Banking’s digital transformation journey

With all the funding that’s piling into fintech, it’s easy to think that banks aren’t innovating or that they are bad at digital transformation.

Even inside a bank it may feel like the world outside is moving at pace and your own bank is too slow.

However, it’s easy to forget that the vast majority of fintechs are unprofitable, few have grown to have double-digit millions of customers, and none have the resources of Tier 1 banks.

Too much emphasis is given to innovation alone, even though having a great idea does not necessarily lead to a profitable business. Is it better to roll the dice on innovation while existing products and services are generating profitable income?

In the defence of banks, they have already gone through some huge transformations in relatively short windows of time. In the late 60s, ATMs allowed customers to withdraw cash without human intervention.

In the 70s, mainframe computers were introduced to remove the paper ledgers in branches – leading to the creation of core banking systems. Branches were given terminals for performing bank transfers.

In the late 80s, PCs were introduced into branches to automate many paper-based functions. Prior to computers, banks had fleets of secure vans moving money and paper.

This was a change I experienced first-hand when I started my career at Lloyds Bank. We not only put a local area network into every branch, but had over 40,000 PCs deployed across 2,000 branches. Now imagine having to upgrade the software on these! We wrote our own solutions for distributing software and managing this huge estate. With 2MB of memory and Intel 386 processors, we were running six to eight Windows applications. By the mid 90s, the bank introduced the first customer file on IBM’s DB2 database.

By this time we were already analysing customer data to understand who the bank’s most profitable customers were and created a programme to redeploy branch managers to take personal responsibility for the top 5% of customers that were earning 80% of the bank’s profits. Each manager was armed with some of the first laptop computers and dial-up modems to download data on a monthly basis. We developed CRM solutions to help managers monitor and manage these customers.

By the late 90s, banks had already started developing internet banking solutions. Having left Lloyds Bank, I was involved in implementing some of the very first internet banking solutions for over 20 banks across Europe.

For the Co-operative Bank, we delivered not only internet banking, but also banking on a Windows CE device. This was essentially an early smartphone without the phone. We also delivered the same solution in kiosks and all three shared around 75% of the same code base as they were written in Java 1.0.

Before the dot-com bubble burst, many of the UK’s Tier 1 banks had each spent over ￡1 billion creating internet-only banks. NatWest had spent a similar amount on Mondex, a digital cash project. In 1999, I helped deliver the first mobile banking application in the UK for Woolwich. The project was canned less than 18 months later.

So, banks have been going through massive transformations at scale for decades now. When you have a large base of customers, staff and branches, you can’t introduce change too quickly else you risk burning customers with ill-thought-through solutions.

Compare this with our two most successful start-up banks: Monzo, founded in 2015, and Starling, founded in 2014. Neither has the product range or customer base to compare with any of the Tier 1 banks. And I doubt they will be moving any faster than the incumbent banks when and if they do reach their size. Indeed, their pace of innovation and speed at which they have introduced new products has already slowed, especially as regulators take a closer look at their compliance.

We tell our children not to grow up too quickly, to enjoy the moments of their childhood. Yet we live in a world that seems to want to grow up too fast. I think it’s long overdue that we recognise what banks like Lloyds, Barclays and NatWest have done and are still doing in the transformation of banking.

I’m not saying they couldn’t do things better, we all can. I’m just saying that the transformations banks have already gone through in the last 50 years are huge and commendable. It will certainly be interesting to see how they respond over the next few decades.

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