Why Britain’s banks must turn their combatants into collaborators

10 August 2016

By Isabelle Jenkins

Britain’s banks can survive and prosper – but only if they are prepared to embrace new operating models and novel ways of working even more wholeheartedly as they confront the challenges that keep piling up. That’s the message banking leaders should take from our new research into the state of Europe’s banking sector, which concludes this is an industry that now, more than ever, needs an overhaul.

The list of problems confronting the banks is familiar. Post financial crisis regulatory reform continues to consume precious resources. Interest rates - that have been lower for longer than anyone expected and reached a record low this summer - have left banks operating at cost-to-income ratios that would once have been unthinkable. New rivals are emerging at a frightening pace, and range from challenger banks to FinTech start-ups to large businesses from other sectors, notably technology. And now you can add the disruption and volatility of Brexit to this mix – not least the prospect of rates that will now go even lower for even longer.

Britain’s banks, moreover, face particular issues. Less modernised than many of their continental European peers, and saddled with the legacy of complex integrations that date from years of consolidation, they struggle with an infrastructure created decades ago in a world when branches opened from 9am until 4pm, and large-scale batch processing took place overnight. Digitalisation has been slow.

That’s the bad news. And it is certainly true that if the large incumbent banks are unable to adapt quickly enough to their new environment, they risk their rivals taking a sizeable and permanent share of their market. These incumbents could even find themselves replaced by the challengers, or at least marginalised into low-margin utility activities.

There is, however, an alternative vision of the future – a more positive picture in which challengers and incumbents become collaborators rather than combatants. In this new world order, leading banks work together with actors including technology providers, market infrastructure specialists and FinTechs – as well as with one another – to build collective solutions to shared problems, from basic operational requirements to the challenges of contemporary society.

Is that too much to hope for? Not if banks are prepared to look outwards at the changing world around them. The traditional response to adversity – in banking, as in other industries – is to hunker down and wait for the trouble to pass. For banks, this has translated into a focus on cost reduction and internal process, despite the impossibility of making radical advances given the complexity of their infrastructure, especially in the UK.

Now, however, more forward-thinking bank leaders are looking outwards for solutions to their problems – they are beginning to recognise that the greatest cost efficiencies and process advances may come from technological and commercial collaboration. The rest of the banking sector must follow suit, building a new business model based on partnership.

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