The FT recently reported that Lloyds Banking Group, one of the UK's largest retail banks, had started discussions with regulators concerning the transfer of half a million banking customers to a new cloud-based core banking platform. This is particularly interesting for a couple of reasons: firstly, this is one of the first moves made by a top-tier bank to shift such mission-critical systems to the cloud; secondly, it also marks a shift in willingness by retail banks to work with new players using cutting-edge technology over proven platforms.
The move follows Lloyds' investment in, and strategic partnership with, Think Machine in November 2018, when it purchased a 10% stake for £11m ($12.5m). Think Machine is a recent fintech startup based in London (founded in 2014), founded by former Google engineers, which has developed a cloud-native core banking platform called Vault utilizing smart contracts. The FT report mentioned that Lloyds was initially planning to transfer 500,000 customers from a legacy, closed-book brand, Intelligent Finance, onto the platform, with the ambition that (if successful) the platform could be used to transfer customers across all of its businesses in coming years.
The rationale here is that cloud-based systems allow scaling up with significantly lower overheads and costs than Lloyds' existing mainframe core systems, with far stronger analytical capabilities available around customer data, and a faster ability to develop and innovate new products and services.
As mentioned, Lloyds' choice to go with Think Machine is an interesting one. In terms of assumed benefits, the latter advantage here would be similar to most modern core banking platforms available on the market; indeed, most of the main core banking providers in the market would be happy to provide a SaaS-type service to Lloyds. However, relatively few of the main providers are truly cloud native in their design, and Lloyds appears to be making a decision based primarily on the underlying architecture rather than on traditional selection criteria such as successful deployment experience, richness of functionality, or out-of-the-box business models. This is definitely taking a longer-term perspective that the benefits of modern architecture will outweigh the short-term costs of developing business functionality depth, and Lloyds seems to be taking the view that newer technology outweighs the risk of working with a new vendor.
Given the strategic partnership, the program is likely to involve a close collaboration and heavy involvement from Lloyds rather than a vendor-driven "lift and shift" and, as a top-tier bank, Lloyds does have the experience and IT function scale to do this. However, given recent core banking platform migration challenges seen by TSB Bank in the UK in 2018, this is still something of a brave move, even if its first move is with a lower risk closed-book of business.
From a broader industry perspective, this is significant. It marks one of the first reported (albeit through a leaked internal document) moves by a top-tier bank to move its core platform onto the cloud. While Ovum knows that other banks are looking at this, 2019 is likely to be an inflexion point in this regard to banks embarking on plans here.
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