• Timm Wege, Vice President Business Development at SWK Bank, Mainz


• 25.07.2023 01:15 pm
#banking

What are the current centrifugal forces in the banking sector and their impact on processes, what influence do AI, innovations, platform economy, banking as a service and finally sustainability have on the future of banking?

There are three areas where banks' business models are under pressure and which are influencing processes in the background, creating the risk that business could migrate:

1. customer demands - customers are used to simple and fast processes from other areas of life (as the example of Amazon in particular shows). Whoever is the leader here attracts the younger generation in particular, which automatically leads to a redistribution of market shares due to demographic developments.

2. costs - Even if the interest rate increases bring some relief to the banks, the most important economic performance values remain under pressure because the benchmarks remain high. This is happening, for example, due to disruptive FinTechs (although there is currently more willingness to cooperate here) or due to foreign investors who are consistently restructuring classic banks and setting them up efficiently. Accordingly, the requirements for process efficiency remain high.

3. Competition - Platform and marketplace models in particular continue to challenge the banks' customer interface, which means that the ability to plan growth ultimately depends on submission to the price dictates of the marketplaces.

For banks, this means thinking about comparative competitive advantages. If a bank wants to use its usually scarce resources to concentrate on its real unique selling points, i.e. where it differentiates itself from the market, is a specialist and is perceived as such, it must outsource its standard business. And it must do so to providers who are masters of this standard mass business as "process leaders" or "cost leaders", who are experienced and competent in perfect customer service for this mass business and who also leave the customer interface untouched. This means offering genuine "white label" solutions and always acting on behalf of the outsourcing bank, as SWK Bank, for example, does for numerous customers. As an innovator in consumer credit processes, SWK Bank has a digital DNA and has also been active in "business process outsourcing" for decades, for example as a long-standing fronting bank for auxmoney. SWK Bank offers its Banking as a Service services to banks and FinTechs looking to enter the German consumer lending or deposit market.

These three areas - customer demands, costs and competition - are not new, but they will experience intensification in the near future and this comes from the area of sustainability/climate protection. Banks will be at a disadvantage in the future, either directly or indirectly, if they cannot prove that their business models are climate neutral. In the future, customers will also evaluate banks from this point of view and factor it into their decision to choose a suitable bank. There will be disadvantages in financing because investors will manage their investments from this point of view. In addition, there will probably also be a direct "punishment" from a regulatory point of view or by rating agencies for the lack of implementation of the topic of sustainability. Competitors will also differentiate themselves through this topic and thus develop differences in products that were previously considered "commodities".

Importance of AI for banks and banking services

There is one major area of application for artificial intelligence (AI) that is also becoming increasingly relevant in the financial world: Marketing. AI will put significant pressure on the marketing labour market, as numerous marketing managers confirm.

For banks, the topic of dark processing (i.e. business processes that run completely automatically in the background and whose processing is IT-supported, without human intervention) will certainly experience another leap in quality due to AI. However, there are still various compliance and data protection hurdles to be overcome, so that one cannot assume short-term effects here.

In the area of credit decisions, the use of AI is ruled out for the time being due to legal/regulatory requirements; in customer service, one or two chatbots (a text-based dialogue system that enables chatting with a technical system) could be replaced, but certainly - at least in the short term in the German banking world - no human call centre employees.

Are there still innovations in banking at all?

AI will already have a certain impact on innovations in banking and, despite all the hurdles for banks, will be a much stronger innovation driver than blockchain, crypto or metaverse. However, not in the sense of new products or process features. It is much more about reinventing oneself as a bank, thinking in terms of structural and process innovation. These will not be global innovations because they already exist elsewhere, but for a bank such internal changes are to be understood as "innovation in a system through the application of new ideas and techniques" and that is by definition an innovation. And the good thing is: you can also earn money indirectly with it.

Meaning of platform economy, open banking, banking as a service

If we reduce the term platform economy to the sales-heavy topic of "marketplaces", this area is the most developed of the three mentioned: Through marketplaces, a bank can generate "flow on demand", i.e. plannable growth, and has been doing so for more than a decade. Around the topic of marketplaces, the area of "open banking" emerged with the aim of expanding the bank's product portfolio within the bank's IT infrastructure. The actual widespread use has only increased in recent years. Then there is the topic of banking-as-a-service in the sense of business process outsourcing, whereby outsourcing of processes and thus cost savings in the area of IT, product and process infrastructure are made possible. This last area has historically been used more by FinTechs, but is not yet as strongly developed at traditional banks as the other two areas of marketplaces and open banking, and it is therefore also interesting to act as a provider there.

Perspective in banking until 2028: Sustainability is the most important topic

In my opinion, sustainable banking replaces - at least temporarily - the other major trend "contextual banking" as the most important focus topic in the further development of banks and banking business.  Contextual banking stands for a banking model that offers a connected banking experience where offers and updates are presented to the customer at the right time and place. In my opinion, however, sustainable banking will be more important in the near future: The banks with the best standing in sustainability will gain market share. So it is not about a great front end, but about content and clear positions. Banking as a service providers must therefore offer "best in class" processes for their product portfolio in order to minimise the "footprint" for their banking partners, and at the same time they must also provide mass-compatible "climate products" (for example, special credit solutions for financing sustainable infrastructure) in order to achieve direct competitive advantages for their partners. This complements the cost advantages that arise anyway. Banks that use BaaS therefore achieve multidimensional positive effects in terms of the profitability of their business models.