At Lloyds Banking Group’s annual results announcement last year, group chief executive António Horta-Osório said the bank hopes to achieve £1 billion of annual run-rate savings by the end of 2017, relying on a hugely expensive digital strategy.
Earlier this year, Lloyds launched a new Digital Banking Hub to provide a sneak preview of the bank’s digitisation process. From experimenting with heartbeat authentication technology to reviewing the potential of ‘smart’ appliances in banking, Lloyds’ focus on going high tech is unmistakable.
According to Lloyds group digital director Miguel-Ángel Rodríguez-Sola, the bank’s openness to all things tech is motivated by its customers. “(Digital) is interlinked into every part of our business – something demonstrated by the 1.6 billion log-ons our customers made to our sites in (2015),” he explained.
“We are, without doubt, in one of the most exciting stages of transforming the way Britain banks,” Sola added.
Research from the British Bankers’ Association underscores what Lloyds discovered a year ago. UK customers log into banking apps over 11 million times a day, transferring £2.9 billion through online banking every week. The Royal Bank of Scotland (RBS) has already reported a 43 per cent drop in transactions made in their branches, down 6 per cent since 2014, and HSBC recorded only 2 per cent of customers visiting branches to transfer funds.
The business case for going digital is clear, but the other side of the coin is the onslaught of job losses and the lack of access to banking for customers in remote, rural areas in the UK.
For those in remote areas where internet connectivity is poor, bank branches may be the only connection to immediate finance.
In the past year, 600 branches across Britain have shut their doors, with a grand total of 3,000 within the past decade. Bank branches are expensive to staff and maintain, and with around a third of customers using online and mobile banking services (and growing), there is a decreasing need for banks to have a presence on the high street. Lloyds has been steadily slimming down its workforce since 2014 as part of an efficiency drive to save £400 million. So far the total number of job losses stands at just over 12,000.
Arguably, the fintech sector got to digital first. In the wake of the 2008 recession, the sector grew, empowered by retrenched bankers, technology innovators and frustrated customers, to work more intuitively and responsively than the traditional banks.
By building their IT systems in-house from scratch, challengers to the big high street banks quickly entered the market at a relatively low cost, constantly experimenting and innovating, with faster access to the market. The model for these early fintech champions placed customer needs first, in a lean and efficient way. For example, TransferWise took a real customer pain point of the costliness of transferring money overseas and addressed it.
With traditional banks notorious for adding on hidden charges and high transaction costs, digital remittance applications like that of TransferWise or newer entrant TransferGo win on price and customer service.
According to TransferGo CEO, Daumantas Dvilinskas, the future is convenience. “People want and expect instant results and Banks are merely reacting to this new behaviour. In the last week alone we have seen an increase of 10 per cent in user registrations, with $17 million transferred last month, meaning there is very strong demand for online and mobile financial transaction systems.”
Now customers have a huge variety of options when it comes to financial services. With hundreds of fintech companies joining the ranks, and with the reputation and centuries-old track record of banking institutions.
The current competitiveness of the retail banking sector may be the fertile ground in the industry needs to carve out a new nexus: the fintech bank, which harnesses the power of ex-financial services experts, digital gurus, peer-to-peer crowdfunding platforms and investors with an eye for innovation.
These banks are made to be intuitive, foreseeing customer pain points and addressing them early on, and may be the future of traditional banking.
Fintech and the Bank of England
Even the Bank of England has conceded that a cross-over between banking and fintech is the only way forward. Recently, BoE launched a fintech accelerator to tap into fintech innovations for central banking.
This partnership offers budding fintech firms access to the central bank as a “first client” reference, inviting them to run short proof-of-concept projects in areas where BoE needs innovation the most.
These are some of the fintech innovations BoE is experimenting with:
- BitSight: Uses publicly available bulk data to assess firms’ cyber resilience, including looking for evidence of malware on a firm’s systems, signs of known software vulnerabilities, or weak encryption. For the proof of concept, BoE is evaluating BitSight’s ability to assess the Bank’s own resilience and the potential of this service being part of the BOE’s information security arsenal.
- Privitar: Provides tools to anonymise and desensitise data. As part of the proof of concept, BoE will first test this software on a manufactured dataset to examine the analytical value of the desensitised data. The Bank will then look to assess the capability of the tool on data held internally.
- PwC: BOE has invested in understanding the scope of blockchain technology and distributed ledger, working with PwC. The team built a multi-node scalable distributed ledger environment, which contained several smart contracts to illustrate the applications of the technology. This has enabled BoE to better comprehend the resiliency benefits and practical limitations of the technology.