Lloyds’ CEO vows digital transformation as critics slam bank’s cost-to-serve
Last month Lloyds Banking Group CEO Charlie Nunn announced a new £1 billion IT spend for the currently-publicly-owned bank as part of Lloyds’ digital transformation strategy. The timing of this announcement comes just two months after a video leak showed an LBG director describing its on-prem systems as “not fit for purpose”. The news came as as Lloyds’ reported net income for the year of £15.7 billion.
(Arguably astonishingly — certainly to the casual observer — the earnings call showed that Lloyds is now treating certain fraud as an operational expense rather than an impairment. CEO Charlie Nunn blamed a rise in “push payment” fraud. The bank said the impact of the reallocations would have increased above the line costs by around £685 million to £8.3 billion in 2021, noting it would have no impact on the bottom line.)
The Stack pulled out five key takeaways from Lloyds digital transformation strategy.
1 – Lloyds digital transformation aims to cut costs, open new markets
The group will spend £1 billion over the next three years to modernise its IT systems, with the aim of cutting costs in the long-term. By 2024 the bank plans to reduce its legacy applications by 15%, reduce its run and change technology costs by 15%, move 20% of its applications to public and private cloud platforms, and automate 60% of its new business lending decisions in a series of comparatively cautious-seeming targets.
The risks of making dramatic changes to any legacy banking IT platform are of course substantial – as TSB found in 2018, when it moved from Lloyds’ platform to its new owners’ infrastructure.
But CEO Nunn appears keen to see change happen: “There is an opportunity to be faster than we have been historically, in modernising our technology estate, more effectively using our data and creating end-to-end efficiency,” he said on an earnings call; emphasising that the bank has 18.3 million active digital users, “making us the largest digital bank in the UK, with a digital user base greater than all the neo-banks combined.”
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“The reality is if we weren’t to continue to innovate, improve and invest in our business then there is a downside risk either to cost inflation exceeding the pace in which our revenues grow, or alternatively losing share. We haven’t built the investment case on that. The investment case is very clearly on what we need to do to progress on our revenues and efficiency,” he added on the earnings call.
2 – Lloyds wrote of £400m in software investments
In its annual results LBG revealed it spent £956 million on restructuring in 2021 with £570 million in Q4 alone – and of this Q4 figure, £400 million was assigned to writing off software, “given new technology investment”.
Given it aims to modernise its technology stack this makes sense – we were unable to ascertain precisley what the write-off was for — but it’s still a significant sum. Of course, there’s also the tax break to think of. Last year LBG also spent £155 million on technology R&D, a significant increase from 2020’s £61 million spend.
3 – LBG focusing on existing customers via digital
Nunn revealed Lloyd’s digital Net Promoter Score is +69, but noted of the seven financial products UK consumers each have on average, Lloyds only provides 2.4 of them: “We see a significant growth opportunity to enable our existing customers to choose more of our products by providing them with an even simpler and more personalised experience. For every 5% increase in the average needs we meet of our existing customers, we can generate additional revenue of £200 million pounds per annum,” said Nunn.
In tech terms this means improving data and analytics capability, offer better-personalised pricing and credit decisions, as well as more personal engagement, as part of Lloyds’ digital transformation.
“This will result in more customers being digitally active, driving higher depth of relationship and revenues. Payments will be a key anchor to drive greater engagement and we aim to grow our market share in credit card spend, which is currently below our share of credit card balances,” Nunn added. The company considers that it has “significant headroom for growth by getting closer to our natural share in products such as motor finance, home insurance, protection, individual pensions and investments. We will look to emulate our success in workplace pensions where we have grown market share from 10 per cent to 19 per cent over the last few years.”
4 – LBG not aiming to compete with fintech start-ups on costs to serve
During the annual results Q&A, a KBW analyst asked how LBG could be sustainably competitive when spending, at his estimate, “between £150 to £200 a year” per customer, compared to “between £10 and £30” for the group’s digital competitors.
“if you want to create the proper revenue per customer to build a sustainable shareholder return, you can’t do it with a digital-only proposition,” replied Nunn. He said comparing the cost-to-serve numbers was “one way of looking at it”.
“But we need to look at the sustainable returns of those relationships and the ability to then really grow those over time from a net profitability per customer. And today we think actually, our stance having multiple channels and all channels with trusted brands with full service, is actually the only proven way of creating sustainable returns.”
He added that while the discussion of costs might be “uncomfortable” from a three-year perspective, longer-term shifts in customers towards digital channels, combined with Lloyds’ digital transformation, would improve the group’s long-term cost efficiency.
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Nunn also said Lloyds plans to target underserved wealthier customers through digital channels: “We intend to focus on this gap in the market, which is the broader pool of mass affluent customers with income or wealth above £75,000, with a scale digital wealth offering and integrated banking solution.”
5 – SME business in major need of digitalisation
Nunn highlighted the transformation needed in LBG’s SME banking division. While Lloyds saw 60% growth in the number of SME products “originated digitally” in 2021, the group is aiming to provide more than 50% of its SME products digitally by 2024, suggesting the current proportion is well below that (although the bank didn’t provide precise numbers).
“We plan to digitise front-to-back to allow our clients to engage, transact and fulfil needs through a digitally integrated front-end across all of our products. We will provide a personalised experience by using data and analytics, both for self-serve and for insights to relationship managers to better support our clients,” said Nunn.