Lloyds, one of the UK’s biggest banking groups has announced the £10 million acquisition of a 10% stake in Thought Machine, the technology start-up building a new core digital-first banking platform. It’s been a tough year for Lloyds with the high street lender’s share price dropping almost 30% 72.12 pence in late January to 55.83 pence today.
Traditional banks are having to cope with the mammoth task of digital transformation away from legacy systems in the context of tougher regulatory requirements on capitalisation, the need to split off investment banking activities from retail banking, low interest rates hitting profitability and new competition from online-only fintech banks.
However, Lloyds appears to be taking affirmative action in addressing at least one of the challenges it faces, digital transformation, through its stake in Thought Machine. The decision to invest in the core banking software fintech was taken having worked with the company since 2017.
Lloyds, like its traditional competitors such as Barclays and Santander, face a much bigger task than fintech start-up rivals such as Monzo and Starling in building the core banking platforms fit for the digital age. While new online-only banks have been able to build lean core systems from scratch, big banks like Lloyds have to somehow transition huge back-end legacy systems. The core IT systems Lloyds and its peers rely on have generally been cobbled together over years of acquisitions and patchwork development.
This means they are generally complex and inefficient. But it’s not a simple case of building a new core system from scratch using the latest technology in the world, plugging it in and hitting ‘play’. The huge volumes of data on legacy systems also have to be transferred over in a way compatible with new, more efficient systems and do it in a secure way. TSB’s recent catastrophic IT melt-down provides stark warning of the consequences of this process being mismanaged. If Lloyds’ stake in Thought Machine helps it avoid similar problems, £10 million will prove to be an absolute snip.
Commenting on the deal, Zak Mian, Lloyds director of transformation outlined:
“A key part of our recently launched three-year strategic plan is applying technology innovation to meet our customers’ evolving needs. I’m really excited to work with the Thought Machine team to explore ways to simplify and enhance our IT architecture and helping on our journey to make banking easy and simple for customers.”