Since the financial crisis of 2008, banking regulators have been seeking to encourage competition in an industry often characterised as being dominated by national monopolies and cartels. In the UK, we initially saw the wave of ‘Challenger Banks’, and more latterly we speak of ‘neo-banks’. Equally, a plethora of fintechs have sought to provide propositions within Financial Services without needing to go as far as becoming a bank – with all of the licensing that this involves.
But, while a hundred flowers may genuinely be blooming for fintechs and new entrants, what of the incumbents: the so-called ‘legacy banks’? What is the opportunity for them in the transformation of the industry, or must they stand on the sidelines with fingers crossed? Andrew Arwas, Head of Corporate Development at Chetwood Financial explains.
It’s clearly an over-simplification to suggest that ‘legacy banks’ don’t have modern technology. Legacy banks have a lot of technology: some ‘tried and tested’ (i.e. ‘old’) and some much more modern. However, all that technology carries a major burden in the cost and effort to simply keep it running. As well as this, there is a sunk cost and capitalised investment from which it’s just not possible to walk away.
So, it’s not that legacy banks can’t do tech, but rather that they cannot be as nimble in switching their operations to meet the needs and demands which now change and develop so much more quickly than they used to.
While the fintechs and new entrants may have the edge in terms of the adoption of new technologies and ideas, what they don’t have – and what they must regard jealously – is the customer franchise and brand of incumbent banks.
The big five banks in the UK are all household names. They each have tens of millions of customers all of whom would name them in answer to the question “who do you bank with”. One or two challengers are making modest inroads, but even the most successful have a long way to go.
The legacy banks – the ‘universal banks’ – set themselves up to play in every stage of the value chain: brand relationship, advice and product manufacturing. While the former has proved highly resilient despite all the efforts to introduce competition into the market, the areas of ‘advice’ and ‘product manufacture’ are seeing much more change.
Open Banking APIs
The emergence of Open Banking APIs has enabled a raft of fintechs to analyse bank account data to make recommendations on actions, behaviours and services. Digital marketplaces such as ClearScore and MoneySuperMarket all provide a bountiful range of product offers without ever needing to go to ‘your bank’. And whilst the legacy banks might well appear on these sites, it is clear that the panels are dominated by new businesses that have built themselves to operate in this digital economy. The ‘fintechs’.
So, what’s to be done for the legacy banks? Should they seek to drive even more new technology – and digital operating models – into their mammoth organisations? Do they try to grab more with their already over-full hands? Or, do they make some selective choices about what to hold onto and what to put down.
As previously mentioned, the greatest asset of the legacy bank is their customer franchise – an asset which no fintech can hope to replicate without huge spend and many more years. Increasingly, though, those customers don’t care who ‘made’ the products. They just need them to be great.
So, with an abundance of fintechs creating new products, the role for the legacy banks would seem to be to create the marketplaces where these products can be bought. Every financial services product bought by a ‘legacy bank’ customer, not bought through that bank, is a lost opportunity.
Banking as a Service
The emergence of Banking as a Service as a growing reality allows any business with a customer base to make available either an entirely open market, or a range of selected products. Retail is full of comparisons: Amazon being the ultimate marketplace for an open range of products, or supermarkets carrying own brand and select third party brands. The consumer knows they shopped at Amazon or Tesco, but the brand of the product they bought may or may not have been important.
With Banking as a Service, product manufacturers can make their product available in any digital marketplace with a relatively simple API call. The growing financial services marketplaces of today are the likes of ClearScore or MoneySuperMarket – businesses who have built up brands and customer bases through propositions based on information provision, ‘advice’, price transparency and convenience in execution. The legacy banks ought to be even better positioned to do exactly this as they already have the customers and the brands and much of the contact infrastructure.
Sourcing product – great product – is becoming increasingly easy and the legacy banks cannot afford to lose their place in the market. They need to be brave enough to stop juggling every ball or plate – to put some down and focus on their prized assets. And if they do so, then their flowers too may continue to bloom.