Rajashekara V. Maiya, vice president, global head for Business Consulting, Infosys Finacle
The banking business model is changing. And the change is likely to accelerate in the new year under severe pressure from market forces. This change in business model is no longer limited to creating economic and financial value. We are talking about change that encompasses all aspects of business – customer segment, distribution, products and services, ecosystems, technology, revenue model and cost structure, people, and competencies. In 2020, all these fundamental building blocks of business will reshape the banking business model.
For the longest time banks created value with specific products such as checking account, savings account, lending, payment, etc and targeted demographic clusters. Progressive banks are now beginning to employ digital technologies to target a ‘segment of one’ with personalized solutions and experiences. This level of personalization requires a deep understanding of not only the aspirations and goals of each individual customer but also lifestyle, values, mindsets and underserved needs. Adopting a GAFA approach to insights, progressive financial institutions augment insights from their ecosystem participants to deliver enhanced value.
The ecosystem approach has given rise to a business model that is proving to be more remunerative than the traditional one. According to a leading consulting company, the returns on sales and distribution of third-party products – sourced from ecosystem partners – are significantly superior to the returns on owned products: where manufactured products that appear on the balance sheet account for 53% of revenue, they deliver only 35% of the profit at an ROE of 4.4%. On the other hand, distributed products may not appear on the balance sheet, but they contribute 65% of profits and 20% ROE.
Apart from the revenue model – where there is an evident shift from interest-based income to fee-based revenue – the cost structures are also undergoing a massive shift. Incumbent banks are competing with digital models of challenger banks whose cost-income ratios are nearly half that of incumbent banks in many markets. While incumbent banks can also digitize their way to lower costs – a global bank’s analysis estimate cuts between 30% and 50% – they risk losing 10-30% of revenues to new competitors who are even more adept at ‘digital’.
When it comes to distribution, there’s a world of difference between what banks have traditionally followed and the demands of the new digital age. Not only has the brick-and-mortar branch model of distribution come a long way but a plethora of non-branch digital channels have made their way into the channel mix. As more and more transactions move away from bank-owned channels to new voice-assisted channels or emerging and yet-to-emerge IoT interfaces, banks are learning to perfect the art of distribution of services to deliver contextual propositions on every customer’s channels of choice. This change will be more pronounced in the case of open payments, where non-bank players dominate the market: In India, for example, just 3 non-banking players, namely, Google Pay, Paytm, Phone Pe hold nearly 90% share of over 1 billion open payments transactions done monthly.
Business Model Change in 2020: Evolve or Transform
A bank can approach business model revision in one of two ways – by identifying a focus area of excellence without changing the basic model or by transforming the existing model into a new one.
The first approach is about evolving to become a leader in scale, value, customer experience or product. Faced with competitive pressure, acquiring from a pool of unsustainable banks can help banks achieve scale quickly. Such banks should harness synergies by merging the most suitable products, processes, data assets, and physical presence. To become a value leader as the most cost-efficient player in the market, ubiquitous automation is key. Some banks choosing to evolve the existing model may aspire to become leaders in customer experience, for which investment and focus on design thinking-led customer journeys will be imperative. The banks have begun recording tangible returns from their investments in enterprise-wide agile and design thinking approaches. Lastly, product leaders will champion a chosen niche – unsecured lending, mortgage, student financing, or any other.
Transforming the existing business model radically is about exceling in one or a combination of areas in the banking value chain. Here we can classify banks as manufacturers, value aggregators, and distributors. A manufacturing bank produces best-in-class products that can be white-labeled and sold through ecosystem partners. A value aggregator curates best-in-class products to fulfill more than just banking needs. And a distributor focuses only on acquiring and servicing customers, without middle and back office burdens.
In 2020, the banking business model will continue to evolve around the world, thanks to data-sharing agreements and a wave of consolidation activity. Change will be faster, choice regardless. Heading into 2020, banks will place clear bets, and move fast.
- Rajashekara V. Maiya is vice president, global head for Business Consulting, Infosys Finacle
