Your Nemesis is Coming: Are You Ready?

You may have seen Aidan’s excellent piece in FinTech Magazine earlier this month, in which he calls for a focus on generating value for the customer, rather than just on the tech, and he chose banking as an example. Reading it made me think of my own foray into the banking world.

Back in 2017, I was involved in setting up one of the new ‘challenger banks’ in the UK, which was going to be primarily online. During this time, I was going to a lot of banking conferences and, at one of these, I met the head of IT of one of the Big Six high street banks. He told me that they’d recently done a group-wide audit of their digital assets and had found over 3,200 separate systems with more than 40,000 different connections between them. Some of the software was still running on ancient mainframes, written in long-dead computer languages by programmers who were also long dead, and they had no one who knew anything about how they worked. Everyone just hoped that they’d keep on working.

These are staggering numbers and go a long way to revealing the huge scale of the challenge faced by the traditional banks with regard to digital transformation. Yes, most now have decent websites and mobile apps, but these are largely front ends that are bolted on to ancient, creaking, piecemeal backend architectures.

And it’s not just the sheer number of systems and connections they have; they also have a lot of customers who rely on those systems being up and running 24 hours a day. According to Statista, RBS had 19 million customers last year, Lloyds had 25 million, and HSB had 40 million. That’s a lot of people to upset in the event of a major IT failure.

In fact, at another conference, I spoke to a chap from another big bank who had just experienced one of those week-long meltdowns we have every now and then, where the payments system grinds to a halt, or the ATMs stop working. I remarked on how quickly this particular one had been resolved, and he replied that that wasn’t the miraculous part. The real miracle was that they weren’t having a similar meltdown every week.

There’s a myth that traditional banks exist primarily to serve the individual and business customer. That’s not really true, as evidenced by the massive closure of bank branches in recent years, forcing customers to either travel further or bank online. A survey by Which? found that, between January 2015 and June 2021, 4,299 branches of banks and building societies had closed, a rate of roughly 50 a week.

No, the real purpose of traditional banks (apart from making money for owners and shareholders) is to implement monetary policy, as set by central banks or governments.

When we look at the new challenger banks, however, who are less burdened by policy obligations and antiquated IT, these are generally designed with the customer firmly front and centre of the proposition – and it shows. Revolut, aiming to be the ‘Amazon of banking’, is just six years old and, in that time, it has gathered 15 million customers across 35 countries. Earlier this month, it was valued at £24 billion. That’s up from £4 billion just a year ago, making Revolut a more valuable company now than NatWest, that has been around for 294 years. (All that and it’s still making a loss – but that’s a story for another time.)

I submit to you that here are two takeaways from this post today.

• Whatever the situation at your company, you are probably not facing the scale of digital challenge that we see inside the traditional banks. However, the challenges you do have are real, and they’re only going to get more severe, the longer you leave them.
• This is urgent. Somewhere out there is another Revolut, eying up your sector, getting ready to innovate, disrupt, and whip market share away from you by providing customer value in ways you’ve yet to dream about. You need to pick up the pace.