Challenger Banks are already encroaching on the territory of the retail banking market. But where are the likely battlegrounds? Regular contributor Derek Britton takes a look.
Despite healthy trading statements in 2015 at HSBC, Barclays, RBS and Santander – and market dominance of around 77% of the available market, according to FT.com – the major retail banking giants face many challenges.
Many of the big four established banks – widely accepted to mean Barclays, HSBC, Lloyds and RBS – are still struggling to leave a post-2008 doldrums of – to some extent – their own creation. Renewed and increased regulatory scrutiny for past sins, including LIBOR, FOREX and PPI and the consequent damage to loyalty ratings are all contributing to a ‘big is bad’ narrative. Worse still, global economic growth will slow in 2015 to the lowest rate since the financial crisis, according to the British National Institute of Economic and Social Research (NIESR).
A perfect opportunity, then, for the challenger banks, untainted by the indiscretions of the past, to nimble manoeuvre themselves into position to snatch clientele and market share from the old guard.
This article will explore the potential battlegrounds where Challenger Banks and their established adversaries will meet, the attributes of Challenger Banks, the digital world and, perhaps conversely, the misunderstood world of underlying banking IT systems.
I like a good challenge
Challenger plus points
- Challenger Banks are more nimble to meet new market demand
- No branches improve margins for longer-term health
- Not affected by poor reputation of more established institutions
Retail Bank plus points
- Savings, loans, mortgages are all IT-based products, already built by established banks
- Retail banking is changing to reflect market demand through revised investment plans, branch closures and revised marketing
The umbrella of ‘UK Challenger Banks’ encompasses a variety of backgrounds and profiles, including new start-ups such as Metro, Atom and Starling; recently-established brands such as Virgin Money and TSB, and the banking arms of supermarket giants including Tesco, M&S and Sainsbury’s. This eclectic collective has sought to undermine and disrupt the retail banking establishment and – in the last few years at least – the plan seems to be working.
The Challenger Bank market seems buoyant in terms of customer acquisition and deposits. The most notable start-up example is Metro Bank which, during 2014, saw its deposits soar from £1.3bn to £2.9bn, with lending growing to £1.6bn from £754m and customer accounts increasing by 63% to 447,000 in the same period.
Clearly, a compelling market offer is behind this uptick. In the savings account arena, “challenger banks are offering 90 per cent of the top fixed rates”, said Anna Bowes of Savingschampion.co.uk.
As we have mentioned, the newer banks have something of an advantage in that they are not counting the cost of decades of IT, products and customer information. Another significant factor is the lack of overheads represented by the branch network, which claims a massive proportion of the operational spend for established banks and examples abound of new entrants emerging almost overnight offering a range of streamlined, online services.
However, when one considers the array of products – and the depth and breadth of retail banking facilities offered by the market leaders – it remains to be seen whether this is one battle that the would-be usurpers would prefer to avoid.
Some scaling down may be in order. Over recent months and years, the longer-established banks have taken a hard look at this issue, and some have undertaken a plan to reduce branches. More than 470 were closed in 2014, and 399 have already been lost in 2015, according to The Campaign for Community Banking Services as part of a more balanced customer strategy.
Challenger Banks Plus
- Unshackled IT infrastructure makes challengers more suited to new digital markets
- Cloud, Mobile, Big Data are hard to do with a large banking IT estate
- Built from the ground up to meet demands of modern customer
Retail Banks Plus
- Greater resources and previous investment enable established banks to have strong mobile presence
- Established banks will already have Cloud and Mobile-ready platforms as well as a lot of skills and software investments
The banking market is changing. No bank, however, big or small, established or otherwise, can behave or offer the same service it did even as little as five years ago. Product innovation is one thing, but so too is route to market and with the number of people using mobile banking set to double in the next four years alone, according to KPMG, the stakes are high. Even a cursory glance at the website of any of the established bank brands reveals a less than innovative experience.
One view is that as the more nimble, younger banks have “less to change” when pushing ahead with digital, they are arguably in a good position to offer cutting-edge online products and services. Newly-registered Atom Bank, for example, will offer online banking only, with no branches or telephone banking facilities: “Our aim is to make it so simple to operate online that it is faster than the time it takes to call someone”.
However, the level of resourcing, investment, skills and technology available to the more established bank may be an advanced position of strength for them. Clearly, by now they will obviously have invested in platforms and strategy in support of the digital age. According to Barclays, customers use the Barclays mobile banking app 26 times in a month on average, and the app receives 1,980 logins a minute – clearly this facility is now a major component of its retail banking service.
Legacy Looms Large
Challenger Banks Plus
- Established banks’ IT estates are harder to change because of their size and complexity, making challengers more able to get to market faster with new facilities
Retail Banks Plus
- The overwhelming majority use IBM mainframe platforms under 3 years old which possess unrivalled levels of reliability and performance
- The overwhelming majority use COBOL which remains fully supported
- Embracing Cloud, Mobile, Web and Big Data are all easy with core COBOL technology
There has been a lot of commentary about the reliance of current banks on ’legacy technology‘. Unsurprisingly, there’s also the issue of cost – and the concern of banks ‘overpaying for IT‘ is widely reported. The widespread belief seems to be that legacy banking systems cannot embrace the digital world and that this represents the established banks’ collective Achilles’ heel.
However, it is worth looking at that supposition carefully. Firstly, anything defined as ‘legacy’ has, by using this label, been working for some time. In a recent article I examined some of the dangerous conceptions around older systems – but in many cases, including many banking organizations, the following statements are true:
- the overwhelming majority use IBM mainframe platforms under three years old which possess unrivalled levels of reliability and performance
- the overwhelming majority use COBOL which remains fully supported by products from a variety of major vendors
- embracing Cloud, Mobile, Web and Big Data are all technologically straightforward from existing core COBOL IT systems
Ready … aim …
So what does all this mean? Is the challenge from younger, more agile banks mere sabre-rattling or does this mean a permanent shift in the marketplace dynamics of consumer banking? I see this as a war on two fronts; the battle for customer hearts and minds and – behind this – the struggle to deliver the technological innovation we all expect and demand from the organizations that receive our monthly salaries.
From a professional perspective, it feels as though the old guard have the edge. They may run so-called legacy systems, but the enabling technologies that bridge the old to the new – bring modern functionality to older tech – are evolving at such a pace that this no longer feels like an issue. For example, the mobile banking app on your phone is supported by a COBOL application written many decades ago. In other words, their IT investments are already paying off.
For the Challenger Banks, for whom mobile is not only a given but essential, their advantage lies in innovation – in utilising their agility and flexibility to outflank the more robust institutions.
From a personal, customer perspective I am looking forward to seeing how the battle plays out. Because unusually, whoever wins the battle, ultimately it is the bank customer who will win the war.
- Best (UK) bank accounts for customer satisfaction – http://www.which.co.uk/money/bank-accounts/reviews-ns/bank-accounts/best-banks-for-customer-satisfaction/
- Challenger Banking Results – http://www.kpmg.com/uk/en/issuesandinsights/articlespublications/pages/challenger-banking-results.aspx
- Money Insider: Supermarkets: the real challenger banks – http://www.independent.co.uk/money/spend-save/money-insider-supermarkets-the-real-challenger-banks-9922010.html
- Research to show high street banks are succeeding against challenger banks: http://www.finextra.com/news/fullstory.aspx?newsitemid=27591
- Benchmark shows banks overpaying for IT – http://www.bankingtech.com/349531/banks-overpaying-for-it/
- http://www.finextra.com/news/fullstory.aspx?newsitemid=27280 – challenger banks facing tough times
- http://www.finextra.com/news/fullstory.aspx?newsitemid=27274 – banks on brink as customer experience stagnates
- http://www.finextra.com/news/fullstory.aspx?newsitemid=27150 – Banking has reached a digital tipping point BBA warns
- IT Skills planning in FS – https://www.globalbankingandfinance.com/financial-service-it-skills-strategic-planning/
- Skills – Crisis? What Crisis? http://blog.microfocus.com/news/it-skills-crisis-what-crisis/3328/
- UK Challenger Banks Aim to Loosen Grip of Big Four – http://www.theguardian.com/business/2015/jun/01/uk-challenger-banks-aim-to-loosen-grip-of-big-four
- Metro Bank’s growth confirms its status as top ‘challenger’ bank – http://www.theguardian.com/business/2015/jan/21/metro-bank-top-challenger-bank
- Lailah Gifty Akita, Pearls of Wisdom: Great mind
- Mobile Banking users set to double – KPMG http://www.finextra.com/news/fullstory.aspx?newsitemid=27676
- A legacy case – examining the evidence – http://blog.microfocus.com/news/a-legacy-case-examining-the-evidence/3071/
- Global Economic growth to slow – NIESR http://www.bbc.co.uk/news/business-33772947
ECB stays put but warns about surge in infections
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.
Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.
But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.
“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.
Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.
Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.
She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.
The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.
Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.
Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.
But she signalled those risks were less acute, in part thanks to the recent Brexit deal.
“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”
Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.
“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.
Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.
There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.
The ECB has indicated it may not even need it to use it all.
“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.
Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.
Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.
With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.
(Editing by Catherine Evans)
Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger
By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.
BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.
“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.
As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.
In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.
But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.
“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”
While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.
“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.
NO EXIT EYED
Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.
Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.
Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.
He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.
“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”
(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)
World Bank, IMF agree to hold April meetings online due to COVID-19 risks
WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.
The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.
This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.
(Reporting by Andrea Shalal; Editing by Chris Rees
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