This piece is from our special report on digital banking. Click here to read the first piece in the series, "A bank branch in your pocket."Click here to read the second piece in the series, "the end of cash."
Banks are doing a good job of keeping up with advances in new technology at the moment, with digital apps, faster payments, contactless debit cards and payments over mobile phones. But the speed with which new technology is being developed means that banks will have to make substantial investments if they are to maintain this.
The main incentive for banks to develop a new digital offering is the desire to deliver banking in a smarter way to meet the growing expectations of their customers. Huge numbers of people now have smartphones filled with apps to help them manage their lives. They demand banking services in the same way as they might demand any other service. Digital banking apps have proved very popular and the take-up has been substantial. People now access their banking app 20 to 30 times a month, but visit their branch less than once a month—the banks have been genuinely surprised at how fast that has taken off. RBS says its busiest branch is its mobile app at peak commuting time in the morning as people log into their accounts.
For the banks the key is to continue to innovate and implement change because, if they don’t, others will potentially do it in their place. We are already seeing the first internet-only banks being set up in the UK, which represent a challenge to traditional lenders. There is also a real possibility that other organisations will come in and cherry pick some of the banks’ business: Google Wallet and Paypal offer the ability to make payments across their software, and Facebook plans to introduce this.
To meet this sort of challenge, banks are developing more sophisticated technological products for customers—as described above by Sean Mahdi and Merryn Somerset Webb—such as Paym, the mobile phone-based payment system, and cheque imaging, where cheques are paid into your account by scanning them with your phone. As each innovation is introduced this is creating one of the most advanced payments systems in the world.
Another big incentive for banks to press on with developing their digital services is that they are much cheaper to run than the traditional paper-based style of banking. There is less and less need to process cash and cheques physically.
However, the customer-facing, front-end part of what banks offer is only one part of a larger technological structure, much of which is hidden from customer view. Banks also have a huge technological requirement in their own internal systems. This “nuts and bolts” element—the back-end of the IT system—is going to be the single biggest challenge for the banks over the course of the next five to 10 years.
The use of new digital apps is increasing the pressure on those back-end systems. Banks must ensure that their main IT systems are upgraded and able to cope. This should also enable banks to serve their customers better by enabling them to understand their overall relationship with the bank and the best way they can run their finances. Banks know they must rise to this because, if they do not, other organisations might step in and out-compete the banks, offering quicker, more efficient digital services.
I suspect that most chief digital officers and chief information officers at banks are looking at the development of their digital offer and saying that this is going to require faster and more substantial overhaul of their IT systems than perhaps was thought even 18 months ago.
And this will not come cheap. There is a very real question for the banks of prioritisation—they are being asked to do lots of things at the same time. The regulators want them to build up more capital, and there is pressure for them to lend more. So can banks also invest more in their IT systems? There is going to have to be some honest discussion between the regulators and the banks about how quickly they can progress on these fronts at the same time.
Banks are doing a good job of keeping up with advances in new technology at the moment, with digital apps, faster payments, contactless debit cards and payments over mobile phones. But the speed with which new technology is being developed means that banks will have to make substantial investments if they are to maintain this.
The main incentive for banks to develop a new digital offering is the desire to deliver banking in a smarter way to meet the growing expectations of their customers. Huge numbers of people now have smartphones filled with apps to help them manage their lives. They demand banking services in the same way as they might demand any other service. Digital banking apps have proved very popular and the take-up has been substantial. People now access their banking app 20 to 30 times a month, but visit their branch less than once a month—the banks have been genuinely surprised at how fast that has taken off. RBS says its busiest branch is its mobile app at peak commuting time in the morning as people log into their accounts.
For the banks the key is to continue to innovate and implement change because, if they don’t, others will potentially do it in their place. We are already seeing the first internet-only banks being set up in the UK, which represent a challenge to traditional lenders. There is also a real possibility that other organisations will come in and cherry pick some of the banks’ business: Google Wallet and Paypal offer the ability to make payments across their software, and Facebook plans to introduce this.
To meet this sort of challenge, banks are developing more sophisticated technological products for customers—as described above by Sean Mahdi and Merryn Somerset Webb—such as Paym, the mobile phone-based payment system, and cheque imaging, where cheques are paid into your account by scanning them with your phone. As each innovation is introduced this is creating one of the most advanced payments systems in the world.
Another big incentive for banks to press on with developing their digital services is that they are much cheaper to run than the traditional paper-based style of banking. There is less and less need to process cash and cheques physically.
However, the customer-facing, front-end part of what banks offer is only one part of a larger technological structure, much of which is hidden from customer view. Banks also have a huge technological requirement in their own internal systems. This “nuts and bolts” element—the back-end of the IT system—is going to be the single biggest challenge for the banks over the course of the next five to 10 years.
The use of new digital apps is increasing the pressure on those back-end systems. Banks must ensure that their main IT systems are upgraded and able to cope. This should also enable banks to serve their customers better by enabling them to understand their overall relationship with the bank and the best way they can run their finances. Banks know they must rise to this because, if they do not, other organisations might step in and out-compete the banks, offering quicker, more efficient digital services.
I suspect that most chief digital officers and chief information officers at banks are looking at the development of their digital offer and saying that this is going to require faster and more substantial overhaul of their IT systems than perhaps was thought even 18 months ago.
And this will not come cheap. There is a very real question for the banks of prioritisation—they are being asked to do lots of things at the same time. The regulators want them to build up more capital, and there is pressure for them to lend more. So can banks also invest more in their IT systems? There is going to have to be some honest discussion between the regulators and the banks about how quickly they can progress on these fronts at the same time.
