An Amazon-like future awaits banks as virus hastens online push
As Spaniards endured one of Europe’s most stringent pandemic lockdowns, Banco Santander’s digitalonly Openbank did roaring business. Its brokerage client base expanded 58% in the first four months of the year, and trading in shares, exchange-traded funds and warrants on its platform more than doubled.
The confinement has made people digital beings “by decree,” said Openbank CEO Ezequiel Szafir. With that trend likely to continue, he sees banks of the future looking increasingly like Amazon — online storefronts for financial products in much the same way as the retailer is for consumer goods.
“Amazon took something that’s real, which is retail, and simply made it digital,” said Mr. Szafir, a former Amazon executive who was hired in 2015 to oversee Openbank’s new online platform. “We’re trying to do the same transformation in banking.”
Businesses reviewing strategies for after the COVID-19 pandemic are finding that online activity — from shopping and gaming to banking and social networking — that was already shaking up their worlds has flourished. For retail banking, a survey by McKinsey & Co. from mid-April found a jump of as much as 20% in digitalchannel use across Europe. More than one in five customers in Spain and Britain tried online banking for the first time.
That’s giving a new impetus to banks’ online push. They’re looking to speed up plans to move creaking legacy platforms onto the cloud, a slow and often costly process. Some are also building stand-alone online platforms from scratch or using off-theshelf solutions designed by fintech companies, which may be faster and cheaper.
“Many banking groups are taking a hybrid strategy combining the effort of transforming the original bank and also developing a neobank or, at least, some speedboats, sometimes in alliance with fintech,” said
Francisco Uria, head of Europe, Middle East and Africa financial services, banking and capital markets at KPMG.
Banks globally will spend about $1 trillion over three years to take more of their operations online, according to an Accenture report. Spending on digital transformation has been led by U.S. banks, with JPMorgan Chase earmarking $11.4 billion a year.
“It’s the only way they’ll remain competitive,” said Antony Jenkins, who was CEO of Barclays Bank from 2012 and 2015 and is now chairman and founder of 10x Future Technologies. “They’re already under pressure because return on equity is poor. They have to compete with fintech and big tech. They need to get more agile, get these functionalities onto the market quicker.”
Europe’s banks can expect revenue to fall by more than 40%, which means it will take them four years to get back to pre-COVID-19 levels, the McKinsey report found. With a rise in interest rates from historic lows delayed by the crisis, survival will require cutting costs. That will mean shutting down many more branches, slashing jobs and taking the show online.
The cost-to-income ratio for traditional banks is 55% to 60%, compared with half that for online challenger lenders. Santander Chairman Ana Botin told investors Openbank’s expansion would allow it to reach a ratio of 25% to 35%, a level the entire group could attain in the long term. Santander’s 2018 cost-to-income ratio was 47%, according to S&P Global.
Santander is plowing 5 billion euros ($5.6 billion) a year to put its legacy system data in the cloud, even as Openbank expands from Spain into 10 other markets. Ms. Botin calls it combining “supertankers” with “speedboats,” and she suggested last year that Openbank could eventually become the platform for “a significant part of our business.”
The Spanish bank’s peers are adopting similar strategies. In the U.K., Royal Bank of Scotland is working on digital business platform Mettle. Nationwide Building Society is working with 10x Futures technology, while Lloyds Banking Group is doing something similar with cloud-native digital platform provider Thought Machine. Goldman Sachs started Marcus by Goldman Sachs in Britain after launching it at home.
It may be easier said than done. Years of mergers have left banks with core platforms patched together from disparate systems — “a spaghetti party,” as Mr. Szafir puts it. For many, it may be simpler to start from scratch. Unlike a legacy platform — like the plumbing in an old house — native cloud platforms are like newly built homes where the wiring is exactly where it needs to be.
“I sometimes refer to banks as museums of technology because they’ve got every generation of hardware and software within them,” said 10x’s Mr. Jenkins.