As Spaniards endured one of Europe’s most stringent pandemic lockdowns, business for Banco Santander’s digital-only Openbank flourished. Its brokerage client base expanded 58 per cent in the first four months of the year and trading in shares, exchange traded funds and warrants on its platform more than doubled.
The confinement has made people digital beings “by decree”, says Ezequiel Szafir, Openbank’s chief executive. With that trend expected to continue, he believes banks of the future will look increasingly like Amazon.com – online shop fronts for financial products in much the same way as the retailer is for consumer goods.
“Amazon took something that’s real, which is retail, and simply made it digital,” says Mr Szafir, a former Amazon executive hired in 2015 to oversee Openbank’s new platform. “We’re trying to do the same transformation in banking.”
Businesses reviewing post-coronavirus strategies are finding that online activity – from shopping and gaming to banking and social networking – that was shaking up their worlds even before the pandemic, has increased. For retail banking, a survey by McKinsey & Co from mid-April found a jump of as much as 20 per cent in digital channel use across Europe. More than one in five customers in Spain and Britain tried online banking for the first time.
That is giving a new impetus to banks’ online push. They are looking to speed up plans to move creaking legacy platforms on to the cloud, a slow and often costly process. Some are also building standalone online platforms from scratch or using off-the-shelf solutions designed by FinTech companies, which may be faster and cheaper.
“Many banking groups are taking a hybrid strategy, combining the effort of transforming the original bank and also developing a neobank or, at least, some speed boats, sometimes in alliance with FinTech,” says Francisco Uria, head of financial services, banking and capital markets in Europe, the Middle East and Africa at KPMG.
Banks globally will spend about $1 trillion (Dh3.67tn) over three years to take more of their operations online, according to an Accenture report. Spending on digital transformation has been led by US banks, with JP Morgan Chase earmarking $11.4 billion a year.
“It’s the only way they’ll remain competitive,” says Antony Jenkins, chief executive of Barclays Bank between 2012 and 2015 and now chairman and founder of 10x Future Technologies.
“They’re already under pressure because return on equity is poor. They have to compete with FinTech and big tech. They need to get more agile, get these functionalities on to the market quicker.”
Europe’s banks can expect revenue to fall by more than 40 per cent, which means it will take them four years to return to pre-coronavirus levels, the McKinsey report found. With an increase in interest rates from historic lows delayed by the crisis, survival will require cutting costs. That will mean shutting down many more branches, slashing jobs and taking the show online.
The cost-to-income ratio for traditional banks is 55 per cent to 60 per cent compared with half that for online challenger lenders. Santander chairwoman Ana Botin told investors Openbank’s expansion would allow it to reach a ratio of 25 per cent to 35 per cent, a level the entire group could attain in the long term. Santander’s 2018 cost-to-income ratio was 47 per cent, according to S&P Global.
Santander is ploughing €5bn (Dh20.63bn) a year to put its legacy system data in the cloud, even as Openbank expands from Spain into 10 other markets. Ms Botin calls it combining “supertankers” with “speedboats” and suggested in a speech last year that Openbank could eventually become the platform for “a significant part of our business”.
The Spanish bank’s peers are adopting similar strategies. In the UK, Royal Bank of Scotland Group is working on digital business platform Mettle. Nationwide Building Society is working with 10x Futures technology while Lloyds Banking Group is doing something similar with cloud-native digital platform provider Thought Machine. Goldman Sachs Group started Marcus by Goldman Sachs in Britain after launching it in the US.
Digital metamorphoses may be easier said than done. Years of mergers have left banks with core platforms patched together from disparate systems – “a spaghetti party”, as Mr Szafir puts it. For many, it may be simpler to start from scratch. Unlike a legacy platform, native cloud platforms are like newly built homes where the wiring is exactly where it needs to be.
“I sometimes refer to banks as museums of technology because they have got every generation of hardware and software within them,” says 10x’s Mr Jenkins.
The native cloud platform developed by Mr Jenkins’s company is being tried out by banks such as Australia’s Westpac Banking and Nationwide Building Society in the UK. Part of the efficiency of the new platforms is their business model is built around customers rather than products. That cuts out data overlap such as names and addresses that on legacy platforms appear several times for each product.
The open architecture also paves the way for collaboration between financial institutions – something that is being encouraged by regulatory authorities, with the open banking initiative in the UK and the PSD2 directive in the European Union.
“We are moving towards where the bank is becoming a platform with an e-commerce marketplace,” says Oliver Bussmann, a former chief information officer at the UBS Group and now chief executive of Swiss consultancy Bussmann Advisory.
“You sell not only your own products but also get commissions for selling services and products from third parties.”
It is leading to a bifurcation in banking, says 10x’s Mr Jenkins. Larger lenders may choose to use their size and brand recognition to become the distributors of products on their platforms, a bit like an Amazon.
Smaller banks will become more like FinTechs, specialising in certain products that they will sell on the platforms of others. Some, like Santander, will try to do both, Openbank’s Mr Szafir, says.
New systems are already being tested on segments. Openbank’s platform is used for Santander Bank in Miami and could eventually be used by the US unit. In the UK, Lloyds is still testing start-up Thought Machine’s Vault platform, says Zaka Mian, group director of transformation at Lloyds.
“We continue to test and learn to develop the confidence and certainty in the use of public cloud,” Mr Mian says. “But if you look at the very long-term, do I think that [we] and many other banks will end up on technologies like this? More than likely, I would suspect.”
