Monday, 7 July 2014

Atom Bank: second mover advantage

It’s easy to be critical of the branch-first strategy of Metro Bank in the digital age, but listening to Anthony Thomson at the launch of Fiserv’s new Agiliti system gives one a more sympathetic perspective. The cumbersome regulatory process cost the bank millions; the payments system was jealously guarded by the existing high street banks; and the capital requirement was huge, even at a time when the industry was gasping for collateral.

If the bank had launched in 2007 when it was conceived, it might just have been a sensation, gaining extra momentum with each successive failure of the likes of Northern Rock, Bradford & Bingley and the rest.

However, while it was slogging through the licensing process, smartphones and tablets took off. In 2007, ‘it was a different world,’ Thomson said. ‘The way to create a better customer experience then was through physical location.’ But by the time it had overcome the barriers to entry in 2010, the branch-based concept was already obsolete. While still claiming that Metro Bank was right for its time, Thomson added: ‘The pace of change by 2012 was extraordinary, to the point that, in 2014, building a bank with branches would be like BT putting telephone kiosks back in the high street.’

One can still point out the systems deficiencies in the Metro Bank launch. No matter how strong the belief in the importance of the branch, launching without internet banking borders on the negligent – and that applies equally whether it’s 2007 or 2010. It still doesn't have a mobile app, despite promising one last year. But it has still garnered around 300,000 customers and has attractive branches with convenient service.

Moreover, Metro Bank has done the industry a favour. By demonstrating how difficult it was to launch a bank (it was, of course, the first to do so in a century), it added to the political will to tilt the system back towards new entrants. The fact that there are now close to 30 applicants for a UK banking licence is testimony to how much the landscape has changed.

The question then moves to what the applicants intend to do with these licences, which under the new process should take no more than six months to be granted. Some of these are likely to be international banks with no UK presence, some will be more or less single product propositions (online savings, for example) but some will be retail banks like Thomson’s new venture, Atom Bank.

Despite a recent report from the Social Market Foundation suggesting that more choice of similar products may not equate to more competition, Thomson believes the landscape is becoming more diverse. ‘Wonga, arguably, introduced competition into a new part of the market. P2P lending is also adding competition. There will be new banks, quasi-banks and others that just create more competition in every way.’

However, it may be tricky for Atom Bank to stand out. It will be starting from scratch without a big brand such as Tesco or Virgin, without as much scope to offer current accounts as loss-leaders, and without the hype of Metro Bank. Thomson’s answer is that Atom Bank will deliver a seamless, instant digital experience where the consumer wants it to happen, for which the technology is key.

‘The existing banks can build a beautiful front-end. But this is plugged into a pig of a back office system,’ he says. While undoubtedly true, it is the beautiful front-end that the customer sees. This allows a bank like Barclays to casually describe itself as a ‘leader in mobile banking innovation’, as it did ahead of the launch of Paym.

Thomson counters that just because existing banks have spruced up front-ends doesn’t mean they can exploit them properly. ‘Banks don’t have a single customer view. They don’t have the ability to do the data analytics and the predictive modelling to make your experience better,’ says Thomson: the extent to which a new bank could to exploit predictive modelling will be interesting to see.

Thomson also states that ‘the difference will be the functionality and the fact that it works seamlessly.’ So it remains to be seen what Atom Bank can conjure up, bearing in mind that the model with Agiliti is that it will purchase modules around essentially vanilla retail banking offerings. Agiliti has Fiserv’s IBM iSeries-based Signature core system at its centre, which one source recently described to IBS as ‘safe but unexciting’. The question of how much a user can customise its offerings was raised at the launch event and while products can be parameterised, the suggestion is that Atom Bank will innovate on top of Agiliti rather than within it. And perhaps the underlying technology of a system is less important when you take it on a Software-as-a-Service (SaaS) basis compared to a licence. 

There is a related point, however, and one which contradicts the former Metro Bank philosophy even more. Whereas the latter believes that a customer will forego the best interest rates for better service, it might be that value is a key part of the Atom Bank proposition. It will have a cost-income ratio of below 30 per cent, which Thomson thinks is close to half that of existing banks. ‘With Atom Bank, because it’s a mobile bank, based in the northeast of England, our cost income ratio is low. Not only will we provide a better customer experience, we will offer market leading products,’ he claims.

This is easier to understand. Starting with a clean technology slate, a pay as you grow model, no bad debts or miss-selling scandals and a regulatory tailwind, Atom Bank and other new entrants should be able to give the current banks a run for their money.

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