In part one I talked about bank systems, structures and people holding back innovation due to their legacy, and asked whether legacy structures could be migrated fast enough to keep up with the new guys?
The answer to that question is yes, because banks also have legacy customers.
That is why half the banks costs are wrapped up in legacy, as customers want branches to stay, to keep using cheque books, to have access to tellers and more. This is why banks never close down old things, but just add new to the old. It is because they cannot get rid of the old because the legacy customers want to keep them. That is also where incumbent banks have the advantage, in that they have customers. Many have millions of customers, and customers are unlikely to change easily.
For example, Metro Bank are gaining account openings at the rate of around 15,000 a month through 40 branches but how many are switching their main account to Metro Bank? Getting numbers in this area is difficult, but the Payments Council published figures in January that show who is using the account switching service, and the winner by far is Santander.
The winners and the losers
Low volume participants (C Hoare & Co, Virgin Money, Cumberland Building Society, Reliance Bank and Tesco Bank)
Bank of Scotland
Bank of Ireland (UK) - includes Post Office
AIB Group (UK) p.l.c - inlcudes First Trust Bank and Allied Irish Bank
Clydesdale Bank - includes Yorkshire Bank
HSBC - includes First Direct and Marks & Spencer
Co-operative Bank - includes Smile
Source: paymentscouncil.org.uk. The figures only include the customers who used the switching guarantee service.
Why is Santander doing so well? By buying customers. Their 123 account is loss leader, but it is proving very effective in gaining short-term market share.
So how are the new banks going to compete? Offering a loss leader product to get the rate switchers to switch? Or hoping that being the new, cool, sexy kid on the block will make things happen.
I can tell you now that the latter will fail, and customer acquisition and change is the biggest challenge for any new start-up. It’s why mBank often said that their challenge was getting 4.3 million customer to follow them in their path to digitise, getting them off the old bank platforms and onto the new. They point out that the fresh kid start-ups are minnows by comparison. As a digital only play in Germany, Fidor Bank has gained less than 100,000 customers; Che Banca in Italy, backed by a bigger bank (Mediobanca), has gained just half a million even with distribution through bank branches.
So the core question is: can the new banks sustain themselves when they are going to face years of losses as they build their new bank and have to attract customers?