Banking’s long divorce process

Banking, like any other business, is about two things: products and customers. So, it is no surprise that every incumbent core banking vendor manages these two aspects in their platforms. Although each has their own lifecycle, it is the product lifecycle that vendors focus hardest on.

The separation of customer management from product management has very strong advantages

From defining a product, publishing a product, simulation (showing a product behaviour, e.g. loan repayments or investment growth), to selling a product (onboarding customers), operating a product and finally closing or transferring a product.

The customer lifecycle has largely been delegated to client relationship management (CRM) systems. Many of the tier one banks created their own customer management systems in the 90s, thereby separating customer management and product management. I was involved in Lloyds development of the “customer file” – at that time the largest implementation of a DB2 database costing hundreds of millions.

The separation of customer management from product management has very strong advantages, the main one being that it is possible to aggregate (aka a single view) customers holdings irrespective of the platform the products ran on. Banks typically will run products on separate platforms, e.g. cards, deposits/loans, mortgages and insurance are typically on separate platforms. Banking had always had these two parts, until the late 90s.

I pitched the idea of “franchising banks” (similar to what we call Banking-as-a-Service/BaaS today) to three of the top banks in the UK, and all three declined the opportunity. The proposal essentially makes the separation of product and customer management a business model change. However, a few years later, RBS struck a deal to provide banking for Tesco, whilst Bank of Scotland supported Sainsbury’s.

The advantages were clear. Retailers had better client engagement since customers are visiting their stores and they were already selling third party products. These retailers also had large customer bases, which effectively made them “distributors” of banking products. These partnerships over time were replaced by the retailers getting their own banking licences and systems.

Late in the 90s came the internet and most banks over time added the internet as an alternative channel to their branches and call centres. However, a number of direct (branchless) banks did emerge: Intelligent Finance, Egg and Smile. Smile is the only one that remains operational for new customers today. These banks also managed both the customer and products.

Fast forward another decade or so to 2014 when the discussion on open banking started, and the creation of several vendors targeting BaaS emerged. This was yet another enabler for the separation of distribution and manufacturing of banking products. This time was different, as these initiatives received regulatory backing since innovation came to the forefront as a key diver to increasing competition in banking.

Now we are seeing new distributors leverage open banking in order to own the banking relationship by enhancing banking customer journeys. Some 200 new “banks” have since been created in the UK. Only a few of these have full banking licences, the majority have trusted third party access to banking data and aggregate from existing banks.

These new players are starting with digital banking platforms (DBP) that allow them to create and manage multi-channel customer journeys without the heavy burden of having to be a fully licensed bank. They may go on to acquire a banking licence and implement a full core banking solution, but if they do, they will expect it to be a headless core, i.e. one that only provides “product management” as their DBP will handle customer management.

Technology has a key role in enabling a business model shift and, as can be seen from the above. We’ve already seen a couple of failed attempts at separating banking distribution and manufacturing. So, the question is whether the change driven by open banking will stay or, like before, it will fade away leaving customer straddled with traditional banks. It also begs the question for incumbent core banking vendors that haven’t made this separation; have they “got away” with delaying a major technological shift or will they falter because they didn’t?

My view is clear, this is a shift that makes sense from a business model perspective and the technology is here to support it. I don’t believe we have seen the full extent of the impact of open banking, I believe that comes as verticals outside of banking start to leverage the open banking opportunity. That was my view over six years ago, I’d love to hear what you think the future holds?

About the author

Dharmesh Mistry has been in banking for 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).

He has been on both sides of the fence and he’s not afraid to share his opinions.

Follow Dharmesh on Twitter @dharmeshmistry and LinkedIn.