Other parts of this series:
It's time to stop talking about digital banking as though it’s an end game. Today’s digitalization is just the first step in the more holistic transformation to come. In the first of my focused insights on the Future of Banking, I’ll discuss a few of the meaningful changes banks need to undertake in order to thrive and grow as banking moves into the future. Watch my blog for more of these insights in the months ahead.
Until quite recently, many incumbent banks were focused on a digital transformation that would migrate their current structures and services onto a digital infrastructure with a user-friendly interface. This was what they believed they had to do to compete against neobanks that were offering traditional banking products and services, but using a more convenient digital approach that tech-savvy customers were eager to try. However, the banking landscape was evolving in much more complex ways that some incumbents have yet to address.
Neobanks were initially seen as reinventing the customer experience—but that was just the tip of the iceberg. They also redefined the sellable units of financial offerings and componentized them, adding new pricing options. In the process they fragmented a value chain that had always seemed indivisible. And instead of owning everything and creating a copycat banking business model, they created adaptive business model opportunities. They are now enabling models that are collectively meaningful and exponentially expandable: super-apps, embedded models, and BaaS are just a few examples.
The 2020s have new goalposts
As 2020 ushered in a new decade and new, unexpected challenges, banks moved up their digitalization timelines—but most did not rethink their overall goals or business models. They continued to migrate their existing value chain and business model into the digital realm. That approach is now outdated. Digital-only players are rewriting the rules and innovating fast. The longer banks hold on to their traditional vertical-integration model, the more likely they are to lose customers to more forward-thinking competitors.
Today’s standard version of digital banking can improve a bank’s cost base and reduce inefficiencies, but capturing future growth can be achieved only by looking beyond digitalization to consider multiple new business models.
It’s time to see banking in a new light and understand the opportunities for growth in a market that’s limited only by imagination.
Customers are embracing “best of” banking
The landscape has changed, and will continue to change, in the financial services ecosystem. New players are going beyond emulating traditional banks in the digital world. Instead, they are creating new business models that leverage the opportunities of a delayered value chain. By doing this, they are chipping away at incumbent banks’ business.
Examples include these category killers:
- Chime: around 12 million customers, focusing on fee-free overdrafts and payroll acceleration
- Afterpay and Klarna: over 16 million and 90 million customers, respectively, expanding the credit market through “buy now, pay later” offerings
- Stripe: more than 50 of its clients process over $1 billion each in payments annually
- Wise: disrupting retail forex, it debuted on the London Stock Exchange with a market value of $11 billion
Customers are becoming less and less “brand loyal.” Instead, they are choosing which products they prefer from which providers, and in many cases using embedded services from third-party providers without even noticing them. Customers have the flexibility and opportunity to “build their own bank” by combining services from different players instead of searching for one incumbent that meets all of their expectations. There is no switching cost for them, and the result is incremental, more transparent, and more flexible.
The competitive arena has moved to product innovation, with new players attacking the incumbents in the areas where they are most exposed.
This “best of” approach has upended the vertical integration model that most banks have relied on for decades, if not centuries. The physical convenience of banks, together with the power of their detailed customer data, is no longer a differentiator: digital presence now trumps physical convenience, and data (unless it is intent-focused) is more accessible than ever before.
According to Accenture’s Banking Consumer Study, 27% of consumers opened an account with a new bank that year, but only 14% switched their main account. As customers spread their banking across more providers and platforms, incumbents will see their slice of the pie continue to shrink, even if they don’t lose those accounts entirely.
Trading one model for many
This fragmentation of the banking value chain can’t be ignored. The banks that are willing to embrace new business models and continually evolve them will lead the pack in innovation and profitability. It is time to think about the future of your business beyond your existing model and stop trying to simply adopt the latest digital trends.
Future banking business models will incorporate traditional vertical integration, but they won’t stop with that. Banks will unbundle products and re-bundle them in innovative ways to create new, additional business models. They will introduce new products and offerings into discrete parts of the banking value chain. Banks will replace one business model with many, that work together in order to maximize value for the bank.
Digital banking models are non-linear models that disrupt the traditional value chain by monetizing individual parts of it. For example, digital banking allows a bank to use customer data (both internal and from third parties) to better analyze credit risk and provide lending opportunities to more customers. Digital banking also allows a bank’s services to be integrated with those of its partners, or embedded into various platforms to create new offerings. In these ways, digital banking opens up many more business models for banks to consider.
BaaS provides banking products to companies that either bundle them seamlessly with their offerings or sell them on to their customers. The bank provides its regulatory capabilities and balance sheet to companies that don’t have those capabilities. The bank operates as a third-party service provider, invisibly in the background on a platform branded by the front-end service provider.
Banks will continue to move toward multiple, non-linear business models. We expect them to respond to the continued growth in digital technologies and pressure from digital-first competitors by transforming their value chain. Banks that examine their value proposition and business models on a continuous basis are likely to gain a competitive advantage over those that change only when regulatory pressures or customer expectations drive them to do so.
In upcoming posts, I’ll examine how the banking value chain has been shattered, and why that’s actually good news and a big opportunity for banks. I’ll also examine the evolution of banking business models and explain why one model may no longer be enough. Be sure to follow my blog for those insights.Read report