British politicians are becoming increasingly frustrated with the quality of service UK banks are providing to customers, particularly in the digital realm.
This is something traditional banks should be very wary of, particularly in the context of growing competition from digital-first challenger banks or ‘neobanks’.
A series of IT outages at some of Britain’s biggest banking providers has further piled on pressure. The Treasury Committee, a parliamentary committee of MPs tasked with scrutinising UK financial policy, has turned its attention to retail banks.
NatWest Group, Barclays, HSBC UK, Nationwide, Bank of Ireland, Danske Bank, Santander UK, Lloyds Banking Group and Allied Irish Bank were all contacted by the Committee to solve IT issues at these banks, which each operate huge digital networks often across multinational countries. However, it will not be an easy task though.
“Sending a payment sounds simple,” says Tom Hewson, CEO at RedCompass Labs, a financial services technology consultation firm.
“Actually, there are more variations in a single payment sent from bank to bank than there are atoms in the whole universe. Yet, we expect that when these payments are domestic, they are instant, free and with zero outages.
“While people’s frustrations with banks’ regular outages are completely understandable, payment systems are incredibly complex and more fragile than we are willing to admit or the regulator be willing to accept.”
Treasury Committee scrutiny adding to bank’s pressure points
Britain’s banks have a lot on their plate right now, to put it mildly, and in both a positive and negative sense. In one regard, the government sees British financial services as vital to the country’s future, and is keen to see innovations like Open Banking progress further.
The increase in global crypto adoption also presents opportunities for banks – the Markets in Crypto Assets (MiCA) regulation in the UK’s neighbour, the European Union, has levelled out the market while in the US, regulatory attitudes towards crypto have shifted to at times overt friendliness.
For traditional banks like those listed above, which for a long time have been cautious of engaging too much with crypto, doors are now beginning to open.
On the other hand, banks were expressing some dissatisfaction with the UK Payment Systems Regulator’s (PSR) new fraud reimbursement requirements last year – though many have since noted that ‘the sky didn’t fall in’, and the government is also helping by granting new powers, seemingly agreeing with banks that Big Tech firms too should be bear responsibility.
Meanwhile, the competition from new and increasingly innovative challenger banks is also chipping away at the traditional sector’s market share. Monzo now counts millions of customers and business accounts, Starling is proving a popular choice among many, while Revolut is Europe’s most valuable fintech and finally secured a UK banking licence last year.
If they do not solve their IT issues, traditional banks risk losing more customers to these digitally native platforms. They also, of course, risk continued scrutiny from the Treasury, which although a legislative body and not a government one, can still exert a lot of influence over policy – and of course, as parliamentarians, legislation.
So how can banks address these challenges? Investing in and recruiting more in the realm of IT and cyber resilience is of course one area, and banks may want to look to Europe for examples of this, where many financial institutions have had to scramble to meet the requirements of the Digital Operational Resilience Act (DORA) this year.
“Fixing this problem isn’t easy,” says RedCompass Labs’ Hewson, who points to a ‘lack of deep payments expertise, increasing costs and outdated procurement and information security processes as examples of things holding UK banks back.
AI may be a savior, though cynics may say, not without reason, that it is being touted as a silver bullet for all of the financial services sector’s woes these days. The tech may help banks deal with workloads though, at least in Hewson’s view, and help manage the ‘levels of complexity’ present in IT and cyber tasks.
“Banking is a notoriously tricky balancing act,” he says. “It looks elegant and straightforward when all is going well, but it often only takes a wobble or bump in the road to take a whole system down.
“That’s why banks tend to play it safe. But with mounting scrutiny from regulators and governments, hundreds of thousands of frustrated customers, and millions in compensation payouts, the message is clear: business as usual isn’t an option.
“They need to invest more in both payments expertise and technological innovations to enable them deliver more, faster.”
