An American proverb says, “Where there’s smoke, there’s fire” and just about every day we’re seeing plenty of smoke in banking. Some of it is regulatory (Open Banking in the UK, Australia, Israel, Hong Kong, and Singapore), some of it is validation of the success of new entrants like Stripe and Monzo through rapidly increasing valuations, and some of the smoke is the ongoing chatter speculating if and when tech giants like Facebook, Apple or Amazon will finally target banking industry for service expansion.
We recently conducted a quantitative study to peer through the smoke and try to determine just how much fire there is and if the industry structure of banking is really changing. Our conclusions are striking. We found, for example, that 17 percent of industry participants in 2017 entered the industry over the last 12 years. And these new entrants (many of which are true innovators) are grabbing real revenue from incumbent banks. For example, in Europe, a full third of new revenue creation is now going to these new entrants. The incumbent retail and commercial banks are all feeling the heat. In the UK, many of the incumbents are now looking at open platform models to better compete, while in the US many regional banks are struggling to grow their balance sheets in what should be macroeconomic boom times. In continental Europe there are limitations on incumbents’ ability to invest given that ROEs are still below the cost of capital.
As smoke turns to fire there is now an urgency for traditional banks to rethink their business models and adapt to market-specific changes. Our research suggests that an incumbent bank must focus on two priorities if it intends to win in the digital economy.
Priority one is to put at least a temporary stake in the ground and make a medium-term business model choice based on market-specific conditions. While many traditional banks tend to be leaning towards the Digital Relationship Manager model, one of four archetypal business model choices we introduced last year, market evolution commands a more nuanced examination of model viability within each market. For example, incumbents becoming a digital version of themselves—to be most things to most people—makes sense in more stable markets, like Canada, Brazil and Australia, where new entrants haven’t yet found revenue traction in a protected regulatory environment. That may not be the best decision in more open markets, like the UK, which have a robust ecosystem of fintechs and new offerings. In such markets, the Open Platform Player, Digital Category Killer and Utility Provider models may provide incumbents quicker options for drawing on third-party capabilities to better compete.
Making a clear business model choice, even for the medium-term, will spark the action banks should take in the short term—which is the second priority.
After clarifying their business model, banks need to focus on how to drive top-line revenue growth through digital. The equation is simple. Will digital drive new customer acquisition, customer x-sell, service line expansion, better pricing or higher loyalty? The digital tools exist to become hyper-relevant to customers and also raise the metabolism at which a bank tests, learns and adapts its approach to each economic lever. Regardless of business model choice, those banks that can show that they understand how to use data to drive a vital and growth-focused business will be the long-term winners. The rest will be left groping around in the smoke trying to find a safe haven rather than embracing the change that is coming to the banking industry.
I invite you to learn more about our study findings and how market-specific business models plus the shift to digital-driven revenue growth create a stronger competitive positioning in our companion reports: Beyond North Star Gazing and Star Shifting: Rapid Evolution Required
