Digital Banking Strategy: Launching 7 Banks | Al Southall

Alex: Hello and welcome to the Curiosity Code podcast. As usual, I'm your host, Alex, and today I'm joined by Al Southall, a technology and operational leader who has spent over 25 years building and launching digital banks from the ground up. We'll be exploring the playbook for digital banking success — from balancing innovation with compliance to creating customer-first experiences that truly stand the test of time. Welcome to the show, Al.

Al: Thanks a lot, Alex. And thanks for inviting me to be on your podcast. Having been involved in the setup of seven digital banks, it's obviously an area I'm very excited about. I never get bored of it. Every single bank is something different and a new challenge and I've learned quite a few lessons along the way.

Alex: I'm truly impressed by your experience. I don't think I ever met a person who've been in launching business for such a long time. So what's the biggest shift you've seen in how new banks are built today? Because you have this overlook of how things been done in the past, long term, in the past short term, and now we are at today's point. So what shifts are you seeing?

Al: I think if we look back at the very beginning, what has been the most fundamental enabler has been technology. My very first digital bank was back in 2000, 2001, and at that stage I think a lot of banks were getting a little bit nervous that they were caught out by the digital revolution. They didn't really understand what was going on and they realized they're missing vital customer segments. And so I think the ability to use technology and to create financial services organizations without the barriers of having a bricks and mortar presence has been obviously one of the most kind of key things that's enabled all this to happen. I think you also couple that with the regulators and how they have been very positive in encouraging new entrants into the banking sector. They could see that there were a lot of underserved segments in the market now that could be products that weren't available particularly to people like small and medium sized enterprises. They could see certain geographies were not getting the attention that they needed. So with the big banks not really playing in that space, they have created an environment to set up a lot of these new banks. So I think part of that is down to the geographies and needs and how you to have people who are specialists in understanding, for example a lending customer and what they need to have and say to address the underserved segments that are out there in the market. And I think all the way through regulators have always been super supportive of changes. However, at the same time they have to maintain the stability of the financial system. So in the UK we have a prudential regulation authority and that's about making sure that people run banks and in a safe and secure way and also that you have the right conduct around those organizations so you understand the customer. There's a big thing in the UK about treating customers fairly and consumer duty and it's making sure those kind of principles are followed all the way through. So you know, it's both an opportunity but it's in a tightly regulated environment as well just to make sure it's safe for everybody who's out there. I think the other thing is that you look at a lot of the large scale banks out there, what they have wrestled with is really their legacy platforms and also their legacy operations. They have not really chosen to embrace the needs of smaller segments of the population. So say with small to medium sized enterprises it becomes a little bit too difficult. They don't understand the needs of a large corporation and maybe somebody who has a factory are very, very different. And so the phrase often uses the computer says no. If it doesn't fit into one of their nice segments customers, they understand, they'll tend to just stand back and say no, we're not going to support you. And so that's created a lot of disparity within the markets and it's not just in the uk, it's all across the globe. I think the other big thing which has changed significantly in the last 25 years is also the price of entry. So the emergence of pre built solutions such as core banking platforms, payment systems, that componentization has been a big enabler as well. So traditionally organizations would need to have very large scale IT teams building out systems, building out the infrastructure. Now by being able to plug and play certain components, it's made it a lot faster. So that not having to code all aspects of stack is really important. The other thing about it is you can also leverage the investment of ease suppliers of core banking platforms so that as regulatory changes come along, you're not spending your time having to always invest in those changes. The bigger platform providers will do that themselves and you can benefit from their R and D their testing and those components which you can plug and play into your own infrastructure and keep yourself up to date with regulatory changes. So I think the cost of entry from a tech perspective is no longer what it was. However, the regulatory bar make sure you have sufficient capital to grow your business. And the banking elements is still a fundamental.

Alex: You have to address the challenges that come with conventional banks that have this burden of legacy systems and the struggle to overcome these challenges and become more technology advanced versus newer launch banks who starting from scratch. So what would be the easier path if you were to decide to start digital banking, to have like a fundamental legacy bank backing you up or start from scratch and not to deal with this legacy burden?

Al: I think generally it's to be able to start afresh and then to be able to scale that out. We've seen it in certain organizations. So HSBC in the UK launched First Direct, first as a telephone service back in the. I think it was in the 1990s and then they transitioned to become a digital bank. Whilst they share some elements which are core to hsbc, its parent bank, it's not just a technology, but I think they were allowed to operate and to devise their own products and services and innovate with the customers. I think they used to have a great expression which was they wanted to dance with their customers, which is almost that they're anticipating the next move of a customer and trying to meet that need. And so they have done that very successfully. I've also seen a lot of the other large banks where they have created an incubator for a new bank and then after a few years they've given up. They found it too difficult and I don't know whether that is because they have to look at shareholder returns and they see the cost and the kind of reward not really being married together.

Alex: There is a notion of idea called bank in the box and is gaining popularity, but only few players in the market actually succeeded with it. Why do you think that's the case?

Al: I think there's a lot of suppliers who will try and sell you a bank in a box saying that it's all singing, all dancing will work in all jurisdictions. I personally never come across that. I think there's a lot of benefit, as I said earlier, from people building core banking platforms and investing in the R and D, the testing of those, keeping them up to date with regulation. But often what you end up getting is something which is very vanilla and is not really tied into what your customers need. So localization for language, localization for Payment systems, which can still vary considerably across different geographies, is always a difficult thing. So they can get you up and running very quickly if you're willing to have a very, very simple product set and you don't need a lot of integration with your existing systems, or you don't want to have product features which are probably going to be more innovative and differentiate you from the rest of the competition. So I think those nuances are very different. They can also tie you in to their own ecosystem. So what you may find you're not able to do is to be as agile as your business requires. But instead what is happening is that the vendor will have a roadmap and a release schedule, maybe going out a few years, but if you want some of that functionality, you may have to wait according to what other customers that product want. And it may be that your ability to solutionize is going to be a year, two years out. So it takes away some of that flexibility as well. I'm a big fan of buy rather than build where it makes sense. And if you look at setting up a bank, you're going to have a whole variety of different systems you need, you need a core banking system, you need a general ledger, you need the ability to know your customer and comply with money laundering standards, you need a solution for regulatory reporting, et cetera, et cetera, data warehouses. And I think it's a case of maybe not having a bank in a box, but choosing carefully from several suppliers who can meet your needs and not tying yourself to any one component in that kind of technology stack. And so as the business scales, as it moves on, maybe your business grows very quickly. You can actually plug and play those solutions as time goes on. But I think another point is worth going back to, Alex, is if you look at when you're building a bank, how do you start? And I think most fundamentally you do need to think about the business model first. My main background is technology and operations and I love technology. But you have to start with understanding what is your business plan, what are you trying to achieve, how am I going to differentiate myself in the market and who am I going to be serving? That can change very much the types of products and services that you want to have. And that differentiation is key because that will then drive some of the investment decisions you have. Great example. I was sent into the Czech Republic by a private equity firm. I'd never been there, I couldn't speak a word of the language. And I was asked to even design the products and services we'd Offer a bit of a challenge, an interesting one. But first thing I did is I went around a number of the banks that already existed there. And this was back in about 2009. But what I could see is that the banking system in the Czech Republic at that time was not very customer centric. It was almost like a bank out of the 1970s in the UK. So I walked into one bank and I was immediately confronted by this 24 page A4 booklet listing all the tariffs and charges on the account. If you had your salary deposited into your account, you as the recipient, the real customer, you had to pay a fee for that. You went to get money out of your atm, you had to pay a fee for that. And you look at that, it wasn't customer friendly. Everybody hates charges. But the cost of actually implementing and maintaining that, dealing with customer complaints about charges they think are incorrect, it's a massive barrier. And then you think actually what do we want? We want simpler banking. And so we're able to kind of come at this from a very customer centric proposition point of view as opposed to we're just going to be like any of the other banks that are out there. And I think you've seen quite a lot of changes in other organizations as well where they have taken that same view to improve their products and services. Some of the transactional banks, some of the latest digital app based banks, they provide you the facility to have what we call savings pots. So you can take your funds or your savings and say, well, this is towards a holiday, you get insights to where I'm spending my money, which is always very good. So it actually helps with the empowerment and financial education of people by being able to provide those types of services. And it's the same for, I think there's a great opportunity now in commercial lending where you can understand the actual segment, you understand your customer really well. But with open banking, the customer can permission you to see their cash flows on a real time basis if needs be. And therefore the bank, it can monitor its loans a lot more effectively. You can also see trends where again you could help a lender understand what products and services are correct. And if needs be, you recommend that they switch those. I think it's a very big shift we're seeing. But it all comes back down to you've got to start with the customer and your product proposition first from that product design, making sure that's compliant, that it puts the customer at the heart. Everything else flows from there makes sense.

Alex: So it sounds like the whole banking venture Stands on technology, compliance, product, customer centric product and the business plan.

Al: Absolutely.

Alex: I think as we talk more, we'll be exploring each of these directions. But first, as usual, I'm always curious about this balance between innovation and technology and compliance. How do you keep regulators comfortable while still innovating in the technology and product aspect?

Al: I think it's transparency and communication that's at the heart of all of this. To gain a banking license with any regulator, first thing you have to lay out is your regulatory business plan, which explains what you're trying to achieve, what does good look like? And that's not just for year one, that's year five and beyond. So how your business is going to scale, what are the products and services you're going to offer? If you have innovation, it's explaining to them why and why it's good for your end customers. Whether it's for someone saving money for the future, it's somebody going into the stock market, or it's somebody who needs a commercial loan. So I think that's important. As you build out your regulatory business plan, things will undoubtedly change. Sometimes people have a little bit of a shift and think, oh, we have more products over here. And as long as that is communicated with a regulator and they don't think you're trying to build a super duper or singing or dancing solution for day one and you're running before you've actually able to walk. I think that is one of the key things. So those business growth projections are fundamental. The regulators get a little bit worried and concerned if a business grows too quickly because again, are your risk and control systems capable of managing that? Managing a 5 billion pound bank compared to a 1 billion pound bank are different, they're different kind of scales and so is regulatory treatment to them. So I think that conversation all the way through is absolutely key. But you know, in the uk, the regulators, I think, have been very open to new product ideas. They've even introduced their own sandboxes for people to be able to practice with innovation and to try new products and services. And then that allows the organizations to see how they work best, allows the regulators to have a view over them and to understand them better. And the end result is obviously going to be better products and services for the end customer. I think the other thing I should just mention with that, with regulators, they obviously have to make sure, as I said before, you are financially stable. They want to make sure that you are compliant and you're playing on a level playing field. So making sure that safety and Resilience factor is always there is absolutely key as to how you approach this. But as long as you build that from the ground up, you start those principles in mind. It's really good. Good example would be your cyber controls. Design them from the outset and build them into your systems. When you have people in your organization having access to customer data, you start with what's known as role based access control. So you define the principles as to who can see what and make sure that not everybody in the organization can see everything because that is not good control. It's so much easier to build that when you design and all the way through and to test that then realizing later on it's something you missed and having to go back and start again.

Alex: Makes sense. Makes sense. Let's talk a bit about technology. So you mentioned that you're a big fan of buy versus Build and I think this is challenge that any of more organizations would face and I assume it's also happening in digital banking. You are unavoidably going to lock into cloud provider or major vendor. You mentioned few major systems that you're most likely going to use in building more in digital banking. So my question is like with that risk in place of vendor lock in, how can leaders in banking manage this risk without losing flexibility of the product?

Al: I think you're absolutely right, Alex. You know, this starts with having a clear view of what your technology strategy is going to be, including buy versus Build. Say some elements will be almost easy to buy components, but you just want to use. You plug and play other areas, particularly in the digital space or where you may have bespoke lending criteria or scoring of customers. That may be where you have your innovation, you have your niche and that's where you want to build it yourselves. So I think getting that division between what you will buy and build is important. Obviously the vendor selection is key. We talked about no such thing as a bank in a box. But I think you choose right then who is the right for you is going to scale. You want to make sure that vendor is going to be around for the medium to long term so that you're in the driving seat. If you decide to kind of move away from that vendor, you're not going to be subject to that vendor having a takeover and then suddenly your product, your foundations have gone away. So I think having careful vendor selection, building a win win relationship with suppliers is absolutely key so that you understand their roadmap and where they're going and not trying to bespoke everything in one of their platforms, the little bolt ons and add ons that you think are really special to you, but actually really should be sitting in a different tech layer up here rather than in the core. I think that will help you avoid costly upgrades in the future. Cloud is a very interesting one because I think that has really changed a lot more in the last six or seven years. Until then, most banks were expected to have their own infrastructure. It would still be provided by another vendor, but you had your own risk take on the resilience of the cloud. You had to fail over your system so that if you lost your data center, you could prove that you could restore service from another data center and then restore back again. Now, with cloud, a lot of that is nominally built in, but you do need to understand what is your resilience in the cloud. It's not automatic. The lessons of the last few weeks have shown AWS failing, it's shown Azure failing. And so now people are also considering do I need to have a multi cloud strategy? So I can, if needs be, take my workloads off Azure and put them into AWS or Google Cloud and vice vice versa. It's potentially costly to do that, but I think if you avoid using any real bespoke functionality in the cloud providers, they generally provide a lot of the same types of services. There's the notion of what they call elastic frameworks now, so that rather than having to have a full size bank operating as your backup, and it's all priced around running the whole of your business, you can keep a very small instance of it that you can then tune up and tune down as you need to. So I think there are options there, but I've not really seen anybody address it successfully as yet. But I think that's going to be a growing focus of the regulators over the coming period because technology issues will always happen. It may not be the cloud, it could be a vendor technology. You may find some limitations. And I think that also goes down to you understanding your risk profile, making sure your executive, your founders, your board in particular understand all those technology risks and that they're bought into the right mitigation procedures. Having regular meetings with the vendors I think is really key to make sure you understand their performance. You're a good customer, they're a good provider. That's really kind of key. So that understanding from the board and the support from them I think is really critical.

Alex: Yeah. Interestingly enough, as we recorded this episode, there is a outage of cloudflare and I couldn't log in into Mercury bank just before this recording. So you know, just a good example of how large organizations still struggling with what you just talked about, you know, having this backup systems in place.

Al: Many of the major organizations that they still have problems as well, they always tend to happen around a payday or something like that. And you get lots of news and bad press around people not being able to complete on mortgages for their houses or not getting their salary paid. It's a big thing and it's a very emotional area of the whole of regulation in the uk, the pra. One of the main things to be able to accept deposits is you have to protect the end customer and that's what they're really passionate about because. Because you affect their livelihood very, very quickly.

Alex: Well, I guess there are, as you said, there are advantages of shifting to this direction because what do you say, like six, seven years ago you had to run your own infrastructure. Now you can innovate faster because you can leverage the existing systems that those cloud vendors are providing. So hopefully there'll be a more resilient world ahead of us and this banks will figure out how to manage those down times. Anyway, I really want to talk about product side of things and you mentioned several times how important customer centric design is. How important is looking at underserved segments of customers. There is a notion again the concept of segments of one, which is a truly individual banking experience. In your opinion, how close are we to making this trail?

Al: I think the whole thing comes down to thinking about what the customer really needs at the end of the day. So I give you a couple of examples Alex. In deposits or savings, traditionally people offer you 1, 3, 5 year fixed term deposits or notice accounts or easy access, whereas I may actually be putting some money aside for a child's wedding or a big holiday I want to have. So I may want a product which is 1 year, 5 months and 3 days. It may be to do with a tax bill if I'm a kind of corporate or paying my vat. So why can't people have that as a product where you can pick your own maturity? I've implemented this both on the SME side of the market and also in retail in two of the banks I've been involved with. And it's been a very successful product. People like that flexibility. You price it accordingly, somewhere between the price of say a one and a three year bond. But it gives them the certainty they're going to get their funds back on a certain day rather than, you know, I have to have a 12 month product and then go into easy access by 118 months. So I think that feels a lot more personalized and meets their needs. On the lending it's a little bit more complicated, but you look at an example of a business that maybe have seasonal cash flow. So it may be, let's say a holiday park operator or another business in a seaside town where they get a lot of money in in the summer and then they have quieter months in the winter. So why can't you build out a loan product that matches those cash flows? You marry that together with the ability to use open banking and see the real cash flows of that business means you still can control it. But what you're doing is you're empowering the customer so that they're not having to fit into something that's off the shelves and it's not that difficult to do. If you kind of think about it from the get go, people want to make balloon payments and pay down loans, so why not create the facility that lets them do it?

Alex: What's one hard lesson you've learned from launching new banks that you wish more people in fintech understood?

Al: I think the fintech thing is a really interesting point, Alex. So technology as I've said is a big enabler for all of this. I think for anybody in fintech who's thinking of moving into banking, you can't escape the fundamentals of you have to have people who understand how banking works, not just on a day to day basis, but what happens when there's market shocks, whether it's taxes changing, whether it's the tariffs recently. You can have big shocks to the market which may change behaviors. So how do you respond to that? That's what the regulators are really interested in. Coupled then with the resilience that you need to build in to your products and services. So you know you can innovate a lot. You can bring some very exciting products from the AI world, for example, right now into how you do maybe credit scoring, et cetera. I think it's still very early days for AI and every sees it as a kind of golden egg that they're all chasing. The technology will kind of help with this, but your fundamentals come back down to your business needs to understand what it's doing from a banking point of view. I think it also helps if you've got a good solid board with a wide range of experience. They will tend to come from banking, but if they can be forward looking, they're educated in technology, they understand the risks. I think that is important What I have tended to do is make sure that during the bank bills we're keeping boards informed when the banks are up and running. Make sure that every quarter you have a thematic review or deep dive into matters such as cyber and you talk openly about some of the challenges that are out there, what you need to do, I think you then garner the support you need to make the right investment decisions to move forward. On the financial side as well, we've seen some issues where people have not understood some of the fundamentals about as I grow, I need more capital to support my lending and the so called risk weighted assets, which is how you determine how much capital you need based on the riskiness of some of your lending products. And we've seen a very large organization which had problems with this, they got the calculation wrong and then they had to go back out, raise more capital from the markets and it was very destructive to their share price at the time. So you can't get away from the fundamentals. So get good banking people in. If you're a fintech that wants to move into banking, I'd like to wrap

Alex: this episode up with a little bit of philosophical question for you. So if you were to design the ideal digital bank today, what would you do differently and what timeless principles would you keep?

Al: As I've mentioned before, I think you've got to start with the product and the design, get that right from the get go and keep us true to that and change, manage that, keep us close to your original principles. That's going to help you avoid scope creep. It's going to help make the regulatory journey a lot easier because they understand what you're trying to do and you're doing what you said you would do, which is important. I think it's also about just make sure the vendors are the right ones so you don't have points of failure or you're locked into a particular vendor's ecosystem so you can move as your product needs change or as the scale of your organization changes. And the best way of doing that again is through good dialogue and taking a partnership approach to how you do this.

Alex: Excellent. Thank you very much Al. It's been a pleasure and very insightful conversation.

Al: Thank you very much.

Alex: And for the listeners, as usual, don't forget to hit the like button on YouTube, subscribe to the channel, or if you're listening it to any podcast platform, subscribe and leave a positive feedback and see you in the next episodes. Bye bye.