15 Jan 2020

Innovation in Institutional Banking

Tom Colclough, Head of Customer Journeys for Institutional Banking at RBS International, considers disruptive forces in the industry and how incumbents might respond.

By Tom Colclough

Head of Customer Journeys

4 minute read

Banking is currently facing unprecedented disruption. Whether that’s challenger banks leveraging technology to capture a new generation of retail customers, or regulators acting decisively to lower barriers to entry, the level of change is exceptional in our market.

According to research by Accenture, the UK is the most disrupted traditional banking market in the world, with 15% of revenue going to new entrants. Most would agree that the retail sector has been the focus of the disruption (see Monzo et al); however, new entrants such as ClearBank – the UK’s first new clearer in 250 years – demonstrate how the market is now being disrupted from front office to back office.

Institutional banking as a sector has resisted many immediate impacts from this disruption, but we cannot assume it is immune to it. Technology develops, regulation evolves, and customer habits and demands change constantly.


Winds of change

Disruption is spreading from beyond the familiar app-based ‘neobanks’, and improved experience in our customers’ personal banking lives is reshaping expectations. Institutional banks are navigating several regulatory, propositional and technological headwinds. Take payments: since its introduction, the second Payment Services Directive (PSD2) has forced significant investment in heightened security and customer demand for immediate payments has rocketed. At the same time, the speed and security of technologies such as blockchain have opened enormous possibilities for new financial services players looking to disintermediate traditional operators.

Another neobank feature directly comparable to institutional banking is the creation of banking platforms that look beyond the host company’s own services. So, while talk of banks becoming open platforms in the style of eBay may be premature, the emergence of hybrid models such as Bó and N26 offers insight into the future. Powered by the opportunities of open banking, these new entrants deliver core banking services alongside other services relevant to customers’ financial lives, such as insurance referrals and spending insights, pointing the way to a more open and connected future.

Institutional banks are unlikely to face a like-for-like threat – ie a competitor emerging to offer a direct replica of what they do. Instead, the disruptors tend to look very different from the incumbents, typically offering a myriad of smaller, different solutions that have the effect of making banks less central to the financial services landscape. The sector needs to respond correctly or risk death by a thousand disruptions.


A friend to innovation

Some legacy banks have adopted a defensive position to retain existing business lines by using their incumbency as a bulwark against change. For others, the solution has been to imitate their disruptors, whether by acquiring the intellectual property underneath the new products or by investing heavily in developing in-house capabilities, which do not necessarily come naturally or quickly.

But there is a third way – which we are embracing at RBS International – that recognises the opportunity that exists in harnessing the energy, passion and ingenuity coming from the fintech sector. Each week seems to bring a new disruptor to the fore and our scouting teams are tasked with finding those that could be game changing for our customers. As leaders in the banking space, we can continue to play to our strengths and deliver transformational proposition change to our customers at pace by partnering with the right third parties.

This requires a more open and collaborative approach than simply waiting for the winners to emerge and buying them up, so our watchword is now collaboration, not competition, for the benefit of our customers. And, rather than viewing the new kids on the block as a threat, we are choosing to embrace disruption as an opportunity for us to differentiate. Although it may not deliver immediate benefits to our own bottom line, long term, it’s a sustainable and customer-centric way of being.


A fresh approach

We’ve decided that transforming RBS International into a financial services supermarket offering all things via own-branded products isn’t sustainable or in the interests of our customers. Our institutional banking expertise is focused, precise and has deep roots; our understanding of this complex sector positions us well to understand the new fintech landscape and help our customers to navigate it.

But we know there’s something in it for us, too. Our customer proposition can be strengthened by encouraging and working with new entrants to our sector, which will help us retain and win business. Recognising that these new technologies are here to stay is the first step towards ensuring that RBS International remains a progressive player in the new landscape. Innovation and disruption are a fact of life and those who aim to simply hold back the tide will soon be swept away.


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