By using technology to provide banking products and services of convenience to their customers, such as mobile payments, online banking and use of social media, financial services providers will challenge customer inertia in some sectors of the market where ‘digitally native’ consumers look for banking services that encompass the ‘3 Cs’ – Customer Focused; Convenient and Converged.

The development of these products will ideally be demand-led. Those banking providers that are able to accurately anaylse customer sentiment and quickly develop technology-enabled products that cater for a relevant market sector will find that they are in a good position to increase their market share. The challenge for established banks (as outlined below) is that their legacy IT systems, which are comprised of layer upon layer of IT platforms that have been built upon over many years, do not easily allow new systems for new products to be easily added without significant disruption to existing services. New entrants will find that because of their ‘technological blank slate’ they are more agile when it comes to rolling out innovative technology-led services for their customers.

As banks on the most part do not employ detailed analytics that can offer information on product profitability they are in many cases unable to determine which products to discontinue and which to actively promote. Products may be failing because they do not reflect the needs of customers or that they may not be targeted at the right sectors of the market, amongst numerous other reasons. In many cases it is difficult to remove products from a specific market because of the effect that doing so would have upon a bank’s interdependent IT systems (see Legacy Systems – below). Similarly most retail banks have not yet employed software to bundle particular products to make them more compelling customer propositions. Such a system has been deployed to great effect in the telecoms industry where the bundling of text messages, call minutes and more recently Internet usage on a fixed cost per month basis has led to greater customer uptake and greater customer loyalty.

Such a lack of analytical information has negative consequences in two prominent areas:

• Competition. The ability of banks to retire products that are unprofitable and exit these specific markets is hampered by an inability to gather detailed analytical information on them. This has a negative effect upon competition within the banking sector as it poses another barrier to new entrants competing in markets dominated by incumbent banks. A lack of education about financial products amongst the public adds to this and means that customers are more likely to choose products from well known banks regardless of whether or not they represent the best option for them. If banks are able to identify which areas they are underperforming in and are able to withdraw from that particular market, it will afford opportunities for new entrants and other existing banks to develop successful products in this market that cater for the needs of customers.
• Cost and efficiency implications. For state owned banks especially, it is important that the inefficiencies derived from offering unprofitable products to the market are reduced. This is a situation that could be rectified with short term investment in appropriate analytics software; with the longer term effect of a reduction of costs as poorly performing products are discontinued, but also delivering greater insight on profitable products that can assist business planning.

The cost and complexity of exiting a specific market should not be underestimated by regulators. However, for the sake of greater competition and efficiency, Intellect believes that retail banks should be encouraged to actively evaluate the performance of their products in this sector.

Changing one’s mobile phone operator and keeping the same number – or changing one’s energy supplier, without the lights going off – are relatively straightforward. However, as noted in HM Treasury’s Reforming Financial Markets consultation paper of 2009, both the reality and the perception of the difficulty of switching bank accounts increase customer inertia. In the banking sector especially, customer inertia represents a significant challenge not only to potential new entrants, but to any provider of financial services that is looking to expand their customer base. If banking providers are aware that customers are more inclined to stay with a banking provider than leave, then there is less motivation to ensure that its customers are its number one priority.

Intellect believes that by creating a bank account number that is specific to the individual rather than the bank and that could also be transferred from one bank to another, market stagnation that results from customer inertia will be alleviated to a significant degree. Banking providers that are able to offer a more customer-focused service, with the possibility of innovative technology-enabled banking products, or target a specific sector of the market more effectively will find that they are better placed to increase their market share.

The technology to alleviate the detrimental effects of customer inertia is available and could be adapted to fit the banking industry, what is lacking is a will to change, in part determined by the significant investment that such a scheme would entail and the impact that such large scale changes to banks existing legacy systems (see below) would entail.

Intellect believes that HM Treasury and the new financial services regulatory authorities should undertake an evaluation of the benefits of creating an industry wide system of customer-specific account numbers.

It is likely that new entrants to the banking industry will replace large traditional back office IT departments which require an initial high outlay of capital, with outsourced IT operations that can expand as the new entrant expands. Increased use of Software as a Service (SaaS) and cloud computing, provided by IT outsourcers directly to new lenders, will mean that their services are scalable, easily updatable and importantly, new entrants will only pay for what they use. In the short to medium term this will represent significant cost savings as new entrants will be able to ‘rent’ the services they require without any capital upfront costs. Coupled with a decreasing necessity for banks to have a physical high-street presence in order to establish a foot hold in the retail banking market, technology can facilitate greater levels of participation in the banking sector. With significant future capital requirements likely to discourage many potential entrants from entering the banking sector, technology has a crucial role in acting as a counter balance to this – i.e. allowing potential entrants to adopt a reduced cost model that will only increase as they grow.