Supermarket versus Bank: the UK’s New Battlefront
The UK’s biggest supermarket group originally ventured into banking via a joint venture with Royal Bank of Scotland (RBS), but Tesco Bank has been wholly-owned by the retailer since 2008 – the year when the global financial crisis fully impacted on the country’s banking sector. Since then, the company has spent an estimated £600m (US$1.02bn) in developing a stand-alone bank.
The Tesco Bank current account was officially launched early last month, just weeks after another well-known UK retailing name, Marks & Spencer (M&S), launched its own current account offering. Features of Tesco Bank’s current account include 3% interest on credit balances, Clubcard (the retailer’s loyalty card) points on all debit card spending and what it promises will be a ‘simple and transparent’ fees and charges structure. With over 16m British consumers owning a Tesco Clubcard, the retailer could be in a strong position to challenge the country’s traditional banks.
The offering will also be entirely digital – a nod to the growing demand for online banking services and declining interest in ‘bricks and mortar’ branches. Such digital advancements have not gone unnoticed by high street banks. According to
a September 2013 study
from BIAN member Infosys, the average bank now typically views web companies as the biggest threat to its business, as these new competitors are able to quickly develop and bring to market innovative offerings.
Surviving in the Digital Era
It is not surprising that banks fear innovative new finance offerings. Building their financial services in today’s modern banking landscape, these newcomers have an unfair advantage. They are able to build IT systems specifically designed to deal with innovation and change.
In contrast, traditional banks rely largely on decades-old IT infrastructure that was developed before today’s technological advancements became the norm. To overcome changing IT demands, banks are currently making isolated updates to systems as and when required. However with the underlying issue of old-fashioned core banking systems, this simply works to complicate the overall system further.
In the UK in particular, these IT infrastructure instabilities have in many cases manifested into IT outages, leaving customers unable to access their accounts online. While familiarity and legacy are the key reasons for customers largely sticking to traditional banks so far, against the backdrop of today’s digital landscape they are unlikely to continue to tolerate such technical incompetency.
Banking IT: A Global Problem
However, the problem spreads far wider than the UK. For example IT architecture issues are developing in the African banking landscape, thanks to an increasing interest in technology across the continent. Security and capacity risks are arising as more African banks enable personal devices to access their networks, in an effort to increase productivity and efficiency. Moreover, Africa’s financial services sector is also experiencing challenges with compliance to standards such as the Payment Card Industry Data Security Standard (PCI-DSS) and Sarbanes-Oxley (SOX).
The Middle Eastern and South East Asian financial markets are similarly experiencing challenges, thanks to fast up-take of technology. Following a period of rapid expansion and growth, the industry across these regions has now reached a critical point. Institutions within these regions need to consolidate and streamline their IT landscape to ensure that future growth can take place in a stable manner, without IT systems growing too unruly in the process.
While the US has a sophisticated financial history, its banks are in many cases experiencing a period of technology isolation, which has been brewing in the region for decades. This isolation is largely borne from a lack of communication with banking peers and a reluctance to change legacy systems.
Banking IT: A Global Solution
While the specific challenges across each region may vary, banking technology issues across the board can be addressed by financial institutions (FIs) working together to standardise their core IT systems landscape.
Whether based in Europe, America, Africa, South East Asia or the Middle East, the global finance industry can work collaboratively to cut IT infrastructure complexity and integration costs and focus on what matters: providing a great service to customers.
One of the key barriers to such collaboration is that many banking institutions are continuing to see their underlying IT systems as a factor on which to compete. Banks need to move away from trying to gain competitive advantage in their IT systems and realise that it would be more profitable in the long-run to have a standardised architecture.
In the future, banks should even consider outsourcing some of their core banking functionalities to competitors who do it better and cheaper. The international banking community should increase its collaboration and share knowledge and experience to implement best practices from their peers instead of vendors. Only banks truly understand banking and collaboration will speed up the industry’s ability to change the IT landscape at a lower cost, enabling banks to focus on their most profitable areas.
By working together to build a stable IT system across banks, banks would be able to concentrate their competitive efforts on the areas that matter, such as offering aggressive interest rates on savings compared to their peers and even industry challengers such as Tesco.
While the prospect of Tesco opening a current account might initially strike fear into UK high street banks, for the moment at least traditional players continue to dominate the industry. However as IT outages and technical faults continue to cause dissatisfaction among customers, banks will have to rethink their technology if they are to remain competitive against tech-savvy newcomers.