Dr Tim King, Senior Lecturer in Finance, Banking and Innovation at Kent Business School, and Dr Walter Gontarek, CEO and Chairman of Chanel Capital Advisors jointly commented on the trends towards digital banking and financial services in the future:
TSB Bank plc, a major UK retail bank owned by Spanish banking group Banco de Sabadell, S.A., this week announced the closure of a further 164 branches on top of 82 already earmarked for closure in November. To many industry insiders, this news will come as no surprise, since it comes on the back of a general shift towards digitalised banking models since the Global Financial Crisis (GFC) of 2007-2009, driven by changes in consumer preferences, advances in technology and industry regulatory frameworks, which have resulted in a decline in traditional banking business models. These trends have gathered further traction in the wake of the current Covid-19 pandemic, as people have become increasingly accustomed to online banking platforms and digitalised finance. This trend is also evident in decisions made by banks including Co-operative bank and NatWest Group this year, the arrival of digital banks, including Monzo, Revolut, Marcus, and the August announcement that JP Morgan would launch a UK digital bank.
Although many of the aforementioned factors are likely to be behind this week’s decision by TSB, arguably many of the bank’s problems are of their own genesis. These include managerial decisions made that resulted in the UK government taking a significant financial stake in the lender and the 2009 merger between Lloyds TSB and HBOS, which was supported by a restructuring plan approved by the European Commission and significant financial assistance from the UK government, as well ongoing problems after. Problems were so significant for the newly merged firm, that then CEO, António Horta-Osório, was diagnosed with stress-induced insomnia and signed off work in late November 2011.
Fast-forward to Spring 2018, TSB was acquired by Banco de Sabadell and it was hoped this would herald a new era for the bank, but unfortunately, TSB was again in the national news in April 2018 following major IT issues that lasted several weeks. This incident resulted in, amongst other things, incorrect transactions, disappearing mortgages, customers locked out of accounts, customers given access to other customers’ accounts, and a non-responsive banking app, with an estimated 1.9 million customers affected. The IT issues apparently stemmed from difficulties moving customer records, held on the IT systems of TSB, to a new platform designed by parent bank, Banco de Sabadell.
While this migration had been long-planned and was aimed at increasing efficiencies and improving the digital experiences of customers, it quickly became apparent that the bank had severely underestimated the complexity and risks involved in integrating disparate IT systems and shifting to an improved digital banking delivery model. The bank was hit by reputation damming independent reports, including one commissioned by the bank itself. This report, conducted by law firm Slaughter and May, pointed to management failures within the bank and proffered that the board of TSB lacked “common sense”. The then CEO of the bank, Paul Pester, was forced to apologise publicly for the incident and was subsequently fired.
Aside from the 2018 IT disaster, which resulted in significant financial costs to the tune of approximately £330 million, and further eroded the bank’s reputation amongst clients, over the last few years TSB has been subject to declines in financial performance, driven by, amongst other factors, ongoing conduct issues including Payment Protection Insurance (PPI) claims. Eye-wateringly Lloyds has been forced to set aside provisions for PPI amounting to almost half of the total PPI bill for the entire UK banking sector, which is illuminating of past managerial failures. This year the bank has been further hit by an increasing number of defaults on its loan portfolio and has had had to increase its provisions for loan losses – with more defaults expected over the final quarter of 2020.
So what is the future for TSB? The bank remains a very important lender in the UK, yet one that is very domestically focused. While, in our view, TSB is likely to weather the current storm brought on by Covid-19, and will remain a key lender in the UK, the bank has already seen an erosion of market share in other areas. Notably competition in the banking sector for consumer deposits and to be consumers’ main current and savings accounts has intensified remarkedly in recent years, with the emergence of improved technologies, shift in consumer preferences and the emergence of digital or “Challenger banks”.
Yet, as a traditional bank TSB are not alone in facing fresh challenges and the need to adapt to a new more digital banking world, and pertinently other high street banks, including Co-operative bank and NatWest Group, have also made similar announcements already this year. Although traditional banks still hold the majority of market share in most areas, they are already feeling the effect of the increased competition. This is especially true when looking at the demographics of bank customers, with surveys, including one by CREALOGIX, conducted by Censuswide in November 2018, revealing that 1 in 4 of under 37s are choosing to bank with digital-only challenger banks. Given such statistics, a natural question arises as to whether traditional banks like TSB may become, to some degree obsolete, in certain areas as consumers become increasingly attracted to the streamlined and customer-focused experiences offered by many challenger banks. Even regarding traditional lending activities, the raison d’être of banks such as TSB, there has also been competition from the growth in online peer-to-peer lending platforms such as Zopa and Funding Circle, which change the nature of bank intermediation.
In our view, the trend towards digital banking may have far-reaching implications for customer experience, employment trends, and the risk management of regulated financial services activities in the UK. The branch closures announced this week by TSB, and by other high-street banks earlier in the year, are part of an ongoing decline in the number of bank branches, and are likely to encourage existing customers to further evaluate online options with traditional banks and may encourage many previously loyal customers to switch to challenger banks. Moreover, in the wake of incidences such as the 2018 IT fiasco at TSB, and with the 2007-2009 global financial crisis and now Covid-19 pandemic fresh in peoples’ minds, at the core of such consumer decisions are still likely to be banks’ reputations and customer satisfaction scores. This is a likely further concern for traditional banks, since many have posted poor customer satisfaction scores, and they will have to evolve their offerings to better meet consumer demand for customer-focused digital banking that is reliable, flexible and responsive.
Finally, we would not be surprised to see further shifts towards digital financial services (including wealth management, stock trading/investments and insurance for example) as client behaviours reset during the economic crisis related to the pandemic. Depending on who you are the future is bright but digital!