Whitecap Consulting, in partnership with the Building Societies Association (BSA), recently published a report analysing the competitive landscape for the building society sector. The Whitecap team is summarising the key findings in a series of blogs.

In this article, Stefan Haase, Director at Whitecap Consulting, discusses the sector’s position on digital transformation as well as the challenges that building societies face when approaching their digital roadmaps. Stefan also looks at the potential opportunities with regards to efficiencies that technologies such as APIs can provide as well as the increasing digital capabilities of their members.

The key report findings relating to technology are outlined below:

Societies acknowledge a requirement to enhance digital capability to meet customer needs and deliver operational efficiencies

There is a widespread acknowledgment within the sector that investment in the modernisation of technology is required, to enable more cost efficient and effective

ways of working and to meet the needs of a customer base and distribution partners that are increasingly turning to digital channels. The provision of technology in the banking sector is breaking a 30-year-old mould and moving from a monolithic towards a cloud-based approach, with an API driven application architecture. A new generation of cloud-based core banking systems has introduced competition and the new pioneering FinTech/challenger banks have almost exclusively gone down this route.

Legacy systems are a widely acknowledged issue within the financial services sector, with more than 90% of firms relying on legacy technology in some form. For the long-established building society sector, legacy systems add a significant layer of complexity when looking at future technology plans. Adopting the modern, agile cloud- first approaches now driving the growth of the FinTech sector is a significant challenge, and technology change has been found to be the root cause of 24% of high severity customer-facing incidents, so this is understandably an area where CEOs tread cautiously.

From our online survey, we found key barriers for the sector adopting the latest tech are budget constraints (60%) and legacy systems (57%). Interestingly, non-building society respondents also cite uncertainty around decision making (58%) and cultural factors (46%) as key barriers to technology adoption for the sector, however, building societies did not consider these to be significant issues (16% and 12%, respectively).

Approaches to modernisation range from augmenting existing systems to the complete replacement of core banking systems

Societies are faced with a choice of modernising their legacy systems with their incumbent providers, offering bespoke and potentially costly integrations with 3rd party applications, or undertaking a phased or complete overhaul of their core systems.

There are examples of each of these approaches being deployed by societies, but at this early stage in the sector’s digital transformation there is insufficient evidence to evaluate the effectiveness of these options. The direction of travel is clearly showcased by other tech-transformed sectors, who have adopted a modern, cloud computing powered and API-driven flexible, scalable application delivery model.

Many societies aspire to adopt an API driven approach to deliver modern technology solutions alongside legacy core banking platforms

When considering digital technology, societies are acutely aware of the development of the increasingly prominent role APIs are playing in modernising the financial sector fuelled by the continued and growing success of FinTech and Open Banking.

This research found that while Open Banking is an area of strong interest for societies, it does not currently feature in their immediate priorities, with most CEOs adopting a ‘watch and see’ approach. In support of this, only 10% of building society survey respondents consider Open Banking to be a threat for the sector, whilst 55% consider it to be an opportunity. This is a topic that will be explored further in the next article of the blog series which will look at the potential opportunities for the sector with regards to Open Banking.

Consumer demand for Digital Personal Finance Management  

FinTech Futures (2019) conducted research into consumer demand for Digital Personal Finance Management tools and found that only 14% of people in the UK were using them. However, for those that were using digital PFM tools, they were 86% more likely to save for a future life event such as buying a home compared to non-users.

According to an Insider report (2020), over 75% of respondents said they would prefer to use PFM tools from their primary financial services provider while just 6% said they’d prefer PFM tools from FinTechs or neobanks. This is likely because banks earn much higher consumer trust than their newer counterparts and even more so for building societies who have significantly high levels of trust from their members. However, interesting, over 40% of consumers also stated that they are currently dissatisfied with the PFM tools offered by their primary FS provider, perhaps providing an opportunity for building societies to offer effective PFM tools.

The highly competitive technology and FinTech supplier market is challenging for societies to navigate

Competition to provide technology solutions to the sector is strong, with 13 different firms currently providing core banking and front-end systems to the 43 societies. The largest six societies all use different core banking system providers, but across the rest of the sector there is a higher degree of uniformity with Sopra and Mutual Vision combined providing for nearly 60% of the overall sector. DPR, Unisys, Phoebus, Sandstone, IRESS, BEP and Salesforce have multiple clients across core banking and front-end platforms.

Several technology providers can offer a complete solution covering mortgage and savings front end as well as core banking, but there are also a number of different scenarios whereby different providers work with each other to configure the overall solution. The incumbent firms are facing increased competition from newer cloud-based providers seeking to enter the sector, including Mambu, EQ Credit Services and other UK and international providers. The wide range of technology providers to the market presents a challenge to societies when looking to assess their potential future options. This, combined with a cautious approach to risk, means the decision-making cycle can be a long one, albeit CEOs recognise the longer term need to embrace modern ways of working and modern tech provision to maintain their market relevance.

The topics discussed in this blog are covered in the report, along with a number of other technology related developments within the sector.

Background to report:
Building Society Sector Analysis 2021 – A review of the strategic landscape for building societies

The research underpinning the report was conducted by Whitecap Consulting in partnership with the BSA, and involved a quantitative data analysis of all 43 building societies, interviews with 33 of the building society CEOs, and an online survey which received a total of 134 respondents.

This analysis and report was funded through sponsorship from a number of industry stakeholders including: Credera, DPR, EQ Credit Services, Mambu, Moneyhub, Mutual Vision, NivoSandstone Technology, Sopra Banking Software, Shoosmiths, and Phoebus Software.

The eight blogs in this series focus on key topics addressed in the research: FinTech, Strategy, Mutuality, Regionality, Technology, Mortgages, Savings, and Open Banking.

Useful links:
Building Society Sector Analysis 2021
Watch the report launch webinar