Retail Banking supplement: Battle of the banks

The banking collapse of 2008 offered huge potential for a real change in the branch banking market. Although internet players, such as First Direct, had succeeded in stealing market share a while before, banking inertia has continued to dominate consumers’ reluctance to change on the high street.

According to Datamonitor 56 per cent of consumers were less trusting of their banks following the crisis, offering real potential for new players to steal a march or for existing players to transform their business and how they treated their customers.

In October of this year Stick or twist? – a report published by Consumer Focus – showed that three quarters of customers have never even considered switching their current accounts to another bank, and 17 per cent had thought about it but not done it; only seven per cent had switched in the past two years. Nearly a third wanted to switch but were put off by the switching process or thought there was little difference between the banks.

The promise of new entrants such as Tesco Bank, Metro Bank and Virgin Money into the branch banking market had offered real opportunity for change, but circumstances have held up newcomers, and as we approach the end of 2010 that promise has not been fully realised, with Virgin Money and Tesco Bank still to launch full banking services and Metro Bank having only launched this summer. “It’s possible the window of opportunity has been missed because the height of public anger was a while ago now,” says David Fakhri, banking analyst at Datamonitor.

Tesco for example was to have launched both its current accounts and mortgages offer this year, but will now not offer mortgages until early summer 2011; it is still to reveal a launch date for its current accounts. “Tesco are very conscious of having a PR disaster on their hands if they go too early and I think they want to make absolutely sure there is no scope for getting things wrong,” explains Fakhri.

Indeed, Tesco still only has six branches in operation and no timescale for further launches. “We are asking customers what they think [of the branches] to enable us to shape our future proposition,” says a spokeswoman for Tesco Bank.

Getting it right
The new entrants are paranoid about getting their offer right. “The financial crisis has tarnished the reputation of many UK banks, while market concentration in the sector has increased substantially, creating the opportunity for a new entrant to provide a better, different form of banking to its customers,” says Scott Mowbray, communications director at Virgin Money. He defends the company's delay in launching – with a date also still to be unveiled, although it is supposed to be within the next twelve months. “The important thing for us is not to launch a bank quickly but to do things in the right way and build a real alternative for the generations to come,” he explains.

A report by uSwitch in July found that only 38 per cent of customers would be prepared to switch their current account to a brand new bank, although they may be prepared to test the water first with a ‘low risk’ account – 67 per cent would take out a savings account with a new bank, and 43 per cent would be willing to try a credit card. However, customers remain notoriously sticky at the idea of changing their current accounts. “The only way new entrants can overcome that is to offer a truly compelling reason to move,” says Fakhri.

One obvious area they could do this – and where it looks like Tesco, if and when it finally launches its account offer, could win – is through offering loyalty points and incentives. “The likes of Tesco do have a perception for being a customer advocate and if they can carry that through to their banking operations that could prove to be enough of an incentive to move,” says Fakhri.

In a good place
Mohit Joshi, global head of sales – banking and capital markets, at Infosys, agrees that Tesco is well placed to push ahead with a banking offering. “Consumers now have a far closer relationship with their grocery chains than they do with their banks. Tesco has 42 million unique shopping visitors weekly in the UK. Compare this with the focus that the banks have had on discouraging consumers to visit branches,” he says.

Retailers have also, he adds, taken the lead when it comes to digital marketing, client data aggregation through loyalty cards – which allows them to target customers more effectively, and in-store technology. “The data retailers gather about customers through loyalty management programs would allow stores to market financial products more effectively. Retail data is quite rich and the data can be more insightful than traditional banking information. This means that changes in spending can be tracked in real-time and may reveal financial distress or even relevant life milestones.”

Another reason is to provide such a good customer service-based offer that customers really do see a change in the banking market, and therefore are given a reason to switch.

As the only new entrant so far to have launched, Metro Bank claims it is doing well – having surpassed its 12 month targets in the first four weeks of opening its Holborn original store. Although it hasn’t released details of those targets, CEO Craig Donaldson says they were in the “several 1,000s of customers per store” and were the targets that investors put their money in against.

To date four stores have opened – its latest one in Borehamwood in October. New sites have already been confirmed for Tottenham Court Road, High Street Kensington, Croydon, Bromley, Ealing and Uxbridge. However, technology is allowing Metro Bank to steal a march: “We have tried to keep the technology very skinny in their stores so that we can open stores very quickly for them and use virtualisation to deliver all their desktops,” says Peter Gee, sales director of niu Solutions, which has delivered Metro Bank's entire IT infrastructure.

Instant issuing of cards, chequebooks and the ability for customers to open an account in one visit are also winning customers over, and are already prompting rival new and existing players to consider plans to follow suit. “The account opening process today takes a minimum of two weeks and is fraught with disaster along the way. If a card is instantly issued and the customer chooses a PIN, then it's a top of the wallet card,” says Steve Poulston, managing director of Magtek Europe and provider of the instant issuing technology at Metro Bank.

Leading the way
Donaldson says Metro Bank has simply made use of solutions that were already available. “The technology is there – what we have done is put it together,” he says.
For traditional banks legacy systems and the lack of investment cash have made it harder to follow the same route. “New entrants can start with a modern and relatively simple but powerful IT solution, so the difference of a bank running a single modern software suite compared to the silo legacy systems of most banks is really huge and leads to a host of benefits,” says Mark Gunning, strategy director at Temenos, core banking supplier to Metro Bank. “An integrated solution gives them much richer information immediately about their customers,” he says. Gunning believes more banks will have to migrate their core banking to modern solutions. “The days of the sellotape has gone. Now you have to renovate,” he says.

Poulston believes other banks will follow Metro Bank’s lead. “What we do know is that new banks are basing their banks on a customer service model, and Metro has set the model for it,” he says.

Andy Deeks, managing consultant with Navigant Consulting, agrees: “It has opened banks’ eyes up, and on things like instant issuing has got them questioning whether it needs to take them so long,” he says. Indeed, one high street bank is already planning to instantly issue cards from next year and new players are likely to follow suit, further revolutionising the branch banking experience for customers.

Fiserv, the provider of core banking for Tesco Bank, says traditional banks will have to work hard to keep up. “There is no question there is very stiff competition out there so traditional players have to think what their customers are looking for and make sure they are servicing customers and that’s about using analytics and creating a customer service model. Relationship management is then the next big wave,” says Carol
Cowan, president product management and marketing bank solutions at Fiserv.

Of course, the one advantage that new entrants will have is the leapfrogging of their rivals they can achieve through the use of newer technology where established banks are struggling with the integration of antiquated legacy systems, with HSBC spending £1 billion to do so and the likes of merging banks such as Santander struggling with integrating systems of the banks they have taken over.

“Our advantage is we are starting with a blank sheet of paper and are not hindered by legacy systems, and we will aim to provide a compelling proposition with good value backed with excellent service/access as well as fair charges,” says Mowbray.

“Technology has moved on and now there are a lot of off the shelf banking platforms that new banks can take advantage of, such as Tesco partnering with Fiserv,” says Fakhri. “That allows them to focus on customer service and their product offerings and is an area where new banks could steal a march,” he says.

Deeks agrees: “A couple of banks are re-platforming at the moment so they do realise it's an inhibitor, but it’s really a crossroads for banks at the moment and they have to decide which technologies are a fad and which to go forward with,” he says.

“Consumers are driving preferences based on a combination of value and convenience and a bank that can deliver on those will have a service advantage over a bank which is stuck with legacy systems,” says Janice Horan, senior director pre-sales, EMEA, at Fico, provider of decision making rules software for Metro Bank.

It seems the battle for customers on the banking high street may only just be beginning after all.

Metro Bank - the story so far

July 2010: Metro Bank is the first entirely new UK High Street bank to launch for more than 100 years, and opened its doors for business. Headed up by CEO Craig Donaldson, ex-MD of retail banking at RBS, it brings a retail-based branch banking model to the UK, with weekday opening hours of 8am-8pm and Sunday opening.

July 2010: It is announced that MasterCard will exclusively provide LINK-enabled debit and credit cards to the new business in a five year deal, with Temenos providing the core banking platform and VocaLink the electronic payment processing capabilities.

September 2010: It is revealed that Verisoft, provider of EMV Card Issuance solutions, will issue Bank Cards in Metro Bank stores. Verisoft's InstantEMV application will be used to issue 100 per cent of Metro Bank Cards. The application resides on the Metro Bank Host system, and uses the MagTek ExpressCardEMV to personalise bank cards in store. Each Metro Bank branch will have multiple ExpressCardEMV devices, and these can be re-located to new locations, allowing Metro Bank to cater at the opening of new stores.

September 2010: Metro Bank chooses Wincor Nixdorf, a provider of retail banking solutions, to provide automatic teller machines (ATMs) at its branches. The deal sees Wincor provide around 120 ProCash 1500xe ATMs across 24 branches over the next three years, and will work to support Metro Bank in its aim to be a more 'customer-centric' bank through its suite of banking services.
Wincor also provided specialised ATM training to Metro Bank branch staff, such as an overview of the core functions of the ATMs and user interfaces for simple and easy troubleshooting. Updates on card fraud, skimming and initiatives to aid fraud prevention have also been covered.

October 2010: Metro Bank selects ICT services provider niu Solutions to provide the retail bank's entire ICT infrastructure, including on-site and hosted voice, data, virtual desktop, mobility, connectivity, website, user helpdesk and datacentre services. The platform is hosted from dual datacentres in the UK and provides a secure, highly virtualised and high-availability architecture, which also integrates Metro Bank's frontline banking applications and third-party suppliers.

October 2010: Metro Bank installs teller cash recycling technology from NCR Corporation, cutting the cash handling time and enabling an open plan branch design. According to NCR, up to 40 per cent of a teller's time is spent counting and re-counting cash at traditional teller lines, and these teller cash recyclers automate the acceptance, authentication and validation of note deposits, and make the cash instantly available for dispensing to customers.

And the future? Metro Bank projects store growth reaching 40 branches in 2014, and 200+ in 2020.

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