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Banks slow to change despite growing competition

The banking sector faces major challenges in transforming IT to meet the digital needs of customers

Published: 19 Aug 2014 13:12

The banking sector faces major challenges in transforming IT to meet the digital needs of customers as a result of indecision, complacency and internal resistance, according to a recent financial services roundtable.

The event, hosted by analyst firm TechMarketView, also revealed that a lack of metrics to measure the success of investments is slowing digital transformation at banks, which risk being stripped down as a result.

As established banks face pressure from regulators, new competitors and more demanding customers, they need to rebuild their IT. But developments are slow and there is indecision.

“Banks, in many cases, have yet to decide which key functions they need to develop and operate internally. Many services use bespoke technology or offer features which are no longer necessary, are costly to maintain and are slowing change,” said TechMarketView.

Large, established banks are built on mainframe systems that date back to the 1970s. These business-critical systems are coming under increasing pressure as more and more software is linked to them to offer new services such as online and mobile banking to customers. Banks would like to replace these systems, but it is not easy – replacing the legacy IT of banks is often likened to changing the engine of a 747 jet during flight.

The roundtable, attended by banking executives, suppliers and lawyers, revealed that internal resistance is a major factor in the slow pace of change.

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Those present at the roundtable discussion revealed that internal stakeholders are very successful in resisting major organisational change, many banks have difficulty translating management decisions into action plans and the decision-making process at middle-management levels is often flawed. It also found that the lack of clear metrics and cost and benefit information weakens business cases.

Banks need to take competition seriously

But there is also a level of complacency. “Established banks are complacent about their market position and the barriers to entry across the banking sector,” said TechMarketView.

Attendees said the number of services offered by traditional banks could reduce significantly as a result of competition from companies outside the banking sector, such as PayPal, Tesco and social media giants. Google is another example of an internet giant offering services traditionally provided by financial firms. 

In its recent Why Google bank won’t happen report, analyst firm Forrester said the high costs and strict regulation of setting up a traditional bank – alongside the advertising revenue that comes from banks – would push internet firms into roles that support the relationship between banks and their customers, rather than offering more traditional bank services such as current accounts, mortgages and savings. These include transactional payment services, financial advice, money management and product comparisons.

“[These businesses] are developing brands with relevance in banking and other financial services. Banks run the risk of being hollowed out as the new competition captures valuable transactions through their new relationships,” the report said.

Recent research from Accenture revealed that consumers see large internet companies as viable alternatives to retail banks in the future. 

Accenture's research showed that 67% of the 6,000 consumers surveyed in 11 countries would consider buying insurance from companies other than insurers. Some 23% cited online service providers as an option. Just 43% said they would consider banks in their buying decision. Accenture said there could be billions of pounds' worth of policies up for grabs globally, as 40% of consumers look to change providers.

TechMarketView said that despite senior bank executives being fully aware of the competition and the need to offer consumerised IT, innovation remains on the periphery of IT and the business, claiming it is “difficult to cross the chasm to wide-scale implementation across the bank”.

The roundtable found there is little evidence of banks having made significant change over the past five years and that very few have opted to renew core systems.

It also said new service introduction is very slow, citing a lack of high-level programme management skills to manage change in banks as part of the reason.

Cloud computing has potential to support banks through change

Attendees suggested banks could benefit from setting up a completely parallel approach and migrating services onto it and away from legacy systems.

The cloud is already being used by banks and offers an opportunity to move services.

Barclays is an example of a large traditional player that has used cloud computing to create new services. Led by former IT head Shaygan Kheradpir, the bank launched its Pingit mobile phone payment app, which sits in a private cloud rather than using a website that sits on top of the bank's core IT infrastructure.

Kheradpir left Barclays in November last year to become CEO at Juniper Networks. His replacement, Michael Harte, who joined from Commonwealth Bank of Australia (CBA), transformed the CBA into a digital powerhouse, including moving its online banking service into the Amazon Web Services (AWS) cloud in 2012.

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