Banks must act quickly to cannibalise their core banking systems or risk losing market share to newbuild challengers.
“Incumbents cannot be innovating in the future,” said CEO of digital bank Pepper, Michal Kissos Herzog. “You actually need to take the decision to cut off the legs to preserve the body. The ones who are willing to do that are the ones who will succeed.”
Herzog, who was speaking at an industry event last week in London, went on to argue that success for banks was being first to market.
“In the UK, the incumbents are building their own challengers but it’s reacting, in Israel we initiated that competition,” she said, explaining how Pepper’s parent Bank Leumi had created its own competition in the ‘startup nation’ of Israel.
“If you want to react fast, you need the underlying technology,” she said, explaining the complexity of real-time spend notifications at incumbents that most challengers can deliver with ease, describing Pepper’s technology as “lasagne” rather than the complex “spaghetti” systems that made up its parent bank.
A number of incumbent UK banks are looking into their own ‘Bank X’, with RBS’ Mettle and Bo the most recent examples.
According to Citi’s Bank X report – published last week - the key benefits of a standalone brand allows the parent bank to meet evolving customer expectations more quickly and effectively by implementing entirely new tech stacks and systems, distinct from the parent bank.
The report also highlights the disruption in the core banking vendor space, and the work the likes of 11:FS, 10x Technologies, Thought Machine, Mambu and Leveris are doing to build standalone digital challengers which operate on straight-through digital cores for seamless experiences.
“Core banking is considered by many to be unsexy, incorrect. It’s considered by many that you’ll have to deal with the pain and go with what’s out there, incorrect. The spaghetti won’t do anymore,” said Dr Leda Glyptis, CEO of 11:FS Foundry, a yet to be launched modular core banking capability.
Glyptis, speaking on the same panel and having spent 20 years in the innovation function at QNB Group and BNY Mellon, believes that a number of traditional core banking vendors are solving a bygone era of banking problems that are leading to “jarring experiences”, but that is changing.
“Increasingly,” she said “both incumbent providers and new challengers have appeared and said it doesn’t need to be that way and they’ve created instances that can be digital all the way through. What they don’t have is the ability to scale, but it’s not designed for that, it’s designed for single products.
“11FS is working with incumbents to build new digital propositions in greenfield banks which will be digital all the way down in a way that is flexible, modular, scalable and possible to swap out and change when new technologies become available. We found that every provider out there fell down on at least one of those criteria,” said Glyptis.
Pepper, founded in 2015 went to market using incumbent provider, Temenos’ T24 core banking platform which Herzog believes was critical for growth: “To really scale up you need an infrastructure you can scale with a lot of products.”
Also on the panel was Megan Caywood, head of digital strategy at Barclays, who confirmed the bank would focus on US expansion to capitalise on a lack of competition in the US market and the fact the bank is licensed there Further, Caywood said they would heavily invest in the consumer mobile and online banking.
“It’s the Netflix moment in banking, either you heavily invest and get it right or start slowly fading as competition comes to market,” she said.