The development of new, off-the-shelf banking IT solutions is transforming the back-office of the banking landscape. On the back of more efficient and innovative platforms, new entrants are eyeing the opportunities in the market, not only in niches, but also in the mainstream segments.
In 2010 the first new high street bank in over 150 years opened its doors, the Metro Bank; it did so in a way characteristic of this age – it outsourced one of the most difficult aspects of the banking industry, the necessary top of the line computer system. "It's almost impossible to do a new bank unless you have one of these packaged IT systems. That had never been done in Britain and Metro Bank would never have happened unless we were successful in arranging to get that done", remarks Metro Bank co-founder Vernon Hill in an interview with Reuters.
Thus, rather than the tradition banking sector approach of financing and constructing a purpose built computer system the new entrant went for a “off-the-shelf” prefabricated platform that allows for quick and easy launch into business. The possibility provided by such technology finally creates the “game changer” British lawmakers have been seeking, by which new start-ups like Metro Bank can enter into the market and improve the competitive field.
"That's the way the whole process developed in America," said Metro Bank co-founder Vernon Hill, a colourful U.S. entrepreneur who opened his first bank branch in Philadelphia at the age of 26 in 1973 before growing Commerce Bank into one of the country's top 20 lenders over the next three decades.
Winning market share
The big five banks in the UK – Lloyds, RBS, Barclays, HSBC and Santander – are still dominating with 85% market share between them for current accounts. However, entrepreneurs are looking for ways to topple the top, noting that there are five challenges that need to be overcome to loosen their grip.
The difficult steps, include finding a niche in the market, raising the capital required for a banking licence, gaining access to payment systems and finally – often the biggest barrier – having a secure and powerful IT system in place.
The final issue not only brings with it time, but also considerable cost. It is precisely this issue that has been overcome through the radical development of digital technology. Hill and his co-founder Anthony Thomson from Metro Bank turned to Swiss banking systems specialist Temenos whose platform solution provided, in nine months, what may have otherwise been undoable. The relatively new system in addition has the further advantage that many banks are still living with legacy systems, making their off the shelf model more efficient, reliable, and arguably better equipped to deal with the luring cybercrime monster.
Software opening niche markets
With technology more accessible, the number of new entrants to the UK banking market is expected to increase, with five banking permits already accepted and up to 25 more companies looking to offer specialised banking service. Each will need an IT system to deal with clients and customers.
To meet the possible demand, Metro Bank and software firm Fiserv have joined forces to offer an "off-the-shelf" software platform called Agiliti. This platform will allow new entrants a “standardised platform” that is “configured for the service it wants to provide” which will work on a subscription basis of around £8 for a normal account and £20 for a specialised product. The flexibility of the new software will allow new entrants to create tailored niece offerings for the wider and narrower British market.
With ready-made back-office platforms and off the shelf solutions, as well as flexible technologies allowing new entrants to gradually scale up services as required by organic growth, substantial development is expected in the coming years. The UK currently has around 64 million accounts, which are expected to grow to 80 - 90 million in a decade with around 15 million accounts expected to be taken by new entrants, or around 15-20% of market share.
Yet according to Nic Parmaksizian, a London-based Director at financial services consulting firm Capco, successful market entry does not just boil down to technology. Setting the right strategy, including targeting the right customer segment and developing a sustainable commercialisation model are all equally important. “You need to have something different to break through the noise and attract a segment of the market, so you need to be clear on who you are targeting and what is your niche proposition," comments Parmaksizian.
With Metro Bank’s recent opening of its 32nd branch in Cambridge, one thing is clear: the digital revolution is well under way, and is set to revolutionise the banking industry.