James Ashton: High street banks need a tech boost to face the future

In the rush to drive customers online the big lenders must put service standards before cutting costs
AFP/Getty
30 January 2014
WEST END FINAL

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Not for the first time, something in Britain’s banking industry does not add up. The increasingly familiar service disruptions that see customers unable to make payments or withdraw cash are an SOS signal that the IT systems underpinning our high-street lenders are struggling to cope after years of underinvestment. Yet consumers are being asked to put more faith in such technology, not less, as banks foreshadow the future: fewer traditional branches and more mobile phone apps.

Even though Barclays insists it has “no intention to make an announcement about branch closures in the UK” alongside full-year results on February 11, judicious briefing has made it clear what direction chief executive Antony Jenkins is travelling in.

Given the problems banks have been suffering, it seems an odd time to proclaim a brave new world. Why tell customers they must make do with less human contact when the suspicion is that the machines taking their place can’t cope with the increased traffic?

This quandary says much about modern banking. More than five years after the financial crisis the industry is still making up for past missteps. Everyone knows the stories of human failure: the chief executive who overreached himself, the trader who fixed the Libor rate, the “grand in your hand” branch worker who tried to hit sales targets by punting income protection policies come what may.

Such loss of faith has until now masked the fact that the systems are failing too. When he was still regarded as a visionary, Fred Goodwin made great play out of the speedy integration of RBS’s IT platform with that of NatWest’s after their merger in 2000. He may well not have spent another penny on computer systems from that point on. The apology issued by the bank’s current boss, Ross McEwan, following technical faults on a busy shopping day just before Christmas, suggested as much.

There are other glimpses of how our lenders have struggled to keep up with the times. When quizzing former Co-op boss Peter Marks in a Treasury Select Committee hearing, Mark Garnier MP let slip that he had heard that the computer systems behind the 632 branches that Lloyds was trying to sell contained software to convert pounds, shillings and pence to decimal currency.

It’s easy to believe that Barclays underinvested in IT too, given that here is the bank which for several years dished out more money to staff than it did to shareholders. With that twisted logic, how far down the pecking order must boosting spending on software and servers have come?

Catching up is not the only driver to banks’ modernisation efforts. Crushed by stiffer regulation, ring-fencing of assets and the need to pile capital on their balance sheets to insulate against unexpected shocks, they are being forced to make savings where they can.

Staff have been cut. Bonuses and expense accounts have been reduced to take account of lower trading volumes. In the retail divisions the marbled banking halls of yore have already long gone. Yet declining footfall on the high street has bosses asking each other whether they need quite so many branches. Sure, office workers still like to nip out at lunchtime to pay in a c heque, but out-of-town shopping centres and supermarkets are far busier. How long before NatWest needs to review its pledge to stay open for business if it is the last bank in town?

Of course there are pull factors as well as push. It was 25 years ago, with the launch of telephone bank First Direct, that customers first got a taste of what was possible without ever walking into a branch. For its convenience and speed, the take-up of internet and mobile banking has soared.

When he sets out his vision for RBS next month, McEwan is expected to talk about how he can simplify taking out a loan or opening an account for customers. That means following where the customers are heading with better technology.

The broader point is that banks are asking themselves where they can make money in the future. Mortgages, yes, and small-business loans, probably, but current accounts? I expect that after driving down costs, the next step will be a concerted effort to increase charges.

There is a pact with the Government that banking customers shouldn’t have to pay for basic accounts if they remain in credit. The idea of a free-banking model is something of a figleaf, though. Zero interest paid on cash on deposit has become the norm as the price for banks looking after your money. Fall into the red, and fees can be punitive.

For its part, Santander has done much to prove that customers are prepared to pay if there are enough incentives. Its 123 account, promoted by Jessica Ennis-Hill and Rory McIlroy, has lured more than two million users in a short period of time.

Some bosses believe the industry might not have strayed into so many exotic, risky areas if it was easier to make a decent return from bread-and-butter banking. I doubt that opening up one avenue of profit would have been enough to distract them from another.

However, holes in service are opening up. Take investment advice. Most of the high street lenders have been censured for offering poor advice on savings and pensions. Many of them have given up on this line of business as a result. So while high-net-worth individuals can consult their wealth managers as before, those with less to invest have fewer options. I’m not advocating higher charges as the answer. But shrinking service should be of greater concern than the shrinking of lenders’ high street footprints.

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