Tesco Expected To Disrupt UK Banking With Outsourced Model

Tesco and others are using outsourcing and new IT to break further into the UK banking sector

The banking crisis has opened up the UK financial services sector to new entrants which will use new software licensing models to help them break into the previously closed market, according to analysts.

In a research note released this week, analyst group Datamonitor outlined its view on how technology could help new entrants break into the UK banking sector. In particular the analyst singled out retail giant Tesco which is hoping to expand on its foothold in financial services and offer customers full-blown banking services. Tesco has previously been in partnership with troubled RBS group but recently bought out its banking partner in favour of going it alone.

“That relationship is now winding down, however, with Tesco having bought RBS out of the partnership and established a timetable for the business to transfer to other infrastructure. Tech vendors say that Tesco has already selected its core banking system provider and intends to run the software itself,” said the report’s author Rik Turner, senior analyst with Datamonitor’s financial services division.

The report does not go into detail about what banking platform Tesco has selected but explains that other entrants are using new approaches to banking technology to give them a competitive edge against the troubled incumbents. For example, Vernon Hill, the US entrepreneur who founded Commerce Bancorp, plans to open a UK financial services institution called Metro Bank in October this year. Hill apparently plans to use banking software from Swiss firm Temenos but will avoid having to lay-out hefty up front IT costs by using a rolling payment approach.

“In terms of the IT platform that Metro Bank will be using, Hill has signed a deal with Swiss core banking provider Temenos for its T24 Model Bank. He has also expressed his amazement, in an interview with Retail Banker International magazine, that: “The typical outsourced IT model that all new US banks use, where you pay per account per month rather than paying the money up front, has never been used in the UK.” Industry sources say the deal with Temenos reflects that method,” Turner stated.

According to Turner, Metro Bank is not the only banking group that will adopt this approach to its banking software. “Core banking system providers tell Datamonitor that they have had talks with entrepreneurs from areas such as the Middle East, some of them with links to sovereign wealth funds, and that the common theme in all such conversations is for any venture in the UK to be, like Metro Bank, more opex- than capex-led with regard to its IT infrastructure,” the report stated.

New approaches to banking technology won’t just have an impact on banks but also other tech vendors that already supply software to the financial sector according to Datamonitor. “The big US players Fidelity and Fiserv should be in a good position, given that the service bureau model is in their DNA. Temenos says it has gained such expertise since its 2007 acquisition of German software company Actis-BSP. Computer Sciences Corp is also looking to pick up such business through its relationship with Oracle’s i-flex banking software division,” the report stated.

However, although Swiss banking software provider Temenos should benefit from its involvement with Metro Bank, the tech company has also been linked to some of the previous fall-out from the banking crisis.

In March, Scotland’s largest building society, Dunfermline Building Society was sold today to Nationwide in a move underwritten by the UK Treasury. Dunfermline, was reported to have lost £31 million in setting up an expensive IT subsidiary to outsource mortgage activity at other financial institutions.

Dunfermline Solutions mortgage IT system was developed in cooperation with Temenos, over a period of at least five years. In a case study on Temenos’ website, Stewart Cooper, director of operations for Dunfermline discussed how the building society was using Temenos’ Globus application to develop its own mortgage IT system that would be distributed via Dunfermline Solutions.