Long read

In defence of the big banks

By Alex Wood 25 September 2015

Challenger banks and bitcoin may be biting away at their market share, but Natwest's Neil Bellamy is embracing the future.

Banks have had a tough time of late. But with the worst of the financial crisis in recent memory behind them, it’s now time to get back to business.

With crisis comes opportunity, and while Europe’s biggest banks were left still licking their wounds, the next generation of upstarts were born, hungry for a slice of the market.

Atom and Mondo both have their sights set on the big bank’s dominance of current accounts. Transferwise, a peer-to-peer money transfer service from the makers of Skype, has been eating away at the lucrative foreign exchange market. And as if that wasn’t bad enough, now Amazon is quietly making moves into small business lending.

Are these new upstarts threatening the multibillion pound world of finance? And how does an industry like banking, that is not known for its agility respond?

The fightback

Neil Bellamy, Head of Technology, Media & Telecoms at NatWest is optimistic about the future.

Instead of burying their heads in the sand, NatWest have embraced the rapid change around them by working with, and not against, the new challengers.

Talk may be cheap but the bank has put their money where their mouth is and invested in a new innovation centre where businesses and developers are free to trial out their technology in a mock bank branch, or on NatWest’s own back-office systems for free.

At the bank’s offices in heart of London’s financial district, The Memo spoke to Neil Bellamy to find out how the bank plans to fight back.

Alex Wood: With Amazon moving into small business lending and TransferWise snapping away at foreign transfers, it feels like the banks are being attacked from all sides. How do you respond to that?

Neil Bellamy: New innovators in the sector are pushing us hard to innovate quicker – which is a good thing.

Banking has gone through transformations before and will continue to adapt to the environment. You only have to look at the use of mobile and online banking to see how much the industry has changed. Our own NatWest app has gone on to become the most successful and one of the most used banking apps on the iOS store.

We also offer Apple Pay and we were one of the first to build in fingerprint recognition into our mobile app. It’s all part of a step change in all of the big banks. Previously we would have erred on the side of caution but these days we’re much more open to innovation.

AW: How do you balance the pace of innovation against maintaining security for your customers?

NB: Security will always be the number one consideration for banks. But, as we are seeing, usability and innovation is a big influencer. The fingerprint recognition feature on our app is a good example.

Once we deployed it, usage has gone through the roof and more importantly our customer satisfaction has also risen. It shows how important financial tech innovations are in the banking industry today and we have opened our door to innovation.

What do you mean by opening your door?

We’ve been progressive by acknowledging there’s great innovation outside of the bank – particularly in smaller businesses.

To keep up with the pace, we’ve set up innovation scouts in the UK and in the Silicon Valley where we’re looking to bring the best financial tech and enterprise innovators  to the bank.

Last year alone we saw 300 companies pitch their idea to us. But instead of looking to acquire them or invest, we’ve taken the view the best thing we can do is be a client. By being a client we’ve been able to help support these companies by giving them contracts worth up to millions of pounds.

And by being a client, you’re offering them market validation?

Absolutely. Many of them are customers of ours as well so it’s great, that’s a real win/win.

A Thames Valley based client of mine was awarded a multimillion pound contract with the bank to help with our customer relationship management (CRM) work. They are now in their second round of fundraising & looking to export to the major US Banks.

And another great one I like is a Manchester-based client of ours that  take our paper forms and put them on our tablets and mobile phones. They are piloting that with our internal forms first, and will move on to our external forms for our Relationship Managers.

We have also created two technology solutions centres – one in London and one in Edinburgh – where businesses can test their product/technology in life-like environments. So if you’ve got a bit of financial technology you can come in and test it out in our environment for free. We’ve even got cameras in the ceiling so we can monitor the interactions while the new technology is being tested out. So far we’ve tested a lot of contactless mobile pay systems at the centre to see how they work in practice.

Is that something the other banks are doing?

I don’t think anyone else has got those.

Our Edinburgh centre has test servers as well so if someone has a big data solution or a trading platform for example you can try it out with the kind of volumes that banks have to deal with. Recently we had a cryptocurrency business come in and start doing testing out their bitcoin distributed ledger technology.

What’s a cryptocurrency business doing in a bank?

As an experiment, we created our own currency on our separate systems and issued currency, traded it and settling it between banks. Off the back of that Ripple are talking to us about what else we could do with them.

If you take RBS as a whole, we have the Royal Bank of Scotland, NatWest, Lombard, RBS Invoice Finance, Ulster bank and Coutts. A lot of these are separate legal entities so there are settlements between on our old legacy systems that occur just like we were transacting with Lloyds and other external banks.

It’s a pipedream, but imagine if you could take a distributed ledger system and put it in a back office and do away with a lot of that legacy infrastructure.

A lot of people think we’re going to be very wary and defensive or shy away from some of this newer cryptocurrency but I think the actual process and the sentiment behind it could be very exciting.

Can you speculate about the timeline?

We are testing right now.

When it comes to financial innovation, who’s leading?

It’s difficult. I can’t think of any global bank where I think they have embraced technology as their number one competitive advantage because we are the type of service where any technology is not going to win us the single unique selling point.

I think your technology has got to be good, robust, easy to use, simple and what your customers need. But if your customer service is poor, or you don’t have all the delivery channels from branches to mobile, to internet to face-to-face I don’t think technology on its own is going to win.

Is that the kind of edge that you’re always going to have over upstart mobile-first banks?

I think niche players are going to make inroads using technology, you might see that on the consumer side first but when you start getting into business and commercial, corporate, you’re getting more into areas that are getting harder to replicate where it becomes more about expertise, specialism and our people.

That’s where we’ve been successful in the past. We very much see specialism as our unique selling point. We have boots on the ground, which is my favourite expression, to do that, not just down in London but across the UK.

What other technology is on your radar?

We’re getting better at funding intangible assets. It’s our response to the change in Western economies that are moving very much away from industrial era, the assets of which were financed by the banking sector.

The next era is based on ideas and it’s all intangible. Ten years ago, 80% of the balance sheets of companies in the S&P 250 in America was made up of tangible assets, buildings, machinery etc. It’s flipped in ten years and it’s now 80% intangible, and 20% tangible assets.

We’ve been funding intangible assets like TV and film production through Coutts bank for years, so now we’ve developed a new product where we can lend against the intellectual property based in software, attribute a value to it and provide a sale and leaseback to release cash.

I think we’re unique in offering it. We’ve done transactions like this for all sorts of companies, not just tech ones.

Follow Natwest’s Neil Bellamy on Twitter.

image credit: istock/blackred