Challenging the Channel

Banks are currently spending 45% of their IT budget on updating channels. This is according to a new whitepaper from Sudhir Varadarajan of software service provider, Tech Mahindra. This equates to spending approximately 3-4% of overall bank revenues on updating branches, ATMs, customer service centres and multi-channel integration, as well as online and mobile solutions. These figures may not seem surprising, after all these are the customer-facing activities of a bank and it has long been assumed that these are the correct channels to invest into. However, this whitepaper supports my personal view that the face of banking has changed and this is no longer appropriate. The whitepaper goes as far as to suggest that this is a ‘flawed investment strategy’. So why are channels no longer the most investment-worthy elements of a bank and where could budgets be better spent?

Banks traditionally focus funding on channels as a way of differentiating themselves from competitors. After all, these are the consumer-facing business functions of a bank. What’s more, this is a trend which has been further encouraged by the introduction of internet and mobile banking – banks across the Globe are jumping into the mobile banking market, offering products allowing their customers to bank on the move. It has simply been assumed that multi-channel banking is the optimal way of attracting customers in this age of increased competition.

Yet Sudhir Varadarajan’s paper makes a powerful point about the new frontier of banking and what customers actually want from their financial services. Firstly, the paper makes the argument that decreased customer loyalty – encouraged by the emergence of new financial players and damaged bank reputation following the 2008 credit crunch – actually creates an appetite for ‘ANYBANK’ solutions. That is, consumers are increasingly using bank-agnostic solutions which aggregate all their financial information onto one platform. Another example are the ATM machines. Bank-specific debit cards can be used to retrieve money from most ATMs around the world, regardless of the bank running the cash machine. The focus is very much on ‘ANYBANK’ convenience as a driver for use, as opposed to brand loyalty. What’s more, the proliferation of mobile, as opposed to illustrating bank innovation, is actually highlighting bank inflexibility and inability to keep up with developments in technology.

These two customer trends point to a need to significantly change the way banks handle their IT – namely, why play catch-up, when you can play collaboration?

The fact is that banks do not have the budget or the infrastructure to support innovation. Intellect, an organisation representing the UK technology industry, recently released figures showing that at present 96% of total bank IT budgets are being spent on regulatory changes and upgrades. Shackled by their outdated legacy systems, banks are updating their IT with high-risk, patchwork and make-do upgrades.

The Tech Mahindra whitepaper refers to a need for ‘componentization’ – regular readers of my blogs will know that I see a service oriented architecture (SOA) approach as the best method of implementing a component-led structure in banking IT. But this requires cross-industry collaboration. I thank Mr Varadarajan for recognising the work of BIAN in his whitepaper. The banking industry is beginning to challenge the dominance of the channels – together we can stop updating and start innovating.