Analysis: Technology is breeding fundamental change but where is success being seen?
The financial services market has been undergoing a fundamental change as customers demand better service, visibility and ease of use.
While traditional banks have been acting to meet these demands, they are faced by increasingly strong competition from fintechs and challenger banks that have adopted technology driven models to swiftly advance into businesses that banks have long considered safe from competition.
Challengers such as Atom Bank, Tandem, Starling, and Mondo have sought to capitalise on a gap in the market where they believe they can provide a better service.
In 2013 a YouGov survey highlighted the amount of distrust the public has in the banking industry as 84% agreed with the statement that "bankers are greedy and get paid too much."
Fighting to improve the image of banks is undoubtedly a difficult task but a number of challengers have been created with a disruption of the incumbents in mind, and they are using technology to get the job done.
Atom Bank, which is based in Durham, Northumria, is one of only a few challengers to have been granted a banking license, having been authorised to take customer deposits in November 2015 and launching in full after regulatory restrictions lifted in April 2015.
The bank has opted not to build core IT systems from scratch, instead opting to use commoditised banking software from FIS and layering integrations within middleware. While its core systems may not be unique, it has developed apps that are.
Everything the bank offers in its app is personalised to the user from the name and design to security access through integrated biometrics, both facial and voice recognition.
London based Tandem meanwhile has opted for off-the-shelf technology to build its core banking software and infrastructure, it uses Fiserv’s Agiliti platform.
Tandem isn’t aiming to have a groundbreaking app, it is instead looking to stand out by helping customers to make their money go further. This is something which it believes differs from the traditional banking model which is aimed at selling products to make money.
Customers receive notifications to alert them of missed payments and if they are approaching an overdraft limit, in addition to preferred rates for alternative savings and investment services.
Tandem’s model appears to be popular as it has already raised £100 million in capital ahead of an expected launch at the end of 2016.
The flexibility provided by these technology choices will theoretically mean that they will be able to respond more quickly to customer desires, adding in new features when requested enough to do so.
From the traditional high street retail banks such as Barclays, Lloyds, HSBC and Royal Bank of Scotland, there wouldn’t appear to be a lack of interest in technology, perhaps just a slowness to widely deploy.
Barclays for example is using Hadoop after moving away from huge Oracle databases that would take a long time to process data.
Peter Simon, head of information at Barclays said: "to process across all our small business customers on a daily bases it’s about six weeks work of processing data."
Six weeks is hardly useful for a small business under daily pressure to survive and trying to grow.
Things have changed now though, Simon explains, thanks to the increased processing speed, and reduced cost of a Hadoop stack.
The move to Hadoop has reduced that processing down to 21 minutes, "There is a technology capability that exists now that didn’t exist two or three years ago that lets us do stuff that is timely, relevant and insightful for the customer," said Simon.
Barclays is far from alone in moving to embrace, or at least test newer technologies. A growing number for example have been testing Blockchain technology for smart contracts.
Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract.
RBS meanwhile is using analytics from SAS to transform its organisational processes in addition to improving customer engagement. With a lofty goal of being the UK’s number one bank for customer service, trust, and advocacy by 2020. The processes may be different but the end goal target is the same – a better service for customers.
The investment space is quite different having already been significantly disrupted over the past 20 years by technologies such as algorithmic high-frequency trading. But it too has been significantly disrupted by Fintechs.
BATS for example has achieved great success in the US and now represents 20% of all traded equities and it is only 10 years old. In Europe Bats Chi-X trading now exceeds the London Stock Exchange and Euronext and it is only eight years old.
Other start-up names include eToro, which focuses on novice investors and acts as both a broker and social trading network.
ZuluTrade is another Fintech that has taken the social approach to investment banking and offers full trade copying and socialinteraction capabilities.
The point is that there are numerous entries into this market that have taken advantage of the consumerisation of technology to disrupt a market area that has been hit by stagnation, regulation, and legacy systems.
In a report into digital disruption Accenture said that: "Investment banks must either shape the emerging digital ecosystem, or risk being shaped by it.
Investment banks can therefore no longer afford to operate from behind fortress walls. Their future success will depend upon external collaborations that improve business operations, particularly those that introduce systems to support new products and better customer service."
The idea of collaboration is one that operators in the financial services markets are increasingly looking at.
According to an Accenture study in the first quarter of 2016, global investment grew 67% year-over-year to reach $5.3bn. Citi for example has invested in Visible Alpha, a start-up offering a platform for aggregating and interpreting sock analyst models and forecast data.
In the investment banking sector it is clear to see that challengers have begun taking business from the established names in the market with a fresh approach supported by technology being a key contributing factor to this.
Retail banking is a harder area to judge as many of the challenger banks that are appearing are only just launching, Atom Bank’s app only went live at the start of April, so it is difficult to say how much traction they will get.
What is clear though is that even the threat of taking customers from the big boys has resulted in a much more proactive approach to innovating in order to improve services.