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In the Efma-Infosys Finacle ‘Innovation in Retail Banking’ 2020 study, author Jim Marous strikes a somber note when he says, “COVID-19 has had a lasting impact on consumer needs and behaviors, changing business models and creating significant new opportunities. More than ever, innovation is the foundation for digital transformation and must be prioritized to unlock the potential for post- crisis growth.”
The survey also opened on a downcast note. Asked to share their outlook for the banking industry in 2021, 53 percent of respondents painted a pessimistic picture, equally divided between a scenario of economic downturn with significant challenges (27 percent)and economic downturn with challenges outweighing opportunities (26 percent).
Out with the old
If banks are to survive these challenges and also hold their own against increasingly fierce competition from fintech and big tech, nothing short of a transformation of the business model will do. Unfortunately, relatively few banks are acting with urgency: evolving the overall business model ranked 8 out of 9 in importance as a digital transformation strategy; what’s worse, 59 percent of respondents said that a universal banking model would be their primary business model even in 2025.
Sticking to an outdated model can have serious negative consequences, from irrelevance (to customers who have moved far ahead with their expectations) to oblivion. And banks know this. Quoting another study, the report states that most financial institutions are clear on the need and approach to digital transformation; the problem is simply a reluctance to upend the status quo.
And in with the new
We have helped several clients out of this quandary by breaking down business model innovation into manageable steps.
At its core, all business model innovation is about exiting a pipeline business to embrace one that is rooted in a platform, ecosystem or digital marketplace. This means working with entities the bank has never worked with – and very likely competed against – before, such as fintech firms, insurance companies, other banks etc. in a digital ecosystem where everyone has a common purpose and goals. But banks need to significantly reorient their mindset before they can derive the full benefit of a platform, ecosystem or marketplace model.
The first is to go digital-first. As recently as 3-4 years ago, many (incumbent) banks believed in physical-first – where the branch was the primary channel of transaction; meetings happened in person; and all official communication was printed on paper. Some of the more progressive banks gradually shifted to a phygital model where both physical and digital were equally important. The pandemic blew those models apart to force a virtually overnight transition to digital-first from where there seems to be no going back. Today, on average, 80 percent of bank transactions are occurring on digital channels, with more going that way. That is the first step towards adopting a platform or open banking model.
A collateral advantage of going digital-first is that the bank starts using less of everything… fewer branches, less paper, fewer people. The next stop is to be free of these resources altogether – or as far as it is feasible. As opposed to the traditional bank, which would provision everything in excess in a show of tremendous inefficiency, the new business model tries to build itself on the absence of wasteful, or owned, resources. For this bank it’s all about being less-first and about using the assets of the ecosystem very efficiently rather than owning them yourself.
Banks looking for validation of the platform model need look no further than big tech and fintech, which have been extremely successful in finding and keeping new customers. Companies such as Google and Amazon, Venmo and Square, Kabbage and Chime, are exemplars of customer-centricity. But even as they swear by customer experience and engagement – 88 percent of respondents said this was important to digital transformation – many banks continue to lean toward a product-view in practice, seeing their customers as “savings / corporate/ wealth management” and so on. It is time to go all-out customer-first – to know and serve them as individuals based on need, preference and context, so that each experience or product is delivered where, when and how they want it.
Since the mobile is the single largest enabler of the customer-first approach, any business model transformation must necessarily be mobile-first. To meet the financial and efficiency expectations of another key stakeholder, namely the investor, the model should also be cloud-first; this would make it asset-light as well as operationally cost effective. The next requirement is to think API-first, in order to enable seamless integration and interface with the platform ecosystem. Together, these three can be labelled “technology-first”. They were also rated “first” by survey participants, who voted for mobility (73 percent), open banking APIs (64 percent), AI/ML/analytics (64 percent) and cloud (58 percent) as the most impactful technologies for banking in the next 5 years.
The way forward for banks – and indeed most other businesses – is to adopt a platform-first model in whatever they do, be it launching an international subsidiary, adding a new channel or growing inorganically through merger and acquisition. This is the only proven path to scale, reach and customer engagement. Platform-first thinking is a composite of several tenets – digital-first, less-first, customer-first and technology-first. Banks must therefore address them first on the road to business model transformation.