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Retail banking has come a long way since it began in the 16th Century, when cashiers in trading and shipping cities began charging customers for depositing their wealth for safekeeping. The practice later spread to the UK where it was dubbed ‘high street banking’, indicating its presence as one of significant importance to major commercial districts.
Recently, banks have shown a trend of deserting the high street for the digital superhighway, as shown by HSBC’s recent announcement that it will soon shut down an additional 52 branches around the nation.
Despite heavily investing in digital technology, banks like Lloyds have not reaped the expected returns on the retail end of things, with only 23% of their customers choosing to use internet banking. Furthermore, with recent news over the dispute of Link cash machines between banks, it seems the industry is swiftly deteriorating. So what is the problem?
Are Banks Underestimating Technology?
Legacy IT systems are the bane of any large bank attempting to meet the new demands of customers and regulators.
Currently, most operating systems used by the major banks are installed on OS/2 and IBM mainframes (Os/390 and z/OS), which date back to 1987. The problem this causes in terms of development and hardware is that manufacturing core processing systems for banks can be costly: these systems once built for the sole purpose of processing account deposits and payments were only meant to be maintained, and never altered.
As banking services developed, core systems had to be compatible with new facilities, such as ATMs and call centres. When internet banking was finally introduced, the rate of customers accessing the system has outgrown the decades-old core processor and was too cumbersome to support further extensive functions.
Catching Up to Advanced Systems
Changing their systems should have been the go-to step for banks. However, replacing the technology foundation has proven to impact banks’ performance levels for months. Therefore most opted out by adding ‘middleware’ and front-end systems to patch up any errors.
Senior business management who see IT as a supplier or utility provider rather than a partner or a part of core business would prefer to do without it in an ideal world. But they are unaware that many customers only interact with their bank via technology – it is in fact core to a bank’s offering and services.
Banks who rely on obsolete legacy IT have become victims to recent scandals: from RBS customers failing to access their accounts due to a glitch in their CA7 batch process scheduler in 2012; to malfunctioning cards during the shopping spree in December 2013; to the more recent DDoS attack on Lloyds, it has become a norm for banks to suffer very public IT disasters.
Such IT catastrophes have woken regulators up to the problem, which will hopefully lead to real change. Without an adequate setup, the digitisation of banking and customer services is not only putting huge pressure on legacy systems but could potentially expose every possible failure in near real-time. According to Accenture’s 2016 tech report, there are numerous near-misses and ‘minor’ issues every day that don’t reach the media.
Banks are now attempting to refresh their legacy IT systems, and this can go one of two ways. They can take the lowest risk: migrating, instead of taking the risk of replacing the entire core system, which results in a very reliable but low-tech processing unit – similar to the integration between HBOS and Lloyds; or they can choose a riskier approach of replacing their core, as banks like Nationwide have done using Accenture and SAP. Despite facing numerous fragmented last-century solutions, Nationwide’s replacement was a success but with higher cost and effort than previously anticipated.
Retail Banking: Slow to Change
People’s cultures have shifted and been present in the age of digital efficiency. They expect services to be personalised and accessible – banks included. However, as people’s everyday lives integrate tightly with their financial lives, banks gain significant leverage over how to monetise their business, and has since neglected customer experience in favour of profitability.
Nowadays, especially since the financial crash, there has been an emphasis on looking after our financial health. However, the perception of retail banks as relatively hard-nosed and unfriendly has tarnished their public image.
The UK Competition and Markets Authority (CMA) reported that banks earn an average of £128 in yearly revenues from each customer, generating total £8.7bn profit through regressive hidden fees and charges.
It is common to find customer complaints in the media, from the overpriced nature of a ‘3% on every purchase or cash withdrawal made abroad’ to the unreasonableness of demanding ‘£5 for ordering a duplicate statement’. Compared to the modern pace of life, banks are lagging behind. And even with the internet or mobile banking, payments or money transfers can take days to register on one’s personal account.
To worsen the situation, misplacing a debit card can result in long periods waiting in phone queues and for postal services to deliver the replacement. Banks lack newer systems to give consumers the impression that their systems are fit for purpose in our internet and smartphone world.
The two problems explored above are somewhat blanket statements in terms of attempting to identify the difficulties that established retail banks currently face. There are many complexities yet to be resolved.
The shape of the retail banking market will change from a few big firms to a multitude of smaller companies in the next few years, according to PwC’s latest FinTech report. One reason for this is the adoption of the revised payments directive (PSD2) in March 2016, which has mandated a revolution in the European payment industry.
With backings from regulators and governments, the playing field is finally level for startups in the FinTech space to play a more important role in banking. Banks appear to be in survival mode as their flaws have opened up ways for rising-star startups to penetrate banking products via technology, thus eroding the market shares of big banks.