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How to survive and be local
Restructuring expert ANN CAIRNS looks to the Netherlands to solve a strategic dilemma for the UK’s smaller societies which seek scale but without damaging their gift for personal service.
With trust in financial institutions at a low point, the local, more personal service offered by building societies could be key to restoring consumer confidence. But they’re finding it too difficult to revitalise their business models just when the need for choice on the high street has never been greater.
Encouraged by the likes of the Future of Banking Commission to provide the banks with stiffer competition, it’s widely held that building societies could offer savers and homeowners a better range of products and services. Yet their ability to exploit this potential gap in the market is being hindered by a number of structural challenges.
The two largest building societies represent almost two-thirds of the sector’s total assets, leaving plenty of smaller-scale operations struggling to fund the systems upgrades demanded by increasingly technology-savvy customers. Faced with FSA demands to hold more capital, some smaller societies have been forced to contemplate a merger. That may be the right route for some, but the danger is that inefficiencies are retained beyond the union.
Building societies grew up within communities, gaining extremely strong local identities and loyal customers. Most would be unhappy about losing brand independence in a merger. Moreover, a forced merger invariably focuses on achieving the best results for survival, with little consideration of the brand and local relationships.
An “alliance model” may offer the best survival route, while protecting all-important local brands. The model would cluster a group of societies in a formal coalition to share back office functions, and co-manage similar funding, activities and resources. Most societies have similar lending and deposit-taking products, capital needs and processing requirements.
Crucially, however, each member’s customer-facing brand would be retained. This model allows for rationalisation, improved technological efficiencies and cost savings: it meets capital requirements, while sustaining the trust and long-term relationships built with loyal customers.
For the smaller societies, the biggest problem is finding the capital expenditure to keep pace with automation. By joining together, they have a much better chance of being able to invest in the systems to grow at a sufficient pace. Several of the larger societies operate good platforms which may form the basis of a shared infrastructure.
But to reap the benefits of scale while retaining the local service ethos, there needs to be swift consensus among alliance members on which systems to deploy, as well as regularly measuring employee and customer experience. Agreement on technological change and careful, synchronised implementation of new systems is absolutely critical in achieving success, and demands clear and concise communication with customers and staff.
Treasury-based functions like back office processing, risk management systems and governance are the most obvious sharing opportunities. The greater the scale and the bigger the balance sheet, the more options become available. But the number of members in an alliance needs to be restricted, with focus on synergies such as region, community ethos, scale or product sophistication. Trying to aggregate businesses at different levels of maturity is challenging, as embedded processes, technology and the ability of the business to deal with various levels of complexity vary hugely.
A good example of a successful model which could be adapted for building societies is Rabobank in the Netherlands. It’s a federation of local banks with a central hub acting as the ‘daughter’, not the ‘parent’ used in other models. Different Rabobanks operate in their own regions and share a common central back office infrastructure.
One could foresee a “greenfield” site being constructed as the prime servicing facility for the mutual sector. It could be built by bigger players, with smaller societies migrating from their current systems over time. Product platforms, credit risk engines, client-facing internet platforms, fraud detection systems and call centres could be handled centrally for a number of societies. This would encompass sharing of services such as marketing in addition to the more technology-based operations.
Striking the right combination of scale and professionalism, while retaining localisation and features that customers value, is the challenge facing building societies, who want to be independently strong, able to raise capital and operate efficiently, thus fulfilling the Future of Banking Commission’s desire for a more consumer-focused financial services industry.
If building societies were to follow the ‘alliance model’ approach, we would see the best of both worlds – large scale operations with a personalised customer service. This would ultimately lead to the preservation of our diverse financial services market.
ANN CAIRNS is a Managing Director and head of the financial services team at restructuring and performance improvement firm, Alvarez & Marsal.
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