Grant Thomas, head of practices, BJSS

With 2016 now in the past, the retail banking sector is facing the new year with a bit of a hangover. Major players across the industry have sleepwalked into becoming too operationally complex, heavily fragmenting their customer experienceso that their customers have become dissatisfied and market shares eroded. But most damaging of all, is the malaise which has led to a market littered with offerings that customers – and often bank employees – simply cannot understand. In many cases, banks have fallen into a rut where commercial propositions are poorly executed and points of differentiation are rapidly dwindling.

It shouldn’t be a surprise they find themselves in this position. A reliance on “last century” IT operating models has led to an abundance of duplicate processes, systems and operational capabilities. When new, more nimble entrants enter the mix, without carrying the baggage of legacy IT andprocesses,it becomes clear thatretaining existing customers and recruiting new savers while delivering value to shareholders, is truly an industry-wide problem.

1. Challenger banks really are… challenging!

There has been a rapid change in the competitive landscape of retail banking. While it’s true that banking products have become heavily commoditised, it istechnology that has driven the greatest change. The way that banks apply their technology has become a key competitive differentiator.

Competitors posting double or triple digit market share growth should be enough to frighten any business that hasn’t experienced real transformation in the last few years.To compete, banks need to become easier to do business with. Simplification has the potential to tick many of the KPI boxes that stakeholders care about, and IT-enabled simplification plays the greatest role in delivering Cost/Income ratio and customer satisfaction results.

Enter “challenger banks”,small players who aim to compete with the “Big Five” retail banks: HSBC, Lloyds, Barclays, RBS and Santander. The challengers do this by combining generous deals with superior service, delivered primarily through investments in online and mobile channels.This simple technology-led model is resonating well with the market: in 2015 challengers increased their lending assets by 32 per cent, while their established rivals recorded a decline of 5 per cent.

Challenger banks are challenging because of the simplicity of interacting with them.While their enhanced service is easier to achieve because they don’t have legacy IT estates to contend with, in 2017 the challengers will enhance their user experience by investing further in online and mobile offerings.

2. High-performing banks need high-performing IT functions

While the challengers aregrowing rapidly, evolving regulatory directives such as open banking and the PSD2 revised payments directive, will create an even more difficult operating environment for established players.

To counter this,throughout 2017, the established playerswill invest in modernisation programmes to transform legacy applications, simplify processes and deliver true omni-channel experiences. They will become “high performing” banks.

A high performing bank has a clearly defined target market which they understand, constantly listen to, and respond to. They have a portfolio of simple, easy to buy and use products which they design around the needs of the customer. They can also tailor these products, services and pricing structures to appeal to an individual as well as a whole market segment.

The high performing bank will have several touchpoints which will be available wherever and whenever the customer needs them – either physically, or digitally. They will manage risk and achieve compliance without impeding on the customer experience, and they’lldeploy staff to all customer touchpoints while automating back-office functions.

To support the high performing bank, the traditional IT function will be transformed too. This will see high-performing and empowered DevOps teams which are organised around product rather than project. The team will embrace Agile delivery methods, be architecture -driven and will not afraid to takerisks. This high-performing IT function will automate across the systems development lifecycle, embracing continuous delivery approaches and confidently deploying emerging technologies such as Public and Private Cloud, open source and “XaaS”.

3. The hidden value in “Know Your Customer” and other collected data

It is becoming increasingly meaningless to think about business and customer outcomes without their digital enablement. How would any of the following achieve ‘best in class’ without technology: cost to serve, income, customer advocacy, product holding per customer, risk management? Banks are already heavy users of Big Data, from achieving regulatory compliance, to boosting cybersecurity, and managing the customer lifecycle. Data drives the modern financial industry in many ways, but historically it has been an expensive and time-consuming exercise.

Recent innovations mean that Open Source products provide a viable alternative to their commercial counterparts – and at a fraction of the cost.Immediate cost-reduction opportunities lie in regulatory, fraud and sanctions management, while enhanced customer insight will improve account management, market share, and the overall customer experience.

Banks have unrivalled access to data. The act of opening a new account provides banks with unprecedented access to valuable personal and demographic information. When coupled with ongoing transactional data, banks can gain exceptional insightsinto their customers, to a level of detail that other industries can only dream of.

Throughout 2017, banks will deploy tools such as Hadoop, Python, NoSQL and Spark onto Private and Public Cloud services as a way of clearly identifying and understanding target markets anddelivering customer outcomes in very short periods of time.

Big Data will be combined with sophisticated machine-learning algorithms to upsell products and services based on key life milestones.This use of data science will proactively push mortgages, credit cards, and other complementary products based on customer behaviours, instead of banks simply waiting for applications to be submitted.

Whilst all of the major UK banks have simplification at the heart of their business strategies, they are somewhat constrained by immediate fiduciary obligations to shareholders, customers and regulators.

2017 will be a transformational year for Britain’s retail banks. The challengers will continue to challenge, and in order to maintain their competitive edge, established players will actively implement the tools and processes required to advance their businesses.