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To judge by her CV, Anne Boden is an old-style banker to the core. She has a conventional career behind her, spanning stints at Lloyds, Standard Chartered, UBS and Royal Bank of Scotland, culminating as chief operating officer of Allied Irish.
Now, however, Ms Boden has moved into the vanguard of the digital revolution. As chief executive of Starling Bank, a London-based start-up, she believes the future of high-street banking is not on the high street at all, but on mobile-only platforms such as the one she is midway through setting up.
“Big banks are far too complicated. All their branches and products and legacy systems are very inefficient,” Ms Boden says.
And she is not alone in holding such views. Across the financial services sector, but particularly in banking, start-ups are endeavouring to shake up a staid industry.
Three connected complications make this a rich vein to tap. In the boom times of the late 1990s and early 2000s, many banks failed to invest in technology, preferring simply to ride the wave and maximise profits. During the financial crisis, meanwhile, there was no time to think of tech investment. And in the post-crisis period there has been no money. The net result across much of the world is a banking system that is creaking at the joints.
The industry has been distracted for years, says Piyush Gupta, chief executive of DBS, Singapore’s biggest lender. “Collectively, we have taken our eyes off Net 2.0.”
Groups that expanded aggressively through acquisition have some of the biggest challenges thanks to a common failure to integrate multiple IT systems. Kartik Ramakrishnan, senior vice-president at Capgemini, a consultancy, says the task in hand is vast.
“The financial services industry is one of the biggest spenders on technology,” he says. “However, the majority of this spend is on maintenance activities, largely due to the investment required to keep legacy systems operational.”
Royal Bank of Scotland, which led a three-way €71bn acquisition of ABN Amro just before the financial crisis, has become synonymous with IT failures. After RBS’s systems fell down in the summer of 2012 it took weeks to clear a backlog of 100m unprocessed transactions that froze customers out of their accounts.
Despite a £750m programme of investment, RBS was hit by another embarrassing glitch this summer.
Some of the biggest banks with the greatest need to make amends for past under-investment are now spending billions of dollars a year — not just to maintain old systems, but to try to upgrade them at last.
“There is an urgent need for the traditional players to acknowledge the presence of new digital challengers,” says Mr Ramakrishnan.
“[Banks need] to develop more agile, responsive IT to support faster time to market, better product innovation and improved customer service.”
DBS of Singapore is among the banks convinced it still has time to make amends. Next-generation technology is now “front and centre of our priorities”, says Mr Gupta, who adds that the timescale for getting it done is limited.
“If you don’t get the digital transformation right in the next five years, you will be history,” he says.
As with other bank bosses, Mr Gupta is alarmed at the inroads made into traditional banking territory by non-banks, particularly technological behemoths, from Alibaba in China to Apple across much of the rest of the world.
Their expansion into payment services is particularly worrying for the banks because it directly challenges the banks’ relationships with their customers.
Other core banking activities — such as lending — are under attack from technology start-ups, particularly so-called peer-to-peer (P2P) lenders.
By using sophisticated software to match people or companies with money to lend to those who want to borrow, they can often offer loans more cheaply and cut out the middlemen bankers. “We are steadily taking their customers,” says Giles Andrews, co-founder of Zopa, the world’s oldest P2P lender, who adds: “We are doubling our market share every year.”
A handful of initiatives pose similar threats to other areas of the traditional financial services market.
In asset management, for example, Alibaba has attracted vast inflows across China, thanks to the combined power of its technology and its dominant brand name.
In insurance, a patchwork of initiatives has spread across broking and analytics.
It is in banking services, however, that the greatest changes are afoot. Here, technology companies, large and small, have been helped in their competitive efforts by the increasing regulatory constraints imposed on traditional banks in the aftermath of the 2008 crisis.
While banks have been forced to accept tougher regulatory capital requirements, making much of their core lending more expensive, challengers from outside banking are only lightly regulated.
In some countries, politicians have even gone out of their way to favour non-banks, conscious that there are votes to be won in making life harder for the kinds of banking institutions that were so closely identified with the financial crisis.
In the UK, for example, P2P lending is about to be given the tax breaks and government imprimatur of an Isa, a tax-efficient savings vehicle. At the same time, a new 8 per cent bank supertax has been announced for old-style banks.
The banking industry is not taking the assault lying down. With the trauma of the crisis, and much of the expense of post-crisis regulation now absorbed, the stronger banks have not only begun to invest heavily in unseen back-office IT. There is also a good deal of customer-facing tech investment, ensuring that some banks, at least, are keeping pace with upstart challengers.
A number of models are emerging. Spanish lenders BBVA and Santander have each set up pools of funding to buy up tech-based firms. BBVA even went so far as to acquire Simple, one of the more eye-catching of the US start-up lenders. Meanwhile, BNP Paribas has established Hello, a mobile-focused lender operating across a large chunk of the eurozone.
For Ms Boden at Starling, such initiatives miss the point because, in most cases, the high-tech front ends of the new style still rely on old bank infrastructure.
Of her own enterprise she says: “We’re different. We’re going to be able to offer free current accounts without subsidy from other products.
“That’s because we don’t have the big network overheads of branches and legacy systems.”
If she is right, then perhaps the greatest potential for a more modern form of banking may lie in emerging markets, where old-style infrastructure was never built.
Across Africa, for example, payment services using basic mobiles rather than smartphones are already widely available. In such markets, tech-savvy start-up lenders could do very well indeed.
Many believe, however, that the current phase of traditional financial services being challenged by upstart technology companies will morph into a new world order, in which the best of the old operators integrate the latest technology, either under their own steam or via acquisition.
“The financial services industry is at a crossroads,” says Mr Ramakrishnan. “But we firmly believe that some firms will retake the initiative and challenge the new digital challengers at their own game.
“Indeed, we may see symbiotic relationships emerge, where both established firms and challengers come together to create a mutually beneficial partnership.”