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New UK Entrants Take Different Approaches to Core Banking

New entrants in the U.K.'s retail banking market are taking different approaches to their core banking systems, depending on their size and strategic models.

Much like its U.S. counterpart, the U.K. banking sector has experienced two years of very well-publicized turmoil. Perhaps as a result, a flurry of new companies are eyeing entry into the U.K. retail banking market, bringing their "deep pockets and clean balance sheets" with them, wrote Rik Turner, a senior financial services technology analyst with London-based Datamonitor, in a recent report.

While the potential new entrants all share an interest in taking advantage of what Turner called a perceived lack of consumer confidence in the U.K.'s remaining big-name banks, they have taken two distinct approaches to the market, he noted, and they find themselves facing different technology challenges and decisions. Core banking systems are at the heart of these different strategic paths: The big players are seeking to find the right systems and the right people to run them in-house, while the niche players, looking to stay lean and agile, are showing more interest in outsourced models, according to Turner.

The highest-profile new entrant, Turner said, is Tesco. With more than 2,200 locations, the Hertfordshire, England-based company is the U.K.'s largest supermarket chain, and it already has a financial services arm (Tesco Personal Finance) that sells insurance and offers savings accounts and credit cards. At present Tesco is piloting bank areas inside five of its supermarkets and plans to introduce current accounts (the U.K. equivalent of checking/debit accounts) and mortgage products over the next couple of years, according to Turner and various news reports.

The 'Wal-Mart of the U.K.'

In an exclusive interview with BS&T, Turner calls Tesco "the Wal-Mart of the U.K." and describes the company as well prepared to enter the retail banking market. "Tesco is best placed to [determine the right product mix for the market] given that they have an immense amount of market research just from their regular supermarket business. They're probably the most sophisticated retailer in the U.K. in terms of the sheer amount of knowledge that they gather based on loyalty cards," he explains, adding that the company is adept at crunching those numbers. "They get very sophisticated information about consumers and the way they're spending their money."

Tesco's most immediate technology challenge is implementing a core banking system, Turner relates. Tesco Personal Finance, he explains, was a joint venture between Tesco and the Royal Bank of Scotland (RBS), but the supermarket retailer bought out Edinburgh-based RBS in December 2008 and as a result needs to establish its own financial services technology infrastructure.

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