As a youngster, former U.S. President Ronald Reagan couldn’t decide what type of shoes he wanted. Unwilling to wait any longer for an answer, the local cobbler ended up giving Reagan one square-toed and one round-toed shoe. Reagan later commented, “I learned right there and then that if you don’t make your own decisions, someone else will make them for you.”
Today’s retail and commercial banks also find themselves in need of “new shoes”. Their old business model is wearing thin and is unfit for a digital world. It’s being eroded by inhospitable macroeconomics, new de-risking and open banking regulations, fintech growth, consumer behavior increasingly favoring non-traditional players, and other market-specific drivers. If banks fail to make an explicit decision on evolution of their business model, other more decisive actors will decide for them.
Archetypal bank business models fit for the digital future…and beyond
We identified four archetypal business models that can be successful for banks:
- Digital Relationship Manager—the first choice for most big banks that have the investment capacity to expand on their vertically-integrated bank business model, and serve a wide range of customer needs and segments. Appearing evolutionary, success requires radical, revolutionary change—from true physical-with-digital channel integration and real-time, hyper-relevant contextual advice to customer-driven solutions (not products) and a curated ecosystem approach where the bank can profit from the platforms of digital natives, like Google and Amazon®. It is indeed a new pair of shoes. Also, Digital Relationship Managers are more likely to evolve further to Banking as a Living Business, the industry’s next growth curve focused on relevancy and vitality beyond banking.
- Digital Category Killer—where banks focus on doing one thing very well to serve a narrow niche. Today’s exemplars include PayPal® in payments, Quicken Loans® in mortgages and Betterment in wealth management. Done well, the Digital Category Killer can force itself into new distribution channels (like being a provider to a Digital Relationship Manager), because it creates customer demand. Still, its success depends on other banks’ inability to do many things equally as well, and it can be difficult to diversify and look for a way to expand the single offering towards long-term growth.
- Open Platform Player—offering a customer-centred platform through which other best-in-breed product providers can interact with customers, create and sell products and services, and share value. Our consumer survey indicates that an increasing number of customers are willing to build their own bank through such a platform. Yet as more digital time is being spent on a smaller number of multi-functional platforms, the Open Platform Player must avoid being assimilated into the broader platforms of the digital natives.
- Utility Provider—narrowing the bank’s customer focus and value chain participation to offer end-to-end product solutions or simply a regulated entity for others to book deposits and loans in. Success means mastering the packaging and provision of compliant financial services for others, while using specialist talent and technology to keep overhead costs as low as possible. While the utility model can be a good, steady, non-threatening way to earn income, giving up end customers is a daunting prospect for most banks and establishing differentiation can be hard.
Rather than ending up with mismatched shoes that limit their ability to compete, banks can decide to control their own path. They must map their strategic evolution and de-prioritize initiatives that don’t help them along that path. They must then have the focus and discipline to execute, rather than be tempted to hedge their bets and end up with mismatched shoes.
I invite you to read the full report, Winning in the digital economy: The urgent business model choices facing retail and commercial banks. In it, we detail each archetypal business model, offer a high-level starting point for banks to take a realistic view of their fit to each one, and identify a few key execution rules for building a bank that can win in the digital economy.