A Message to CEOs: Navigating the Critical Years Ahead
The next three years will be pivotal for the survival of small financial services businesses, particularly building societies in the UK. With regulatory concerns growing over their ability to adapt and remain competitive, CEOs must take a hard look at the future viability of their institutions. The challenges are immense, and the risks of inaction are even greater. This article outlines the current landscape, the risks involved in continuing the status quo, and strategic options for CEOs to consider.
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The Digital Transformation Imperative
The financial services sector is undergoing a rapid digital transformation. Core banking platforms that were once sufficient are now outdated and unable to meet the demands of today’s customers. To stay competitive, building societies must invest heavily in upgrading their digital infrastructure. However, the cost of such investment is staggering.
The Investment Gap
The average investment required to modernize a core banking platform is between £5 million and £10 million. For many small building societies, which typically generate around £500,000 in annual profits, this level of investment is simply unaffordable. Attempting to finance such a transformation would put enormous strain on already limited resources and could jeopardize the long-term sustainability of the institution.
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The Risk of Going It Alone
For those societies that attempt a significant digital transformation without sufficient resources or expertise, the risks are substantial. Failure to deliver a successful transformation could result in diminished value when it comes time to sell the business. The current market value for clean, well-managed books of business is around 70p in the pound. However, a failed digital transformation effort could reduce that value to as low as 50p in the pound.
Beware of Unproven Partnerships
Many small building societies are exploring partnerships with technology providers, such as Tata Consultancy Services (TCS), which promise to deliver digital transformation at significantly reduced costs. While these promises may sound appealing, it’s important to recognize the high risks involved. TCS and similar providers have not yet proven their ability to deliver core banking transformations at this scale within the UK’s building society sector. Entering into such partnerships without a clear track record of success could leave societies worse off.
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Strategic Options for Small Building Societies
Given the financial and operational challenges facing small building societies, CEOs must explore alternative strategies to ensure the best possible outcomes for their members and stakeholders. Here are three potential paths to consider:
1. Sell the Book of Business and Execute a Solvent Wind-Down
Selling the society’s existing book of business and going through a solvent wind-down is a practical option for many smaller players. Currently, books of business are valued at approximately 70p in the pound if they are clean and can be migrated quickly to the buyer’s platform. This option allows societies to exit the market in a controlled and responsible manner, protecting members’ interests.
However, timing is critical. As more building societies come to market, competition to sell will increase, potentially driving down valuations. Acting sooner rather than later may yield better outcomes.
2. Seek a Merger with a Larger Society
Mergers offer another viable path. Partnering with a larger, more financially stable society can provide the resources and expertise needed to achieve digital transformation and ensure long-term sustainability. Mergers also offer members the security of continuity and the potential for improved services.
When considering a merger, it’s important to assess cultural alignment, operational fit, and the ability to execute a seamless integration. Poorly executed mergers can create disruption and erode member trust.
3. Consider a Targeted Digital Investment
For societies with stronger balance sheets or access to additional funding, a targeted digital investment strategy may be feasible. This approach involves prioritizing the most critical digital upgrades and phasing the transformation over time to manage costs and risks.
However, this strategy requires a clear understanding of what is achievable and a realistic assessment of internal capabilities. Partnering with proven technology providers with a track record of success in similar transformations is essential.
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A Call to Action for CEOs
The clock is ticking for small building societies. Regulatory scrutiny will only intensify, and the pressure to modernize will continue to mount. CEOs must act decisively to chart a sustainable path forward.
Key Questions to Ask:
• Can we afford the required digital transformation?
• Do we have the internal capabilities to manage a successful transformation?
• What is the current market value of our book of business?
• Are there potential merger partners that align with our values and goals?
• Is now the right time to sell or merge to maximize value for our members?
By addressing these questions head-on, CEOs can make informed decisions that protect the interests of their members and ensure the best possible outcomes for their societies.
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Conclusion: The Best Strategy Is a Proactive One
The next three years will be critical for small building societies. Those that take a proactive approach—whether through a controlled wind-down, a strategic merger, or a carefully managed digital investment—will be best positioned to navigate the challenges ahead.
Inaction is not an option. The risks of attempting an ambitious digital transformation without the necessary resources or expertise are too great. By exploring alternative strategies now, CEOs can protect the legacy of their institutions and secure a sustainable future for their members.