Why banks should see ring fencing as an opportunity
Banks in the UK should be seeing ring-fencing as an opportunity rather than trying to wriggle
out of or diluting the effects of the legislation.
the separation of the retail business from the non-retail business is
estimated to cost each of the major banks between £1.5 and £2.5bn to set up
and a subsequent additional annual charge of between £1.7bn and £4.4bn to run.
Each of the UK banks are looking differently at what will be inside the ring
fence and what will be outside. For instance Lloyds Banking Group, which is largely UK
and retail banking focused, is looking to have most of the existing group within
the ring fence and only the corporate bank outside of it. On the other hand Barclays
is looking to put the minimum, the UK retail bank inside, while businesses like
Barclaycard and the corporate and investment bank would be kept outside the
ring fence. HSBC appears to be looking at a similar model to Barclays with the
UK Retail Bank – effectively HSBC, First Direct and M&S Bank
inside the ring fence with the rest outside with the distinct possibility that
the Head Office of the Group would be relocated to Hong Kong.
the UK based banks are seeing ring-fencing very much as an unavoidable problem that is both unnecessary and expensive.
is a different, more positive point of view and that is the ring-fencing
activity should be seen as an opportunity to fundamentally re-think
both how the bank should operate and make those major investments that it has never
been quite the right time to implement. Ring-fencing should be seen as a means of investing in the business in order to both reduce the cost base and enable the bank to better compete in the UK market.
culture that results in market leadership
2008 there has been a lot spoken and written about changing the culture of
banking, moving from the Gordon Gecko ‘Greed is good’ investment banking
culture and back to one where the role of bankers is to serve their customers. The recent Libor and Forex fines handed out by regulators suggests there is little
evidence of the change in culture being anything other than talk.
With the physical separation
of retail from investment banking there is a one off opportunity to actually
design and implement the different cultural model that each of these businesses should
adopt. The reality is that there is no one culture that fits retail, corporate,
private and investment banking. As Treacy and Wiersema wrote in their seminal
work on the Value Disciplines it is not possible for organisations to be the
leaders in more than one of the three values disciplines – operations effectiveness,
customer intimacy and product leadership. Excelling at each one of those value
disciplines requires a different cultural model. The current size and
complexity of banks has led to a blended culture that has inevitably led
to compromise and resulted in excellence at none of them. Ring-fencing provides the opportunity to put
to replace legacy IT with architecture driven solutions
has been written about the failure of the large banks to step up to the challenge from the digital natives due to the complex legacy IT systems. Ring-fencing
provides the opportunity to step back, produce and implement the architecture
required to deliver the front to back digital experience that customers, both
retail and corporate, are demanding. Under the label of ring-fencing this is the opportunity to ditch the
legacy systems that were designed for a simpler banking world and that have
been twisted and forced to support a multi-segmented banking business. This is
the right time to replace them with architecturally driven, agile,
cloud-based, channel agnostic solutions that will enable the banks to deliver
the experience and services that customers are demanding rather than the ones
that the banks are forcing customers to take. The experience that a retail customer is demanding is quite different from the corporate or investment banking customer requires. After all if the banks are going
to have to spend between £1.5bn and £2.5bn why not spend this on something better than
today rather than just splitting and duplicating today’s systems across those
businesses within and outside the ring fence?
significantly drive down cost while improving customer experience
banks have a real challenge with costs. With the additional capital required to
be held, the low interest rates and the increased regulation there is no doubt
that the cost base for banks need to be dramatically reduced and changed.
Ring-fencing provides the opportunity to look at whatthe cost bases of the
businesses inside and outside the ring fence should be. This includes looking at which parts of the cost base the bank actually needs to own and which it can outsource to those better able to deliver the service on a more cost effective basis. Outsourcing can not only reduce the costs it can also allow the bank to focus its key resources on the strategic priorities such as digital. Ring-fencing provides the opportunity to look at the processes from
the beginning to the end and to decide which parts of the processes the bank
actually needs to own, which parts of the process would be suitable for the application
of Robotic Process Automation and which parts of the processes are no longer relevant. This should enable the bank to significantly improve the overall customer experience as well as drive down cost. This is also a chance to strongly embrace the use
of analytics and deploy Next Best Action tools. By executing all of these activities
cost can, without doubt, be significantly reduced while exponentially improving
the customer experience. This means that not only should the additional cost
of operating the bank in a post ring-fencing world be reduced significantly
from the estimated £1.7-4.4bn annual charge but the banks that get this right will
be far better positioned for whatever the world chooses to throw at them.
Ring-fencing is an
opportunity to be welcomed
banks that see the glass half full (rather than half empty) when it comes to
ring-fencing who embrace the opportunity to fundamentally re-architect and
re-launch their businesses they will emerge from ring-fencing far stronger, far more
agile and far more profitable than those banks who resent the regulation and
try to do the minimum to comply with it.