1. A MODEL FOR THE UK
BANKING INDUSTRY
TRANSFORMATION
This paper reviews the existing issues about the UK
banking industry competition, examines the reasons why a
conventional approach to boost it might not be effective,
and outlines an alternative approach to industry
arrangement with consideration of IT implications.

3. Introduction
With the crucial role that banking industry plays in the
economic growth and stability, the public and regulators quite
expectedly pay increasing attention to the health condition of
the industry.
Deficit of competition with its direct impact on the consumer
detriment is one of the key health checks, which has been getting
a progressive attention in the UK. This paper reviews the existing
issues about the UK banking industry competition, examines the
reasons why a conventional approach to boost it might not be
effective, and outlines an alternative approach to industry
arrangement with consideration of IT implications.
Insufficient level of competition has been a long-
The concerns have become even more pronounced
banking industry. Throughout the last decade the
consolidation of the UK banking industry throughout
standing public and regulatory concern about the UK
issue
has
been
addressed
by
a
number
of
supervisory examinations: the Cruickshank report on
“Competition in UK banking” (2000) with follow-up
responses from FSA (2000) and HM Treasury (2004),
the report by the Treasury Committee of the House
of
Commons
“Competition
and
choice
in
retail
banking” (2011), the joint HM Treasury and BIS white
paper
“Banking
reform:
Delivering
stability
and
supporting a sustainable economy” (2012) - to name
in
the
the
wake
last
of
years,
the
financial
which
effectively
fostering
triggered
consolidation of dominating position of the “Big Five”
financial institutions in the UK.
According to the Treasury Committee 2011 report
mentioned earlier, it varies from a staggering 85% in
the Personal Current Accounts (PCA) sector to above
60% for savings accounts and unsecured personal
loans segment.
a few.
crisis
3

4. Major discontent about the current state of business is a perceived inadequacy of the banking services quality as
reflected by customer satisfaction surveys which rests pretty much on the deficit of choice for banking clients.
The sources to remove the impediments to the competition in the industry have been clearly articulated:
When it comes to the agenda of increasing the
substantially to the “free-if-in-credit” banking practice
number of suppliers, the discussion evolves pre-
around PCAs and obscure disclosure to the client of
dominantly around the emergence of new banking
associated costs as the root-cause. That sets very
institutions as a required outcome. At the same time
reserved expectations for the new entrants about
there is more or less unanimity in this discussion that
their capacity to get a rapid growth of PCA clientele.
barriers for entry are paramount.
As PCA is generally recognized to be an important
The predicaments for new entrants come from a
gateway product in retail banking, eventually the “Big
number of sources. They are challenged with high
Five” are in the spearhead to enjoy the privilege of
fixed costs of compliance with a regulatory framework
the economies of scale.
– would that be qualification effort of the licensing
On the other hand, the efficiency these days to a
process
large extent comes with technology, and technology
or
Basel
capital
adequacy
requirements
which favour larger incumbent “experienced” players
comes
while requesting more capital from the newcomers.
come in gigabytes of code of core banking systems
Indeed, the capital requirements issue has been
loaded on powerful hardware racks with total cost of
addressed
ownership measured in dozens of mega-pounds for
this
year
with
the
Bank
of
England
with
investment:
banking
production
lines
lowering the amount of capital required for the new
the business volumes of a “Big Five”-type entity.
entrants. Still, even with the gates to run business
In a nutshell, creation of new participants which are
wide open by the regulators, what poses a much
of the same kind and scale as the incumbent ones
greater challenge is competition itself. Competition
implies assembling a powerful processing capacity at
puts the newcomers in the middle of the cost game
profoundly high costs with dim prospects of its full
in which economies of scale and greater efficiency
utilization. In fact, the processing capacity in the UK
are
banking industry seems to be quite sufficient as it is
the
key
drivers.
Neither
of
these
drivers,
however, is the newcomer’s comfort zone.
now and the future growth in transactional volumes
On one hand, PCA segment in UK demonstrates
can be catered by scaling up the existing processing
very
lines.
low
switching
rates,
which
are
attributed
4

5. So,
instead
of
bringing
new entrants which
are
replicas of the existing ones, a plausible alternative is
reframing the operating model of the industry as a
whole with a component-based approach in mind by the same token as the break-down of banking
services into 29 economic functions done recently by
FSA in their Recovery and Resolution Plan exercise.
However, rather than applying componentization from
the product silos angle like in the FSA case, one
can consider the components of high-level business
lifecycle and use them to define profiles for market
participants in a new model (see Chart 1).
Chart 2. Banking industry landscape recomposed
along the business cycle roles
Within this framework the competence of running the
banking business together with the banking licenses
would accrue to banking business managers - the
group of entities in the driving seat of planning and
control, which in terms of existing banks
encompass
bank-wide
strategy
and
product
management
management
marketing,
finance,
groups.
functions
risk,
legal)
Strategic
would
(like
and
acumen,
competencies about proper product engineering and
mix, and expertise in maintaining balanced financial
management would constitute the job description for
the banking business player.
Transaction processing facilities - the existing ones or
the ones yet to emerge if needed - would spin-off
into the community of processing factories operating
under fee-based SLA arrangements with the rest of
Chart 1. Business cycle components
Essentially,
in
this
model
each
element
the industry, open to render services to players other
of
the
lifecycle could be represented by a separate type of
entity. Thus, a community of banks as encapsulated
vertical silos would recompose into the horizontal
communities of participants on the basis of
service role they perform (see Chart 2).
the
than the one from which they originated. Opening
access for the banking business players to consume
services across processing factories would provide
opportunities for the industry to excel in efficiency –
to consume services of a particular factory in the
business area where this factory excels compared to
the peers.
5

6. Such a detachment would also provide much more
for
transparency on the costs and profitability of “free
transparency
banking”,
blurred internal OLAs – for a tangible benefit of
lack
supervisory
of
findings
which
was
as
serious
a
pointed
out
problem.
in
This
processing
factories
and
would
accountability
boost
over
greater
quite
often
prudential supervision of systemic risks.
consequently would put more pressure on banking
As for the third category of entities in a deal
business entities’ pricing to pass on the benefits of
origination role, they are perhaps those very new
the economies of scale to the clients.
players which are required to bring the transparency
The
detachment
critical
and access to information about market supply so
account holding and transactional functions from the
much sought after – the first two tasks mentioned in
impact of redundancy cases in the banking business
the beginning as means to improve competition.
team. Furthermore, it would diversify the financials of
Having independent status from the banking business
the
entity and acting on a non-exclusive basis as the
processing
would
factory
also
and
insulate
decouple
the
their
direct
dependency from financial risk-taking activities of the
deal
banking business, leaving operational risks mitigation
competitive edge would be to maintain the customer
as the main focus. It’s true that dependency is a
focus, deliver a fair and comprehensive coverage of
two-way road here and the resilience of processing
market supply to the clients. Similar to production
factories is crucial for stability of the banking system.
factories case, the detachment from the banking
Stringent
risks
business entities and acting in the interests of the
mitigation matter no less than efficiency especially
clients would be a crucial ingredient to support with
when
fee-based
operating
service
member
of
controls
vendor
the
and
support
industry.
The
operational
goes
beyond
precedents
in
one
the
origination
distributor
service
for
contracting
the
latter,
between
the
their
deal
origination agents and the clients. This way the new
financial services industry in the areas of custodian
industry architecture creates a layout to support truly
or mortgage servicing areas prove however that this
the idea of a financial supermarket, which so far has
task is quite manageable. BPO services domain also
been
demonstrates that a professional services organization
would be dedicated to selling banking products of the
setup can successfully cope with the challenges of
bank owning those channels. A fairly close proxy to
this kind. Moreover, unlike financial institutions it is a
this kind of a new construct is an existing white-
norm
labelling practice. Again current context and rationale
for
professional
services
organizations
to
heavily
methodologies
own product mix presenting white-labelled products
ITIL.
Therefore explicit and formal SLA contracting within
the
under own brand.
advanced certification and methodological framework
6
latter
channels
arrangement with financial services peers to complete
eSCM,
in
sales
across a broad spectrum of relevant standards and
COPC,
though
the
are
ISO,
different
as
subject themselves to the scrutiny of certifications
like
often
constrained
case
–

7. Naturally,
there
is
an
IT
dimension
to
any
For the processing factories the key elements would
organisational transformation of this kind. Technology-
be the OLTP core banking system, as well as
wise, current capabilities of IT domain look quite up
gateways to RTGS/DNS systems (like TARGET and
to this challenge in terms of the industry solutions
SEPA) and international financial messaging systems
and expertise. The SOA integration framework has
like SWIFT. The accounting data for the scope of
been around for quite a while now, the difference
business
being that rather than driving a corporate architecture
particular banking business entity would be fed back
it would raise to the industry design level. The IT
to the financial accounting and reporting packages of
solutions components of a corporate IT architecture in
the latter.
terms of their functional coverage are considerably
Ensuring
Therefore, the participants with different roles could
recently. The issue is not about the required CRM
wield relevant available component of IT architecture.
solutions as these have been available for quite a
The integration agenda here becomes more about
while now. The challenge could be about the multi-
connectivity, security and data protection matters of
channel
the inter-entity data exchange rather than a technical
comprehensive coverage of market supply, originate
challenge.
deals for the selected options with multiple banking
Banking business entity activities rest heavily on the
products suppliers and then establish collaboration
treasury
with processing factories at deal execution stage.
aligned with the components of the business cycle.
room,
management
ALM
and
systems
risk
(supporting
management
dealing
services
origination
an
provided
adequate
community
client
IT
could
interaction
by
the
solution
be
factory
quite
platform
for
to
a
tricky
to
a
deal
until
deliver
functions),
The advent of the modern User Experience Platforms
gateways to the OTC or exchange trading systems,
(UXP), however, has filled in this gap by contributing
BI solutions for economic and financial planning,
a powerful engine to consolidate a spectrum of
budgeting
and
analysis,
as
well
as
financial
functionalities needful for this role. Unlike the portals
accounting
and
reporting
tools
for
the
business
family, due to the components pre-integration and
portfolio owned by this entity. Granularity of some
built-in
UX
design
and
management
core banking solutions also renders support for the
solutions would be much more digestible for the deal
banking products engineering as separable from a
origination entities in terms of associated solution
deal execution stage.
costs and effort.
7
tools,
UXP

8. To summarise, the transformation initiative of the UK banking landscape is gaining shape and pace fuelled by
the concerns over the state of competition in the industry. The country’s newly created Competition and Markets
Authority have declared the UK banking sector as their prime focus. Here we have considered one of the
potential recomposition approaches to attain more transparency, better quality, wider client choice and switch-over
flexibility, and fairer price setting for the banking services. The technological advances of IT industry can provide
ample foundation for the proposed transformation. So, the pieces of the puzzle are at hand in the form of
already existing banking industry practices and arrangement constructs, supporting IT concepts and solutions. The
question is if they will get together into a new construct with pertinent regulatory institutionalization.
8

9. Oleg has over 20 years of professional experience in financial services industry
domain, gained across different geographies and through different roles including senior
positions and key roles in organizational transformations. His solid knowledge of
banking practices is leveraged by 15 years of expertise in banking software solutions
involving
top-ranking
international
vendors.
Oleg
holds
MSc
degree
Economics from BI Norwegian Business School, Oslo.
9
in
Financial