Banks in the UK are looking to modernise their IT services to keep up with FinTechs and other new financial services firms thriving in the country, according to a new report published by tech research firm, Information Services Group.

digitization in banks

The 2021 Digital Banking Services Report for the UK has revealed that large banks in the Britain facing significant declines in revenues and market share, with the “big four” high street banks – HSBC, Barclays, RBS and Lloyds – collectively shutting down unprofitable branches at the rate of more than 60 per month in 2021.

To compete with FinTechs and other financial services organisations, banks are shifting to app-based services and embracing other technology advancements, even though there’s little evidence yet that digital transformation efforts have increased profitability at banks, the report says.

While the majority of IT service provider revenues will continue to come from the big four, banking competition is increasing in the UK with 89,000 finance firms operating in the country. The Bank of England has also opened up the country’s interbank payments system to increase competition from FinTechs. In addition, about 98% of UK households have internet access, the report says.

Owen Wheatley, lead partner for banking and financial services at ISG, said:

“After several years of relatively modest consumer adoption, there now appears to be substantial potential for open banking to really take off in the UK.

“New entrants are generating a third of the new banking revenue in the country, and traditional banks are struggling to fend off a relentless assault,” Mr Wheatley added.

The report sees the UK at the forefront of the FinTech and the open banking revolutions. The UK is the first country in the world to deploy a regulatory FinTech sandbox to execute new products and services. More than nine in 10 FinTechs are using open banking for current services and 81% for enabling new services.

The report sees banks in Britain seeking to moderniSe their core platforms, often running on mainframes, to meet the expectations of customers and regulators and to add digital capabilities. Banks are shifting from mainframes to software-as-a-service platforms and the cloud. Cloud-native platforms support real-time processing and are highly cost effective because they are offered on a pay-per-use subscription model.

In addition, demand for third-party integration services is on the rise, the report adds. UK banks are seeking IT service providers that offer commercial off-the-shelf products through customised engagements. Banks have a high demand for artificial intelligence, blockchain and related technologies, and they are seeking providers with skills in agile and DevOps methodologies to integrate these technologies.

The report sees providers offering new approaches to core modernisation. Low-code platforms are gaining traction because they can carry out complex tasks and integrations by allowing employees to point and click rather than write code. Low-code platforms also are being integrated with AI and machine learning capabilities.

In addition, improved mining technologies are making it easier to extract business logic so legacy code can either be refactored, removed or replaced with micro-service architecture, the report adds.

Meanwhile, rising regulatory scrutiny and compliance costs across the British Isles are driving growth for RegTech firms. The demand for RegTechs is increasing in the post-pandemic world, where economic risks are shutting down businesses and increasing credit risk and the number of non-performing assets (NPAs) held by banks. The high growth areas include data privacy, enterprise risk, cybersecurity, financial crime, and risk management.