Q: What are the regulatory pressures shaping banks’ operating models?
A: Financial services firms are morphing. Regulations like the ring-fencing proposals in the UK and intermediate holding company requirements in the US are separating the retail and capital markets parts of the business, and consequently we will see the performance of each side more clearly. A fundamental review of location strategies and businesses is well underway, with the synergies of size and complexity now seriously challenged.
Q: Is banks’ existing technology an inhibitor to effective service provision?
A: Yes, the effect of legacy technology is threefold. Firstly, banks are not investing enough in developing growth strategies as they spend most of their budget on regulation, running the bank and risk mitigation.
Secondly, they are unable to get a single picture of customers and business profitability very easily, and data models have not kept pace with the social media revolution.
Thirdly, their ability to re-engineer their legacy infrastructure is challenged because of its complexity, making the cost of service improvements higher than it out to be.
Q: Do technology firms have a massive advantage in customer engagement over banks in that new world?
A: Yes, because their digital design is based on customer engagement and consumption, rather than financial services product processing. Banks have developed systems that work from the product towards the client, for example taking deposits. Big tech firms, “smart-retail” firms, and even fintech startups, are closer to the customer through their use of online and mobile contact.
The other advantage consumer companies have is the better quality of data through the customer life cycle; for example, Ocado know what you had in your basket in your previous shopping, what you typically need in a week and how much you spend.
Q: What impact does that have on the industry?
A: In terms of consumer banking, it’s an opportunity for companies such as Starbucks or Amazon to disintermediate the banks. Their customer relationships are well established as distribution models. This suggests banking product manufacturers could become utilities in the future.
For corporate and commercial banks, the challenge is more likely to originate from enterprise resource planning (ERP) technology specialists and accounting technology providers. They are the providers of choice for corporate treasuries and chief financial officers, and see a wider universe of financial data than banks.
In capital markets, where regulation and the cost of capital have had the most profound effect, we see a rapid disruption of traditional markets businesses and the emergence of tech-driven new-entrant companies, such as Citadel Execution Services, a broker that has grown from a hedge fund company, and agile electronic brokers such as Saxo Bank.
In all instances, we see the development of partnerships, possibly of a retail bank and large consumer-facing firm such as Starbucks or a commercial bank and ERP provider.
This Q&A appeared in the Sunday Times on 28th February.