Rik Turner, senior analyst Datamonitor, examines the technology options available to new entrants in the retail banking market.
From major high street brands such as Tesco to Vernon Hill, the US entrepreneur who founded Commerce Bancorp, there are a number of companies considering an entry into the UK's retail banking market, with business models ranging from specialized niche offerings for the new mass affluent or small and medium-sized enterprises to fully fledged banking for the general public.
It may be something of a cliche to note that the Chinese word for 'crisis' contains the character for 'opportunity', but the fact is that, when things are going wrong on a massive scale, there are those who detect a chance to make money. That the UK's retail banking sector has been in turmoil for the last two years is no secret, so it is only natural that some game challengers with deep pockets and clean balance sheets should be planning to take advantage of the situation.
The companies looking at the UK's banking market vary from major retail brands with extensive networks around the country on the one hand to purpose-built organizations planning a small, highly focused approach with only a few branches in carefully chosen locations on the other. What they have in common is the perception that the crisis in the UK's financial services industry has resulted in a lack of public confidence in its remaining big-name banks, not to mention huge balance-sheet headaches for these incumbents, creating an opportunity for new players with a differentiated offering.
Among the major high street brands eying this business, the most high-profile is undoubtedly the supermarket chain Tesco, which is already the country's largest food retailer and has a longstanding personal finance arm that sells car, home and travel insurance, savings accounts and credit cards. It has also been running a pilot scheme providing banking sections inside five of its existing 2,200 supermarkets for the last few months, and plans to launch current accounts and mortgages over the next couple of years.
Tesco Personal Finance was originally a joint venture with Royal Bank of Scotland (RBS) and still uses the underlying core banking infrastructure of RBS in order to deliver its services. The idea was that Tesco had the customers in its stores and a vast amount of knowledge about their buying habits as a result of its loyalty card program, and so could concentrate on managing the relationship with them while the bank ran the plumbing at the back end to make it all happen.
That relationship is now winding down, however, with Tesco having bought RBS out of the partnership and established a timetable for the business to transfer to other infrastructure. Tech vendors say that Tesco has already selected its core banking system provider and intends to run the software itself.
Clearly, other high street names could follow Tesco's lead. Another leading supermarket chain, J Sainsbury, already has a Sainsbury's Bank arm offering loans, credit cards, savings and insurance, while the pharmacy chain Boots has expressed interest in financial services. The UK's leading bookseller, stationer and newsagent chain WHSmith, meanwhile, has Post Office branch facilities in 80 of its stores, with services that extend to savings accounts and foreign exchange.
At the other end of the spectrum are overseas interests that see an opportunity for a tightly focused banking operation in the UK, running a few branches and targeting a very specific market. The most high-profile among these is Vernon Hill, the US entrepreneur who founded Commerce Bancorp in 1973 and grew it into a business that he eventually sold to Toronto-Dominion for $8.5 billion in 2007.
Hill has applied for a banking license with the country's regulator, the FSA, and has gone public with plans to open the doors of an institution called Metro Bank in October this year. The idea is to start with just four branches, although Hill has also talked of his intention to expand that number to 200 over a 10-year period. Hill speaks of bringing to the UK the kind of differentiated service offering that he introduced in his home country with Commerce Bancorp, providing evening and weekend banking for busy urban professionals and free coin-counting machines for small business customers.
In terms of the IT platform that Metro Bank will be using, Hill has signed a deal with Swiss core banking provider Temenos for its T24 Model Bank. He has also expressed his amazement, in an interview with Retail Banker International magazine, that: "The typical outsourced IT model that all new US banks use, where you pay per account per month rather than paying the money up front, has never been used in the UK." Industry sources say the deal with Temenos reflects that method.
Hill is not alone in seeing a window of opportunity in the UK market, either. Core banking system providers tell Datamonitor that they have had talks with entrepreneurs from areas such as the Middle East, some of them with links to sovereign wealth funds, and that the common theme in all such conversations is for any venture in the UK to be, like Metro Bank, more opex- than capex-led with regard to its IT infrastructure.
Of course, Hill and anyone else whose plans are still dependent on FSA approval for a banking license should be viewed with a degree of caution when it comes to timeframes. There is nonetheless clearly a groundswell of interest in entering the UK market with new ways of doing retail banking, and whichever ventures actually take off will represent a business opportunity for IT vendors but also a challenge in terms of how they sell their products to these new institutions.
The question then is which core banking system vendors are best placed to take advantage of such a trend. The big US players Fidelity and Fiserv should be in a good position, given that the service bureau model is in their DNA. Temenos says it has gained such expertise since its 2007 acquisition of German software company Actis-BSP. Computer Sciences Corp is also looking to pick up such business through its relationship with Oracle's i-flex banking software division. The decisions made by these firms as they enter the market could have important implications for technology vendors.