Banks need to challenge fintechs by playing the same game

The report suggests that the best method is to take a greenfield venture capital approach, setting up a separate organization – with investment provided in stages – that has the freedom to operate independently from the rest of the organization and deploy new technology.

Oliver Wyman has worked with RBS on just such a project: its digital bank Bó.

“Bó represents a new breed of financial institution – a greenfield digital bank owned by an existing incumbent,” Bó CEO Mark Bailie told the report’s authors.

“We knew the kind of outcome we wanted would be a long and hard journey for an incumbent bank to deliver, with product-centric legacy infrastructure. So, for us, the question was, how long have we got?

“If it is 10 years, you can probably transition the existing core into a truly customer-centric business, because you can do almost anything in 10 years if you are good and you can execute – and we still have a Plan A around this.”

He adds: “But if customers start accelerating their move towards new offerings and you are not already operating in that market, then the downside risk is asymmetric.

“If you don’t know the timing, and you can see the potential for a material impact, then you need to cover the risk, so long as the cost is sensible.”

Playing with fire

The speed with which new business models are having an impact suggests that any bank giving themselves 10 years to transition might be playing with fire.

In our September issue, Euromoney spoke to a number of European banks about their digital initiatives and the challenges they face, including CaixaBank, Erste Bank and Banco Santander. 

Frédéric Oudéa, chief executive of Société Générale, told Euromoney: “My view has always been to manage Boursorama [its digital bank] as an internal start-up and a model corresponding to the evolution of client needs.”

These challenges include how to incorporate the digital business and the risks of diluting the core brand.

She adds: “A lot of the bank’s core tech may have been based on one core system, but with the introduction of a new start-up, there might be more of an ecosystem of contracts, so banks need to be far more flexible.”

Launched in January 2016, CaixaBank’s subsidiary imaginBank has already reached more than one million customers, but most of those have come from CaixaBank itself. 

“It’s our sandbox,” CaixaBank chief executive Gonzalo Gortázar told Euromoney last year. “It’s a great tool to try new things and move those that work onto CaixaBank.” 

In contrast, BBVA folded its Spanish online arm Unoe to avoid competition in the group for digital resources, including tech-savvy talent.

Nearly all banks have old mainframe systems. It isn’t a commonly accepted view, but they are very good at what they do 

 – Mark Bailie, Bó

Oliver Wyman cites the progress of neo-banks in two particular geographies: in South Korea, one of the country’s first digital-only banks, Kakao, signed up 6.3 million customers, or 15% of the total banked population, in just one year from launch in June 2017 to July 2018.

And in the UK, five start-ups – Monzo, Revolut, Atom, Starling and Tandem – grew their customer base from 600,000 to 2.5 million, or 5% of the market, during the same time period.

In China, the country’s first online-only insurer ZhongAn signed up 432 million customers within just four years.

A greenfield approach involves the incubation of a portfolio of investments, with the most promising one or two subsequently becoming a main focus of the organization. Resources then need to be freed up by scaling back parts of the core business that no longer drive growth, but should only be redirected to the greenfield project in stages.

Bó’s Bailie, who was former group COO at RBS, says this is the pragmatic solution, but it isn’t cost-free. 

“It creates other issues, which we have got to learn to manage: we will have two tech stacks and two brands,” he says. “That has taken a lot of thinking through, and in the end you have to make your choice.

“Nearly all banks have old mainframe systems. It isn’t a commonly accepted view, but they are very good at what they do. They’re very stable, they’re very secure and they are a great system of record.”

Bailie adds: “Greenfield is, perhaps, a route to extracting workloads that aren’t suited to the mainframe environment, which in turn allows you to simplify the core infrastructure to make it cost effective.

“This might be an alternative to what numerous banks have considered, and declined: core replacement, something a minority of banks globally have opted to do and even fewer have delivered on time or on budget.”

The chaos caused by UK bank TSB’s migration to a new IT platform last year served as a cautionary reminder of the risks of such a strategy.

In late January, news emerged that UK rival Lloyds Bank plans to switch an initial 500,000 customer accounts away from its legacy computer system to a new core cloud-based IT system developed by start-up Thought Machine, which was founded by a team of ex-Google engineers. 

The bank has estimated that the new system, which could eventually be rolled out across the bank, will cut costs by 35% to 40%.

Bolt-on approach

Other greenfield projects include QuickBiz, National Australia Bank’s digital unsecured lending business, and Goldman Sachs’ digital lender Marcus.

Oliver Wyman reckons that this bolt-on approach enables financial incumbents to compete more effectively with start-ups and achieve a similar “flywheel” momentum. It could also go some way towards levelling the digital disruption terrain, which has become so tilted in the neo-banks’ favour.

“One of the reasons for undertaking a greenfield venture is to shore up against competition,” says Oliver Wyman’s O’Neill. “There is an increasing risk of fragmentation of traditional banks to customer relationships as more differentiated services become available to complement a traditional current account.”

The research examined costs at a group of established banks and a group of digital challengers, and found that the average cost to acquire a new current-account customer differed by a factor of five: $30 at the challengers and $150 at the banks.

It took three times longer for the account to be set up – the same day at the challenger compared with three days at the bank – and the time taken to launch a new product feature was around two weeks at the challengers, but a full three to six months at the banks.