Revenue models and operating costs are all totally challenged.
Customer engagement could be reduced to complaints and issues when it comes to customer contact and communication.
The bank here in the UK is at risk of becoming a data pipe for others to do things more sophisticatedly, and with regulatory changes in place, it can do little to defend against, or ignore, it any longer. The time for change is now.
These changes might not “kill” banks but have a significant potential to significantly sap the sector’s profitability. Over half of all retail customers are unprofitable already. If more of them use third parties for services, that proportion will increase exponentially.
Can the cheetahs change their spots?
UK banks simply are not using technology or organizing their people smartly enough to deliver the transformation they need at the pace they need to. This is in large part due to the people and the leadership within the organizations being the wrong “tools” for the job.
Banks have all the resources needed to be successful today and into the future: tens of millions of customers, billions of investments and permission in the minds of customers to serve this market.
It’s now rather trite to quote that Kodak moment, but this is exactly the moment that the Kodak board faced in 2008. Bigger boys with shinier toys coming into their markets, with their old business models, game plans and points of reference almost overnight becoming irrelevant.
With Kodak wiping 95 percent from their share price in just four years following these market changes due to poor leadership, inability to change and lack of understanding of the magnitude of the situation, banks should look to these relics as sound warnings.
At the same time as banks are figuring out what to do, some of their more forward-thinking peers have recognized that every business is now (or should be) a digital business, and they are starting to position themselves as digital winners.
Coping strategies for bank boards
In my experience, many boards are taking many different directions facing into this challenge, which broadly break down into the following directions:
- Knuckle down and change
Embark upon a significant change programme (or pivot the angle of your current one), with focus on not only what you deliver to customers but how you deliver it via your employee base. This will be the longest journey, but in one form or another, and whether you go with approach 2 or 3 or not, you will need to embark on a culture-change programme.
- Buy your way out of the problem
Many big players in the market, like BBVA, have taken the steps to buy their way out of the problem or at least buy something to kick-start the transition. This could be a very sensible step to move the dial and deliver capability to your customers, show signs of intent to the market and embed new ways of working into the culture of your organisation.
- Partner up with new players and entrants
Incubators and investments in start-ups or buying into partnership with people like Moven in the US offer a great opportunity. Low risk, proven impactful customer change through this type of partnership is a great way to make change happen without running huge programmes or incurring risk. This type of partnership requires a good level of sophistication, which not all banks have. A great example of this being done well is Santander with their Santander InnoVentures Fund partners, where they partner with early-stage FinTech companies to bring to them all the power of the Santander Group.
- Become a utility provider to others
Decide that you want to concede customer relationships to someone better at doing it than yourselves. This could either be a partnership or a full externalisation of this capability. There are significant risks involved in this type of process of becoming a data pipe for others’ services. External parties will expect a very high level of service and capability, and with banking operating costs being high, the operation will need some significant refining and streamlining.
- Hope it all goes away
In the short-term, this is going to be your easiest solution. 300-year-old organisations don’t disappear, but start-ups do all the time.
Time is going to tell what impact the opening of the markets, the FinTech surge into the marketplace and most fundamentally how the customers react to new opportunities and options will have on the industry.
Now with the wolves at the door, banks have a real decision to make. Do they hope the wolves go find other little piggies to attack first and that the sticks and straw they built their houses from hold up, or do they try to get some new bricks?
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