Challenger banks lack outsourcing options, claims Metro Bank president

A lack of IT outsourcing support is preventing new banks from challenging the large incumbents, according to Metro Bank’s president.

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A lack of IT outsourcing support is preventing new banks from challenging the large incumbents, according to Metro Bank’s president.

The government is currently attempting to create more competition in the finance sector by opening the doors for what politicians of al parties have termed ‘challenger’ banks.

It is hoped that the introduction of start-up banks such as Metro Bank, launched in 2010 as the first new lender on the high street in a century, and the creation of new banks by selling off branches of the likes of RBS, Lloyds and Barclays can rebalance the dominance of the big four high street lenders and give customers more choice.

However, in an interview with City A.M., Metro Bank president Vernon Hill warned that a lack of outsourcing options is creating a barrier to more new banks being set up.

The situation differs from the US, he said, where outsourcing and use of off-the-shelf software is the norm among retail banks, enabling a more vibrant financial sector.

“There are 7,000 separate banks in the US and they have a tradition of outsourcing IT. It is very efficient for a new bank to buy a packaged IT programme which is cheap to install and the provider keeps it up to date,” Hill told the paper.

“That is just not here in the UK; no banks ever outsource IT. British banks build their own systems and you can see how far that has got them.”

Financial services analyst at TechMarketView, Peter Roe, agreed with Hill, warning that new banks are currently unable to leverage economies of scale with off-the-shelf systems and outsourced delivery models, due to the incumbents relying on in-house built systems.

“There are moves towards more outsourcing, but Hill is right - it is inescapable that the banks have built their own ways of doing things and because they are not big buyers of third party software and third party platforms, that is going to make things more difficult for the newcomers,” he told ComputerworldUK.

“It makes it more difficult for the challenger because they have more to do themselves. It raises the barrier to entry. You can’t go to a software supermarket and pick up all you need to do to run an efficient bank, whereas in the US it is probably more easy to do that.”

Metro Bank is one of the few retail banks which have entirely outsourced their IT systems. The lender partnered with Niu Solutions to support delivery of software including a Temenos banking platform and a mixture of other applications from Oracle, SAP and IBM, hosted in two data centres.

Last year Sainsbury’s Bank also outsourced its IT, with FIS assisting in its migration from Lloyds’ legacy systems and onto the service provider’s UNIX based core banking software as part of a £90 million deal.

Speaking to ComputerworldUK at the time FIS executive VP, Mark Davey, said at the time that the US model of outsourcing provides significant benefits over the UK, where wholesale outsourcing is rare, but claimed that more could follow Sainsbury's Bank's example.

Meanwhile, banks emerging as the large lenders such as Lloyds and RBS sell off branches, including the newly re-launched TSB and Williams & Glynn, are currently running off their parent company’s legacy systems, but will eventually move onto separate platforms. 

According to Roe there is evidence that the use of outsourcing is increasing among the large banks, particularly as they come under regulatory and cost pressures, and predicts that new entrants will benefit as more turn to service partners.

“It is improving slowly, but as the banks attempt to meet the need of customers, regulators and to fight off competitors, they will have to use third party providers," he said.

“That will help them, but it will also help newcomers into the market by getting access to scale-advantaged software that they can pick up to run banking operations.”

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