Is bank ringfencing a good thing for customer experience?

The banks in the UK are going through a time of change, not only financially but also regulatory. George Osborne, the Chancellor of the Exchequer, introduced a bill two years ago which states by January 1st 2019 banks must have ringfenced their operations. The concept of ringfencing, which isn’t a new one, suggests banking services dedicated to retail and small business customers are legally, operationally and economically separated from the investment services seen to be the more risky part of the bank.

This has obviously caused a stir with the leaders of UK banks who would be affected by the legislation. Some industry leaders like Sir David Walker believes the process of ringfencing is harmful because it will burden the customer with extra costs associated in splitting the banks in half. Whether this is true remains to be seen.

There is some disparity in the response to this news as some suggest the time has come to take the next step in regulating banks. The Bank of England, who is the big cog in the banking transformation wheel suggested it would make sure that all legislation is implemented correctly.

The fact is, whether banks like it or not, the legislation will be implemented and they will have to comply fully with all stipulations, one of the main points being that shared services and IT need to be properly arranged within the new ringfence which will lead to the division of current IT infrastructure. This is a risky move based on the industry’s chequered past when rebuilding or enhancing their technology systems. The Banker, a leading magazine, said leading with IT change is particularly tricky as the authorities will want to see if IT systems can be disentangled so the ringfenced entity can continue operations unimpeded.

Today, technology is possibly the most important service that banks rely on, particularly in the digital age, with consumers making use of internet banking as there are 9.6 million online banking logins a day and the increase of mobile banking usage is replacing internet banking as the primary way to review financial matters

Apart from showing a clear separation process of IT infrastructure, the new legislation expects a ringfenced bank to monitor exposure to both vostro - an account held on behalf of another bank in another country - and nostro - an account where a bank keeps a reserve of foreign currency to avoid foreign exchange risks - accounts in real time. For the most part, banking technology providers vary in the quality of real-time information they can provide and it’s very difficult for client banks to integrate this information into their systems and produce an accurate picture.

However, ringfencing of IT systems will create problems for customer experience because it naturally forces business units to become silos and makes it very difficult for banks to get an overall understanding of an individual customer. What if a customer is a retail and an investment services user? How can their bank deliver personalised offers if regulation enforces the separation of customer data?

The siloed approach will restrict the transparency and access to the customer’s data, making it harder to pool information together to provide the customer with targeted offers. To mitigate this, companies can use technology that spans across the entire separated infrastructure to gather a holistic view of the customer, even when data and products are stored in separate departments. By doing this companies can rest assured that they can provide targeted offers and bringing the customer closer to the brand.  

New regulation provides a great opportunity for banks to standardise their architectures and move away from 60 year old legacy systems. Bank ringfencing will usher in a more regulated age of banking, not only in the UK but also in the rest of the world if ringfencing proves to be a success. But success in one hand may bring disaster to the other as customer experience is under threat if banking systems remains siloed. This is, however, all dependent on how they tackle the situation but help can be found to assist with the optimisation of IT systems and infrastructures. Next question is, which bank will be the first to have a go?