Why disruption means agility has taken on new meaning
Mutually Assured Destruction is a military state of reciprocal deterrence. When it comes to innovation in banking, it’s been a case of Mutually Assured Disruption.
Despite involving somewhat fewer nuclear weapons, Mutually Assured Disruption was a powerful deterrent in the banking space. Banks had the firepower for genuine innovation, but going down that route would force competitors to respond in kind. Real innovation is risky. It’s expensive, it’s difficult, and it can start an arms race.
Why be the one to make the first move and risk disrupting everything, when all sides know that the customers aren’t going anywhere? In 2011, the Banking Commission reported that the average customer switched their account every 26 years. When Metro Bank opened in 2010, it was the first new high street bank in over 100 years.
Retail banks spent a long time doing strategy with a little ‘s’
Disruption wasn’t really a term that existed in the banking lexicon and for a long time Mutually Assured Disruption kept the peace. So it shouldn’t come as a surprise that the 2014 investigation into retail banking launched by the Competition and Markets Authority (CMA) found that:
- The retail banking market lacked effective competition.
- There was weak customer response to differences in quality.
- Banks had little incentive to compete for customers.
Of course, that didn’t mean banking had entirely stood still. Internet and mobile banking both became a thing, but they happened at a pace that was comfortable. Their implementation was about transferring existing services onto new channels, rather than asking if the new channels could change the service. Innovation, according to the CMA, was mostly limited to the rewards and offers attached to the service or product. Strategy with a little ‘s’.
Focal point for change
2008 was the focal point for a number of key developments, sending out ripples that ended the status quo. The financial crisis shook people’s belief in the core financial system. Compounded by scandals around PPI, FX and LIBOR rigging, threat of SMEs and the associated media coverage plus billions in fines, a great deal of damage was done to the public perception of the major banks.
The fallout led to a renewed focus on banking from the authorities, the outcomes of which changed the playing field. The Current Account Switch Service was introduced in 2013, following a recommendation from the Banking Commission. In the same year, the regulators lowered the barriers to entry for new banks: lower capital requirements, the removal of new bank liquidity premium and the ‘mobilisation’ process which allowed for phased authorisation. In Europe, the 2011 Electronic Money Regulations paved the way for companies to offer bank-like services and products without full authorisation - a stepping stone for many towards a full banking license.
Following a sharp upturn in interested parties holding talks with the regulators about starting new banks, the FCA and PRA created the ‘New Bank Start-up Unit’. Purpose-built to further enhance the information and support available to prospective and new banking entrants, and act as a single point of supervisory resource to support new banks during their early years.
Why agility isn’t just a word
Pre-2008, the retail banking industry was seen as an impenetrable market with strongly established brands, shielded by tough regulation and high barriers to entry. In the following years, those same brand identities no longer commanded the trust they once did, at a time when many of the hurdles for new entrants were removed.
Mutually Assured Disruption only works when both sides have the same firepower. But the new players had a different set of tools in their arsenal. The likes of Starling, Monzo, Revolut and N26 offered customers new, intelligent services and run on different business models. With Monzo alone now accounting for 15% of new current account openings in the UK, doing strategy with a little ‘s’ is no longer an option for incumbents. What’s giving them the edge? Agility.
Agility isn't just a word. True agility is in product development and engineering. They can move from idea to it being safely and securely executed to their customers in 3% the time the incumbents can
David Brear, 11:FS CEO
The new challengers are agile. They can move at pace because they have a tech stack and mentality that allows them to. Data is accessible, clean, and available in real-time. Their core banking engines are designed around integrated customer identity systems, not ones that are siloed around product lines. They're easily configurable, allowing the flexibility to create new financial products quickly and easily.
But it's not all about tech. True agility also means having small, autonomous, multi-disciplinary teams, that can take an idea to execution, not pass it from one team to another. Endless committees and sign-off at every level hamstring the process. Give the right remit to a small team of highly skilled talent, laser focused on solving real customer problems, and they can achieve great things.
The result? Instant card freezing, real-time spend notification, intelligent personal finance management, API based services, digital onboarding from the comfort of your own home, bill-splitting, lower FX fees, disposable virtual cards, banking as a marketplace, IFTTT, auto-savings & round-ups, contextual referrals… the list goes on. Agility lets challengers add features that solve real customer pain-points, at a pace that’s brought an end to Mutually Assured Disruption.
Monoliths can’t become agile
The response of incumbent banks so far has been to try and look like their competitors. But billions has been spent on digital transformation, often without a great deal to show for it. Not because of a lack of belief, or talent, or resources, but because the difficulty of wading through the legacy technology and underlying complexity is vastly underestimated and makes the reality fall short of the ambition.
Luckily, there is another way. The recent successes we’ve seen come from starting again from scratch, by building piece by piece outside the monolith until it's no longer needed. An increasing number of firms are turning towards building greenfield propositions. RBS, through NatWest, have launched Mettle, and will soon launch Bo, ING have spun out Yolt and Goldman Sachs have introduced Marcus. A monolith that’s been built up over decades doesn’t just become agile. At some point, it’s time to start from a clean slate.
Not sure where to begin? Take a look at 11:FS Foundry.