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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.

Tesco declined comment for this story. But Turner cites reports from technology vendors claiming that Tesco has selected a core banking system and intends to run the software internally, though he cannot confirm the specific vendor.

Having made the decision to run its core banking system in-house, Turner adds, Tesco must now put together a team that is equipped to run the system effectively. "It's easier now than it would have been a couple years ago, because there are quite a lot of fairly experienced people from the financial sector floating around thanks to layoffs," he notes.

Other, less well-known companies are taking more of a niche approach to the U.K. banking market. "They're not coming in and expecting to have 700 branches or anything of that sort," Turner says. "They're looking to a few well-placed, usually downtown branches in big cities."

Specifically, Turner points to Metro Bank, a new venture from Vernon Hill, the founder of Commerce Bancorp, which was acquired by TD Bank (US$126 billion in total assets) in March 2008. According to Turner, Metro Bank, set to open in October, will look to differentiate itself in some of the same ways Cherry Hill, N.J.-based Commerce sought to differentiate itself in the U.S. -- namely, customer conveniences, such as evening and weekend hours.

Asset-Light

From a technology standpoint, Hill's challenge -- and the challenge for other nonbanks looking to gain a foothold in U.K. banking -- is to find the right vendor for an outsourced core banking system, according to Turner. "None of the [niche entrants] want to get into the business of buying and running their own core banking system," he relates. "They're looking to be asset-light, so to speak."

Metro Bank, for instance, has signed a deal with Temenos for the Geneva-based vendor's T24 Model Bank offering. Turner says industry sources report that the agreement is services-based, although it is unclear whether Temenos or a third party will handle hosting.

"It's much more like the U.S. model," Turner says. "The U.S., as a banking market, is much more accustomed to the service bureau model, not the least because there are so many banks. In the U.K. most banks have been very large and were expected as a result to have their own core banking system -- to own it, run it and, in some cases, even help develop it. That does not seem to be the model Metro Bank is planning to [follow]."

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