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									View Point: UK Banking Industry
UK‟s banking sector, following the US and Japan, is the world‟s third largest and considered
foremost in terms of: efficiency, dynamism and return on capital. It services 95% of the
population with about 3.5% of UK‟s total workforce - over a million workers. The decade
ending 2005 witnessed a surge of three folds in assets to €5526 billion, lending and deposits
more than two fold to €3284 billion and €4984 respectively. The financial sector‟s productivity
is growing at three times the pace of the economy and reflects an increasing share of the GDP.
Last year, banks and financial services contributed £70 billion to the country‟s national output,
equivalent to nearly 7 percent of the country‟s GDP – 100 % percent increase from 2003. UK
leads as a major international center for investment and private banking, cross border banking
and accounts for a fifth of global international lending; with banks in London handling a third
of the global foreign exchange business.

Deregulation, Competition and Consolidation

UK‟s banking industry has seen a radical transformation with market liberalization by
deregulation and the resultant competition. The Building Societies Act of 1986 permitted
building societies to widen their financial services to include insurance and allowed building
societies to convert into banks. Life insurance firms moved into banking and banks diversified
into mortgages and insurance.

Mergers and acquisitions has been the other transformational force in the UK banking
industry. Till the late 1960s, retail banking was dominated by the „big-five‟: Barclays, Lloyds,
Midland, National Provincial and the Westminster Bank. While Midland Bank was acquired by
Hong Kong and Shanghai Banking Corporation to create the current HSBC, National Provincial
merged with National Westminster and was later acquired by Royal Bank of Scotland. In the
meanwhile Halifax and the Bank of Scotland merged to form HBOS. Recently, in Europe‟s
biggest cross-border banking deal, Santander Central Hispano of Spain acquired Abbey.
Further, banks diversification into new product areas has resulted in a number of cross- sector
mergers, where banks are beginning to acquire life insurers. All this has ensured that while
the total number of UK owned banks has declined (from 400 odd banks to less than 100) the
average size and financial strength of banks increased. The numbers of building societies,
which account for around a fifth of personal deposits and mortgages in the country, have
decreased.

Technological Developments

 UK‟s banking industry, following global trends has evolved with technology. According to a
research firm UK‟s banks currently lead Europe in IT spending with 2006 figures of USD 23
billion. For 2004 - 2008, the compound annual growth rate (CAGR) of IT spending by UK
banks is 8.1 %. The emergence of e-banking technology is the biggest single factor driving the
growth in European banks. IT spending and the online channel will remain the foremost in
terms of IT investment growth in 2006. Most banks prefer to follow a multi-delivery channel
strategy, providing customer‟s access through the Internet, ATM and call centers. Between
1994 and 2004, the ATM network doubled to 50,000.

Although there has been an overall decrease in bank branches over the past decade, banks
like Abbey are planning new branches, and several banks are upgrading their existing
branches with new technology. Core banking is an area where technology investments have
been lacking. Banks have been reluctant to upgrade their age old solutions due to the inherent
complexity of a core banking replacement exercise. As a result, banks currently take over nine
months to design and launch a new product.


Over the past year there has been an urgency to evaluate potential solutions to resolve the
issue of legacy systems. While global awareness of risks posed by legacy solutions has
contributed, competition is playing a key role. After acquiring Abbey, Spain‟s Banco Santander
is in the process of replacing Abbey‟s existing legacy systems with its own modern Partenon
core-banking platform. Recently Abbey announced that it has commenced the rollout of
Partenon with the launch of new corporate Intranet and Internet services. The Partenon
platform is being introduced at Abbey in phases through 2006 and 2007. Abbey plans several
developments later this year, including introduction of a single customer database.
In contrast to legacy core systems, a modern core banking solution provides banks a flexibility
to launch new products in days. There are other benefits. Francisco Gomez-Roldan, CEO,
Banco Santander, says: “We‟re introducing better analysis and information on product
profitability, sales capacity and productivity by channel, region and branch. This approach is
enabling us to focus our efforts on reducing under-performance, targeting incentives and
managing performance across the business more rigorously.”

Conclusion

UK‟s banking industry having recorded rapid growth in the past decade is poised to grow
further. In an era of mergers and acquisitions, competition is severe. A 2005 study by AT
Kearney forecasts a drastic reduction in number of operating banks in Europe by over two-
thirds within the next 10 years. To compete successfully, meet regulatory requirements and
satisfy customer needs, banks need to invest in technology not only in deploying peripheral
applications, but also in modernizing obsolete core solutions.

Sanat Rao
Associate Vice President & Global Head-Sales- Finacle

								
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