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Banks
Big banks need to embrace digital era
From the Financial Times of Sun, 21 Dec 2014 13:27:15 GMT

Ask many bankers what they think is the biggest threat to their business and they will generally respond with a single word: regulation.

The obsession with rules may be understandable. Since the crisis bankers have faced a rolling barrage of regulation designed to make them recast the way they run their operations — not least in Britain.

Nor is there any end yet to the continuing cannonade. Next month, UK banks will have to put forward plans on how they intend to “ringfence” their retail banking activities from dicier securities activities as part of the Vickers proposals designed to spare the British taxpayer a re-run of what happened in 2008.

But even as universal banks shrink their investment banking operations, there was a warning last week from the chief executive of Barclays, Antony Jenkins, that they would have to go much further.

There wasn’t much point in trying to trim the universal banking model at the edges, he claimed in an Financial Times interview. Changes to the industry meant the whole thing was “dead”.

What was striking about Mr Jenkins’ remarks was that he wasn’t just thinking about regulation when he made them. Universal banking was also doomed by the need to invest in systems.

“We believe that technology is going to drive competitive advantage in this industry and you can’t afford to invest in technology in every place — so you have to pick those where you have competitive advantage,” he said.

For all the official encouragement of new entrants, competition hasn’t been the dominant theme in banking in recent years. The financial crisis oversaw a massive concentration with the number of competitors falling sharply and costly new rules entrenching the survivors.

Indeed, so ossified does the structure appear that the competition authorities are once again looking at the personal and small business banking markets — their umpteenth investigation of the past 30 years.

But at a time when technology is reshaping one industry after another, banking ought to be ripe for disruption. Not only does it operate a bundled model of service long outmoded in other industries, where universal banks try to be all things to their clients. It has an extremely chequered record of delivery.

There may be advantages to having all of a customer’s financial information under a single roof. But banks have not been good at managing conflicts. Indeed, surveying the scandals of recent years, notably that involving the cross-selling of payment protection insurance, which has so far cost them more than £22bn, it seems that many clients were simply fleeced.

Bankers agonise about cleaning up their act, talking about establishing new diplomas and codes of conduct to restore customers’ trust. But technology may well prove to be a bigger change agent when it comes to reforming their trade.

Digital delivery is now posing a threat to the status quo, just as it has in a number of other businesses — whether Amazon’s assault on the retail world or Uber’s tilt at transportation.

True, this is not an immediate existential threat. Regulation makes it no less costly and time consuming for a virtual full-service bank to enter the market as it does a bricks and mortar one.

But the beauty is that new entrants do not have to take on the banks across their entire businesses. They can pick and choose where to plant their flags. Indeed, the profit model most banks have almost welcomes this approach; running core services as a loss-leader while milking customers for ancillary products such as overdrafts and foreign exchange.

It isn’t just P2P lenders and payday operators such as Wonga that have sought to pick off juicy areas. Technology businesses such as Apple are launching operations like Apple Pay, which could infringe on the profitable business of making payments.

Banks still possess many of the advantages of incumbency. Customers are generally risk averse with their money. Shopping around for the best deals can seem a bit of a pain.

But rising digital competition should influence banks’ behaviour. Take systems: many banks have in the past underinvested in their core businesses while splurging money on costly and volatile investment banking operations. It’s one reason why Royal Bank of Scotland’s IT systems fell over two years ago, denying their customers access to their money for days on end.

Those sorts of glitches never used to carry a heavy cost. Now perhaps they will. Banks that want to keep their core customers will have to pay them more attention or lose out.

It doesn’t mean regulation is off the agenda. But wise bankers need to start worrying about disruption too.

jonathan.ford@ft.com



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