Even inside a bank it may feel like the world outside is
moving at pace and your own bank is too slow.
However, it’s easy to forget that the vast majority of
fintechs are unprofitable, few have grown to have double-digit millions of
customers, and none have the resources of Tier 1 banks.
Too much emphasis is given to innovation alone, even though
having a great idea does not necessarily lead to a profitable business. Is it
better to roll the dice on innovation while existing products and services are
generating profitable income?
In the defence of banks, they have already gone through some
huge transformations in relatively short windows of time. In the late 60s, ATMs
allowed customers to withdraw cash without human intervention.
In the 70s, mainframe computers were introduced to remove
the paper ledgers in branches – leading to the creation of core banking
systems. Branches were given terminals for performing bank transfers.
In the late 80s, PCs were introduced into branches to
automate many paper-based functions. Prior to computers, banks had fleets of
secure vans moving money and paper.
This was a change I experienced first-hand when I started my
career at Lloyds Bank. We not only put a local area network into every branch,
but had over 40,000 PCs deployed across 2,000 branches. Now imagine having to
upgrade the software on these! We wrote our own solutions for distributing
software and managing this huge estate. With 2MB of memory and Intel 386
processors, we were running six to eight Windows applications. By the mid 90s,
the bank introduced the first customer file on IBM’s DB2 database.
By this time we were already analysing customer data to
understand who the bank’s most profitable customers were and created a
programme to redeploy branch managers to take personal responsibility for the
top 5% of customers that were earning 80% of the bank’s profits. Each manager
was armed with some of the first laptop computers and dial-up modems to
download data on a monthly basis. We developed CRM solutions to help managers
monitor and manage these customers.
By the late 90s, banks had already started developing
internet banking solutions. Having left Lloyds Bank, I was involved in
implementing some of the very first internet banking solutions for over 20
banks across Europe.
For the Co-operative Bank, we delivered not only internet
banking, but also banking on a Windows CE device. This was essentially an early
smartphone without the phone. We also delivered the same solution in kiosks and
all three shared around 75% of the same code base as they were written in Java
1.0.
Before the dot-com bubble burst, many of the UK’s Tier 1
banks had each spent over £1 billion creating internet-only banks. NatWest had
spent a similar amount on Mondex, a digital cash project. In 1999, I helped
deliver the first mobile banking application in the UK for Woolwich. The project
was canned less than 18 months later.
So, banks have been going through massive transformations at
scale for decades now. When you have a large base of customers, staff and
branches, you can’t introduce change too quickly else you risk burning
customers with ill-thought-through solutions.
Compare this with our two most successful start-up banks:
Monzo, founded in 2015, and Starling, founded in 2014. Neither has the product
range or customer base to compare with any of the Tier 1 banks. And I doubt
they will be moving any faster than the incumbent banks when and if they do
reach their size. Indeed, their pace of innovation and speed at which they have
introduced new products has already slowed, especially as regulators take a
closer look at their compliance.
We tell our children not to grow up too quickly, to enjoy
the moments of their childhood. Yet we live in a world that seems to want to
grow up too fast. I think it’s long overdue that we recognise what banks like
Lloyds, Barclays and NatWest have done and are still doing in the
transformation of banking.
I’m not saying they couldn’t do things better, we all can.
I’m just saying that the transformations banks have already gone through in the
last 50 years are huge and commendable. It will certainly be interesting to see
how they respond over the next few decades.
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