Consultancy challenge:
Radcore Bank is seeking to enhance its personal savings banking offering. Their ultimate aims are to make their offering more user-friendly, to deepen their relationship marketing with their millennial target audience by offering more bespoke, smart money-saving tools. The CEO of Radcore Bank believes the company’s future rests on the creation of a new flagship account that will act as a key differentiator within the saturated and concentrated financial market that the bank currently competes within.
Consultancy expertise: Consumer behavior, fintech operations, strategic enhancement, product development, market intelligence, horizon scanning, platform integration.
Summary:
Radcore Bank CEO notes two key factors are influencing the bank’s strategic vision for the future: In summary, the combination of technical and behavioral forces are compelling the banking sector to rethink their business models, end-user delivery channels, and service design. For Radcore Bank to survive, retain market share, and potentially enjoy any growth in the next five years, a strategy for adaptation and innovation is urgently required.
Organizational context:
The story of Radcore Bank can be characterized as the accidental rise of a global leader from very humble beginnings. Radcore Bank has its origins in a county-based building society, established in 1886. For eighty years, the building society enjoyed significant growth, based on a strong reputation for its values to provide greater access to finance within its local community. As its reputation grew locally, it became the largest building society in the county by asset share and eventually the second largest building society in the United Kingdom. In 1966 the building society amalgamated with two other county-based building societies to form Radcore Bank, which would go on to focus its strategic aims to become the primary high street provider of retail banking to the UK’s Midlands region. This ambition was never quite fully realised within the regional context – always trailing in its local market share behind Midland Bank (since acquired by HSBC) and Birmingham Midshires (since acquired by Bank of Scotland). Since amalgamation in 1966 the bank has resisted a series of hostile takeover attempts, first by Lloyds TSB and most recently by Virgin Money; as a publicly limited company with a majority of shareholders residing in the midlands area, there is a cultural attitude that the bank’s ownership should remain reflective of its midlands origins.
The rise of “neobanks” •In May 2019 The Economist published a special report on the challenges posed to the
banking sector by the consumer behaviour patterns of a so-called mellenial generation. The opening article of the report argued ‘banking incumbents will need to reinvent themselves to survive the restructuring of their industry’ and navigate the ‘co-evolution of incumbents, fintechs, neobanks and consumers, with developments in each country
shaped by, among other things, the strength of existing banks, quirks of the local market and the attitude of regulators’ (The Economist, 2019a). Shifts in consumer behaviour •After reading the retail banking Sector Views review commissioned by the Financial Conduct Authority (2019), the Chief Strategy Officer (CSO) of Radcore Bank has noticed an industry shift with specific regard to consumer behavior, market trends and a general cultural change what consumers now expect from their banks. Ultimately, in order for Radcore Bank to be successful and continuously generate revenue, it must establish a holistic understanding and oversight of the environment in which it operates, in both regulatory and commercial terms. Traditionally, Radcore Bank has been fairly inactive in competitor analysis (committing the least budget of all UK banks to consultancy and market intelligence gathering activities), this is now recognized by shareholders as a limitation; going forward Radcore Bank must be able to monitor and have oversight of what their competitors are doing. After 50 years of operation, Radcore Bank has now grown to realize that their high-street legacy infrastructure lacks the technical capability to compete with the new wave of “neobanks”.
Environmental context
In general, the banking sector has experienced unprecedented disruption in recent years due to radical innovation in fintech capabilities. Technological developments, particularly relating to platform integration, have affected what was traditionally considered high barriers to entry within financial services. A swathe of new banking enterprises, dubbed “neobanks”, has emerged at the intersection between mobile application development and traditional retail banking. Such enterprises are characterized by their commercial design, which involves operating without physical
branches thus making them seemingly more appealing to the more digitally-literate consumer. These neobanks are taking advantage of the pervasive access to mobile smart devices and mobile internet to usher industry re-defining user-interface methods for interacting with their customers; for example, since its establishment in 2015, the UK-based Revolut has amassed 1.5 million customers, without any kind of live customer-facing function. As a result, the banking business environment is currently grappling with a series of permutations that can be characterised more
deeply as technical, behavioural, cultural and market changes.
Technical Change
Many neobanks such as Monzo (see, Beattie, 2016), Starling and Revolut follow a similar technological infrastructure to provide direct-to-customer and business-to-business services such as in-app purchases, peer-to-peer currency transfers, and personalised financial advice. Many neobanks have custom-built their information systems, commonly called the “backend”, for processing financial transactions and interfacing with other financial intermediaries. For instance,
Monzo’s backend is primarily composed of Go microservices communicating over Kafka, using Cassandra as the primary data store (click here for a detailed video explaining Monzo’s technical build). This is in contrast to most established high street retail banks, themselves widely accustomed to buying-in third-party packages for their customer relationship management (CRM) and enterprise resource planning (ERP) information system needs; for example Radcore Bank’s longstanding license (costing £350k per annum) with the provider SAP is due for renewal in eighteen months. Meanwhile, at the frontend (or “user interface design”), neobanks are taking advantage of artificial intelligence features such as chatbots; a new feature which has been integrated in to various neobanking
products, that has shifted the ways in which their customers troubleshoot issues; though a chatbot is a machine generating responses based on pre-defined data mining and scripted answers, it allows neobank users to quickly find an answer to their queries.
Behavioural Change
In 2015 a consulting firm published a sector report after surveying 114,700 consumers in 17 countries, the survey asked: “What would you miss more for a day, your wallet or your mobile phone?”. The findings were compelling: “54% of US consumers chose the phone, and in China and South Korea, that share rose to more than 75%” (Bain & Company, 2015). More recently, in 2017, another consulting firm reported that “85% of American millennials (those born between 1981 and 1996) used mobile banking, and predicted that the share would be higher still for Gen Z (born after 1996)”, they go on to explain the “main reason people choose a bank is convenience… For older
people that means a nearby branch; for younger ones it means an excellent app” (Raddon, 2017). While it is apparent that there is a behavioural change in how a born-digital generation is accessing and consuming banking services, the very recent nature of these trends means, from a commercial perspective, it is risky to stereotype all consumer behaviour as equated to rushing toward digital solutions, or even that customers who currently demand such mobile services will continue to use banking in this way in the long term or as they transition through various major life-course moments i.e. buying a house. Cultural Change Finance is not simply a medium of economic exchange, it has cultural significance. For example, debt relations, which predate money and barter, are part of the fabric upon which community, kinship, identity and power relations in society are established (see, for example, David Graeber’s book Debt: The first 5000 years). This is still very much the case today, with fiat currencies and banking services
being relatively recent but influential forces in how societies undertake and structure broader relations such as inequality, consumption and progress. In Britain, as with elsewhere, a political backdrop of a period commonly called “austerity” (the tightening of spending public money) cannot be underestimated for its decade of influencing consumers cultural attitudes towards and practices with their finances. In the course of this period, the controversial emergence of predatory pay-day loans, online gambling, digital activism and a broader “gig economy” means people are fostering new cultural imaginaries and demands for how financial services function (from contactless mobile
payments in a local café to global money transfers via cryptocurrencies).
Clearly the combination of technological, behavioural and cultural changes surrounding the banking sector means there are market opportunities for Radcore Bank, however, these opportunities are currently ambiguous given Radcore Bank’s position as an outlier to the top five that enjoy market concentration but also the company does not possess established technical competencies to compete with neobanks – meanwhile although there can clearly be “big winners” from relatively low deposits, the 21.3% market share open for potential growth is already overcrowded. Nonetheless, to do nothing would guarantee Radcore Bank’s product offering, brand reputation and international
niche would stagnate in the context of a future banking landscape that, while unclear, will involve very different provision for services and user experiences soon as a result of new entrants who are re-defining the role of financial services providers.
Actions are already taken by Radcore Bank
1) Radcore Bank has commissioned an external IT consultant to review available third-party backend offerings in order to integrate the current product offerings in both their retail and investment divisions to allow for enhanced user experience via mobile applications; the conclusion was Radcore Bank’s twin legacy systems (retail and banking) will not be compatible with any brought-in system.
2) Radcore Bank has recruited two new developers from popular neobanks to help integrate a new backend and legacy system.
3) The Chief Financial Officer (CFO) of Radcore Bank has committed a £15 million provision to invest in new strategic projects over five years; this budgetary commitment also includes a £1m (excl. VAT) consultancy budget.
4) Commitment to an ambitious strategic vision (see below) has been established and this has proven extremely popular, in principle, with shareholders at the most recent Annual General Meeting (AGM), however, the implementation of the strategic vision currently lacks foresight, robustness and is not operationally embedded within the retail and investment divisions.
Radcore Bank’s Strategic Vision:
• Increase brand awareness for their current account, especially using market segmentation and targeted marketing communications to deepen their current account banking product to millennials throughout the UK and internationally.
• Establish partnerships with educational institutions, to raise awareness of the smart current account product and engage in corporate social responsibility activities regarding promoting financial literacy amongst young adults.
• Become a product leader in their industry and achieve sector-leading levels of customer satisfaction.
• Provide a new bespoke savings tool, enabling account users to save money at a competitive rate.
• Provide competitive interest rates for saving tools. Operational limitations: Consider, the UK is undergoing an especially turbulent business cycle given the ongoing uncertainty caused by Brexit.
Moreover, the banking sector is still experiencing the ripple effects of the 2007-9 and 2010 financial crises with great acrimony, Brexit poses various challenges of which the banks need to adapt to the new political-economic landscape. Nonetheless, if the government decides to have a hard Brexit, or a soft Brexit Banks must ensure that the next five years are financially sustainable and satisfy their own investors’ needs. Finally, a key factor that affects profitability on banks is the rate of interest set by the bank of England, the value of the British Pound has now declined to concerning levels; therefore, contingent upon the direction of the domestic currency strength, this economic factor will dictate the future of stability of markets. One method the bank of England actioned was to completely “slash” interest rates to battle the issue of a volatile currency, whether this poses a unique advantage to Radcore Bank or not, depends upon how the company will position itself now to compete with the sector’s neobank entrants.
Consultancy Requirement
Your consultancy brief is to develop an evidence-based series of recommendations that will inform how Radcore Bank will deliver its strategic vision in practice and satisfy its shareholders in the face of increasing competition from neobanks. In making recommendations you should be particularly careful to consider the attitudes of the bank’s shareholder base, and the potential vicissitudes of market share e.g. although the Bank’s strategic vision clearly contains a healthy appetite for digital innovation (which has been vindicated by shareholders at an AGM), there are already clear constraints (outlined above) in any operational strategy that rushes to compete like-for-like with the merging neobanks.
