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Open Banking: Can banking’s technological laggards meet the challenge?

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30th Apr 2018
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Open Banking has now properly kicked off. With the battle lines drawn, Chris Goodfellow wonders whether the incumbent banks can make their offerings more business friendly.

We don’t like high street banks. Current account customers are fed up with high fees and poor service - customer satisfaction ratings are embarrassingly low - and it takes too long to set up business accounts.

Poor service creates an environment ripe for disruption and traditional banks are struggling to match the technical prowess of the fintech startups trying to solve these problems.

The incumbents’ position as technological laggards was demonstrated last week. TSB was plunged into chaos after it attempted to migrate to a new system. Customers took to social media to complain in their droves. Some talking about the opportunity to switch to new, digitally-led offerings like Monzo and Starling Bank.

The lack of legacy systems means these businesses can innovate quickly. But how long does that advantage last for?

“We have first mover advantage at the moment,” explains Starling Bank CFO Tony Ellingham. “How long does that last for? A couple of years. If you’re a big business you’re looking at how you restack your operations. The incumbents are looking at it and trying to work out how to build it.”

It’s happening already. Forbes broke a story about RBS’ plans to move one million NatWest customers to a new mobile offering last week. It aims to drive “significant” per customer savings and 80 developers are working on the project.

Starling founder Anne Boden predicted big banks “will copy everything we do”, in a recent NewStatesman interview. Arguing cost will become the big battle: “The big banks are increasing their cost base all the time and they won’t be able to compete because our cost of delivery is very low.”

Drive for profitability

Starling’s mobile-only bank has over 100,000 account holders. It recently launched a business offering, which allows entrepreneurs to open an account in less than 10 minutes.

“The back-end functionality is very much the same,” says CFO Ellingham. “Part of our ethos is that we develop applications for high-volumes and then we see what other types of business we can run through the applications we've developed.”

The bank’s raised £48m to develop the platform, growing to 150 staff.

The lack of branch network and technological approach will allow the business to reach profitability quicker than many challenger banks. Ellingham likens the development of its tech to the Ford Model T factory, although he winced at himself for making the comparison.

“In our case, the plant is the technology,” he explains. “You invest in that in the early years. That’s what the risk capital goes to fund. Once you get to a certain volume through that infrastructure you become profitable. You haven't got a huge branch network to support.”

Starling aims to become profitable by its third year of trading, believing it can add customers at a sufficient rate to break even sooner.

The opportunity offered by Open Banking

Open Banking allows customers to share their financial information through APIs, improving the connections between banks and services like business accounting packages. The requirement was created through the European Payment Services Directive (PSD2).

Starling’s been compliant with its Open Banking obligations since launch. Its strategy is to offer customers access to different services through a marketplace. For example, PensionBee can pull your pension balance directly into your banking app. While the aim will be for Habbito to auto-populate mortgage application details and make comparisons between different lenders.

That kind of tech-enabled banking is becoming far more integrated with the needs of the consumer.

“The business is at the right time at the right place,” argues Ellingham. “Tech-enabled banking is becoming far more integrated with the needs of the consumer. That’s partly PSD2 regulation, partly technology that supports living your life in a mobile environment.”

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By boblyddon
10th May 2018 10:14

Is this is a paid advertorial for Starling Bank? It certainly reads like one and I would take considerable issue with many of the assertions in it. For example, TSB is a challenger bank, not an incumbent. It was moving off some old but very sophisticated systems of Lloyds onto newer systems but with thinner product functionality. Sabadell and challengers generally (although I do not know whether Starling has done this) have either bought package core banking platforms or taken the source code of one and adapted it in-house. This is a recipe for simplistic products and it is difficult to acquire a book of business from an incumbent onto such an architecture without going backwards in terms of product sophistication. Having mobile and internet access is not good enough: there needs to be substance in the products as well.

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Replying to boblyddon:
Chris Goodfellow
By Chris Goodfellow
10th May 2018 15:56

Hey boblyddon,

Sorry the article didn't meet your expectation. No, it's not paid advertorial. It's very easy to sound overly positive when you're talking to a single interviewee about the progress of their business. On top of that, there's no annual reports available and they were quite limited on the financial information they would share.

I'll make sure I'm tougher with my interview questions in the future.

Sterling built their infrastructure in-house. I assumed they did this from scratch but I'm happy to ask them a specific question if it's of interest?

Thanks,

Chris

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By Tim Robinson
11th May 2018 13:47

I thought open banking would at last prompt Lloyds to set up a partner feed into Xero (and no doubt other cloud accounting packages) but here we are four months later and still no sign of it....

Cheers

Tim

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