The top four UK banks have recently released their 2022 results, accompanied with overviews of recent achievements and strategic focus areas for 2023 (and beyond). While there are some bank-specific nuances, two clear themes were evident across the group. First, notable consideration was paid to ESG (environmental, social, and governance) issues, with strengthened commitments around sustainable/transition financing and inclusivity common. Second, all banks had a pronounced focus on ‘digitalisation’ with banks continuing to invest strongly in digital transformation programs. This is driving several technology priorities moving into 2023.
Banks continue objectives around digital engagement, with digital SME onboarding a priority for 2023
All the banks identified clear objectives around becoming a digital bank, with digital engagement continuing to expand in the UK. Lloyds reported that the number of digitally active customers was up 8% (reaching 19.8m, over 75% of its customer base), with Barclays reporting the same growth in mobile active customers, also stating that 94% of its new ‘Rainy Day Saver’ accounts had been opened online. Likewise, HSBC highlighted that approximately 49% of customers were now mobile active (at group level), with around 48% of retail sales now performed through digital channels. On the servicing side, Natwest reported that 88% of customer needs were met digitally in 2022 (compared to 53% in 2019).
Of course, this is a continuation of a long-established shift-to-digital trend seen over the last decade, albeit accelerated by the lockdown. Perhaps the more interesting element is the broadening of digitalization across the bank, that is outside primary transaction, credit card, and saving accounts. Barclays reported that around half a million customers now use its banking app to manage their mortgages, with a significant number using it to switch mortgage rates following base rate changes during the last year. Likewise, Natwest has a strategic focus to drive its share in the digital-only mortgage market, following a redeveloped end-to-end digital proposition.
This broadening of digital looks set to continue in 2023, with Lloyds targeting digital vehicle leasing as well as digital origination for asset finance. The SME sector seems to be a key target sector across banks for digital investment in 2023, including digital merchant services onboarding and creation of new digital services. For example, Natwest is planning to use artificial intelligence to drive ‘automated insights’ for clients.
UK banks are starting to use digital to create more tailored, personalised propositions
Another interesting aspect around digital is the development of more tailored propositions for specific customer segments. Lloyds is looking to launch a digital-first mass affluent offering in 2023, with an expanded banking offering (including tiered savings, flexible lending, and enhanced digital investment options). Similarly, Natwest is looking to create a ‘simple and compelling’ new affluent proposition as well as develop ‘full lifecycle support’ for entrepreneurs and high growth customers. It is also looking to strengthen its youth and family offering (such as through the Rooster Card, a prepaid debit card linked to a parental app) and make financial wellbeing services more accessible and tailored for its customers.
The advantage of digital capabilities is banking can look to continue to scale business through automation and low touch remote support, while using data analytics to deliver more personalized and targeted messaging / insight to enable sales. While the top UK banks are not yet as nimble as some of the UK neobanks in micro targeting, we are seeing active signs that they are starting to target customer segments with tailored services through digital services.
Cloud adoption is expanding, with a focus on application rationalization rather than ‘lift & shift’
On the infrastructure side, several of top banks publicly highlighted their expanding use of cloud (including public). HSBC reported that its cloud adoption rate (% of technology of its technology services using private and public) increased from 27% to 35% over 2022. While not detailing specific figures, NatWest also related that it was continuing its migration to cloud. Lloyds highlighted that it had shifted 56 million customer accounts onto Google public cloud platform (GCP), being on track to reach its target of 20% of applications running on cloud in 2024. As a result, Lloyds has been able to reduce its own data centre estate by 10% in 2022.
In this, the large UK banks seem to have largely avoided the temptation to ‘lift and shift’ applications into the cloud to get infrastructure cost benefits. Natwest cloud strategy is part of architecture simplification process where it is looking to reduce long-term cost. Lloyds reported that it managed to decommission 5% of its legacy applications in 2022, planning to increase this to 10% during 2023. And likewise, HSBC detailed its Vision 27 technology strategy, aiming to transform itself into a digital-first bank over the next five years. This includes development of a digital technology map to capture the group’s applications and usage, with the aim to streamline its large and complex technology architecture through the ‘demise’ of legacy and non-strategic applications over this period. While cloud can offer immediate infrastructure savings, the long-term scalability and efficiency benefits come when cloud migration is part of a wider application rationalization and modernization program to leverage cloud-native technologies.
Technology growth-led investment is increasing, although overall IT budgets are not for all
The impact of the focus on digital has been driving increased technology spend. HSBC notably highlighted strong spend growth in its IT spend in recent years, which increased from $5.1bn in 2019 to $6.1bn in 2022. This represented an expansion of technology spending from 16% to 20% of operating expenses over the period. Natwest also highlighted that investment spend would increase from £3bn over 2021-2023 to £3.5bn over 2023-2025, with a shift towards ‘growth’ over ‘simplification’ or ‘safe and secure’ initiatives. However, this strong growth looks likes it is starting to level out for some, with Lloyds reporting that it expects a 10% gross reduction in run and change technology costs in 2023, driven principally from the benefits of prior efficiency investments.
While investors have been largely supportive of technology investment given the importance of the digital bank, the expanding investment figure is now attracting strong scrutiny, particularly as IT spend now represents a sizeable chunk of the operating cost base. It is likely that banks will have to increasingly start demonstrating, and using, efficiency benefits from initiatives such as simplification and cloud migration to fund ongoing transformation efforts.