Andrew Matuszeski considers the impact of the financial crisis on banks’ technology strategies.
Both within Ireland and throughout Europe, the devastation wreaked upon bank brands and reputations by the financial crisis has been harsh for some – particularly those who have suffered from large-scale loan impairment charges – while for others, it has enhanced their reputations as prudent financial managers and trusted businesses.
Throughout the decade preceding the crisis, banks, along with the broader financial services sector, accounted for enormous levels of technology-related investment. Developments during this period, including the movement of retail banking to online platforms, increased regulation and compliance, as well as the significant growth in the financial services sectors of emerging economies all contributed to this growth in spend as the sector increasingly sought to leverage technology in order to drive growth.
With survival now taking priority over growth and capital in short supply, how will the technology strategies of banks be impacted? In a recent analogy by Chris Skinner, chairman of the Financial Services Club in the UK, it was argued that the implications of the crisis for each individual bank – "the nature of the beast" – depended on each bank’s size. His analogy categorises banks as four distinct types of beast: the Shark, the Gorilla, the Cheetah, and the Sloth. Each has a distinct survival strategy and technology outlook.
Four types of bank beasts
The Shark is a large national, regional or global bank with a strong balance sheet and capital reserves wanting to expand through the acquisition of weaker institutions.
The Gorilla is a large bank with a damaged reputation and credibility due to the crisis, such that it is now a bit of a lumbering hulk, ie, those that received bailouts.
The Sloth is a small bank with exposure to wholesale finance markets, which creates a weakened balance sheet and is therefore highly susceptible to failure.
The Cheetah is a small bank that has avoided the leverage, liquidity and capital issues that have affected the Sloth, and is now quietly acquiring market share and increased share of customer wallet.
While Skinner’s clever analogy was conceived with the dense jungle that is the European banking sector in mind, his beasts are, of course, also found in Ireland.
How the ‘bank beasts’ work
It is apparent from the scenarios outlined above that each of these banks will take a different approach to its customers, customer support and customer strategy. For example, a large global Gorilla may still try to operate like a Shark in some countries whilst their position is still weak worldwide. A general approach to customer delivery and client management would see the Shark focus on customer acquisition and operate in a predatory fashion. The Gorilla, who is aware of predators, will focus its customer strategy to ensure retention of customers.
The Sloth on the other hand, cannot do much to help the individual customer due to its weak balance sheet which leads to restrictions on budget, investment, marketing and any other form of competition, all of which means the bank must wait for an upturn in the market. Finally, the Cheetah will focus on its strong customer base and build the loyalty it has accrued.
In an age of online banking and transactions, a bank’s technology strategy is a crucial element of its overall approach and outreach to its existing and potential customers. Each of the four bank types will have their own individual strategies toward technology. When assessing the strategy of each type it is important to note that each will have different aims and capacities as determined by their position and situation. For example, the Shark can easily undercut rivals and will look to launch fast attacks on competitors’ core prime customer base, stealing them through the use of rate churn offers too attractive to ignore. Again, the Gorilla will prioritise customer retention and will gear its organisation, processes, products, services and technology infrastructure to ensure this.
Operating on a restricted budget, the Sloth will hope to consolidate its current offerings and maximise its technology. The Sloth’s hope is that a minimum investment is enough to keep it going until the market stabilises, when it hopes to invest so as to stimulate growth. Finally, the Cheetah will continue to work hard to retain and attract customers through a strong customer advocacy programme that is reflected in its offerings and technical abilities.
In general, all banks, regardless of their "animal type" will have to make some investment in new technology to remain competitive and start to rebuild market share. The challenge is that, with capital in short supply, the priority will remain on driving efficiencies and reducing costs. These two business objectives are not necessarily contradictory; technology applied in the right areas can help banks and financial institutions reduce costs and gain a competitive advantage.
Technology and the four ‘banking beasts’
One very obvious area where technology can make a very welcome impact for any of the beasts is in the area of cost savings. Many banks are actively outsourcing service functions in their business to save costs while others are entrusting management of in-house services to external services providers. Barclays Wealth, Banco Sabadell and AIB have all achieved annual cost savings of between 20 and 30pc by opting for managed services agreements with external services for their printing infrastructure.
The application of new technology will play a vital role in the survival and growth of every bank. Those with weakened balance sheets will focus upon capital preservation and customer retention, whilst banks with strong balance sheets will focus upon innovation through technology leverage for customer acquisition.
As Skinner sees it, the survivors will be those banks which automate their process to enhance customer service (not at its expense) and those whose technology generates a measurable return – as with the examples of managed print services – enabling them to spend more time and resources on their customers.
Andrew Matuszeski is a financial services business development consultant with HP