No 4: The Evolution of Banking

The previous blogs taught us how banking distribution and core banking technology have evolved over the decades. Banks are criticised for lacking innovation and not being progressive with technology, but the exact opposite is true for some. We will later share more on banks' significant challenges when considering replacing their core banking solutions.

In this blog, we will explore the complexity of banks and why every bank has multiple core banking systems, with the biggest banks even having hundreds! Understanding this is important, and it will help you understand that changing or replacing a single core banking solution doesn’t solve the entirety of a bank's challenge.

Unlike technology and distribution, banking has not evolved linearly or chronologically, making it harder to understand and thus different for every bank. Instead, looking at the structure of a bank can help with this. Of course, the complexity of the structure varies greatly by bank size, but every bank will have at least one variation of the layers of banking discussed below.

Every bank has at least one:

• Brand
• Stakeholder
• Customer experience
• Channels
• Business process
• Product

This is summarised in the graphic below, and you will realise very quickly that most banks will have multiples of the categories listed above.

The category variations will have come at different points in the bank's evolution. Sometimes, it will be because they have developed something new, and sometimes because they have acquired another bank. So, whilst we often think of a bank as a single entity, they are more often multiple companies in a group structure. For example, if we consider Brands, then NatWest Group has:

• Natwest Bank
• Royal Bank of Scotland
• Ulster Bank
• Coutts Bank
• Holts Military Bank
• Lombard
• RBS International
• Free Agent
• Mettle

Typically, each entity will have been created and run by a separate management team with the autonomy to develop their own systems to run their part of the business. This autonomy typically means they are running their own core banking systems.

If you just take NatWest Bank and consider products, they would have started with accounts products (deposits, current accounts and loans), added credit cards later, and then mortgages. Each product line would be deemed quite different and have a different director/manager. For example, credit cards have high transaction volumes and different payment rails, and mortgages have long workflows. Hence, they would likely have been managed on their own different cores.

Looking at stakeholders, the same issue arises. Business banking is quite different to wealth management and retail banking. These three stakeholders/customer segments could also have different core banking systems.

Some banks provide outsourced business processing, such as debt collection or mortgage application processing, for other smaller banks. Typically, they may use a different core to support the outsourced processing to their main bank.

We often think of channels as one strategy, but actually, sometimes a channel is a separate business unit as well and thus operates separately, which means they potentially have a separate core. We have seen banks launch a separate brand for call centres, like HSBC, which founded First Direct.

Again, we generally see separate business units for customer segments like Corporate Banking and Wealth Management. Sometimes, banks will share a core for accounts, but they will need something else to manage, for example, portfolios and investments in wealth management. Corporate banking also has many products/services not found in retail, like letters of credit or factoring.

This is a very simplified view of banking evolution, but hopefully, it demonstrates the complexity of banking structures and why banks have multiple core banking systems. So, moving to a new core is neither a single project nor an easy task. We’ll discuss more of the challenges in the next blog.