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Four new, urgent bank models fit for winning in the digital economy…and beyond
As a youngster, former U.S. President Ronald Reagan couldn’t decide what type of shoes he wanted. Unwilling to wait any longer for an answer, the local cobbler ended up giving Reagan one square-toed and one round-toed shoe. Reagan later commented, “I learned right there and then that if you don’t make your own decisions, someone else will make them for you.”
Today’s retail and commercial #banks also find themselves in need of “new shoes”. Their old business model is wearing thin and is unfit for a #digital world. It’s being eroded by inhospitable macroeconomics, new de-risking and open banking regulations, #fintech growth, consumer behavior increasingly favoring non-traditional players, and other market-specific drivers. If banks fail to make an explicit decision on evolution of their business model, other more decisive actors will decide for them.
Archetypal bank business models fit for the digital future…and beyond
Source: Accenture
We identified four archetypal business models that can be successful for banks:
- Digital Relationship Manager—the first choice for most big banks that have the investment capacity to expand on their vertically-integrated #bank business model, and serve a wide range of customer needs and segments. Appearing evolutionary, success requires radical, revolutionary change—from true physical-with-digital channel integration and real-time, hyper-relevant contextual advice to customer-driven solutions (not products) and a curated ecosystem approach where the bank can profit from the platforms of digital natives, like Google and Amazon®. It is indeed a new pair of shoes. Also, Digital Relationship Managers are more likely to evolve further to Banking as a Living Business, the industry’s next growth curve focused on relevancy and vitality #beyond banking.
- Digital Category Killer—where banks focus on doing one thing very well to serve a narrow niche. Today’s exemplars include PayPal® in payments, Quicken Loans® in mortgages and Betterment in wealth management. Done well, the Digital Category Killer can force itself into new distribution channels (like being a provider to a Digital Relationship Manager), because it creates customer demand. Still, its success depends on other banks’ inability to do many things equally as well, and it can be difficult to diversify and look for a way to expand the single offering towards long-term growth.
- Open Platform Player—offering a customer-centred platform through which other best-in-breed product providers can interact with customers, create and sell products and services, and share value. Our consumer survey indicates that an increasing number of customers are willing to build their own bank through such a platform. Yet as more digital time is being spent on a smaller number of multi-functional platforms, the Open Platform Player must avoid being assimilated into the broader platforms of the digital natives.
- Utility Provider—narrowing the bank’s customer focus and value chain participation to offer end-to-end product solutions or simply a regulated entity for others to book deposits and loans in. Success means mastering the packaging and provision of compliant financial services for others, while using specialist talent and #technology to keep overhead costs as low as possible. While the utility model can be a good, steady, non-threatening way to earn income, giving up end customers is a daunting prospect for most banks and establishing differentiation can be hard.
Rather than ending up with mismatched shoes that limit their ability to compete, banks can decide to control their own path. They must map their strategic evolution and de-prioritize initiatives that don’t help them along that path. They must then have the focus and discipline to execute, rather than be tempted to hedge their bets and end up with mismatched shoes.
I invite you to read the full report, Winning in the digital economy: The urgent business model choices facing retail and commercial banks. In it, we detail each archetypal business model, offer a high-level starting point for banks to take a realistic view of their fit to each one, and identify a few key execution rules for building a bank that can win in the digital economy.
The post Four new, urgent bank models fit for winning in the digital economy…and beyond appeared first on Accenture Banking Blog.
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Virtual cash management: A catalyst for new business models for European transaction banks
#European #banks are in the midst of a ‘perfect storm’ of negative interest rates, regulatory pressures and market disruption, and are in search of new sources of value. A recent Accenture roundtable discussion concluded that European banks have the opportunity to develop innovative #transaction banking offerings using #virtual accounts, such as virtual #cash #management, to address changing market needs and create new business #models.
Jeremy Light, Head of Accenture Payments, EALA, speaking at the breakfast roundtable.
The roundtable, co-hosted with Cashfac (a leading cash management #technology provider), was organized in Amsterdam on January 31st, 2017 and saw participation from industry leaders from European transaction banks, as well as a trade body and a #fintech.
Accenture led the discussion by providing insights on the evolving transaction banking landscape and the promise of virtual cash management, and explored the role virtual accounts can play in driving a growth strategy for banks. Cashfac demonstrated the key capabilities enabled by its proprietary “Virtual Bank Technology” and illustrated how it has enabled transaction banks and corporate treasurers to realize their strategic ambitions.
Key takeaways from the discussion include:
- The potential of virtual accounts goes beyond liquidity management solutions and alternatives to notional pooling to address Basel III capital requirements. Together with open APIs (catalysed by PSD2) and instant payments, virtual cash management enables better management of payments, efficient collections, data insights and self-servicing capabilities. In essence, virtual accounts can be a key driver of the digital agenda for transaction banks while supporting innovation in corporate treasury products and services.
- Strategic growth objectives for transaction banks can be enabled using virtual cash management, allowing increased client acquisition. Banks can evolve as regional or global champions using virtual accounts (including through white labelling to other banks) to provide account and other value-added services remotely across borders. At the same time, virtual accounts can be used in new ways to power innovation and new business model propositions (e.g. line of credit offered via consumer travel cards or assigning individual accounts to taxi drivers working for taxi platform companies, for administrative efficiencies and value-added services).
- As an emerging innovation, the uptake of virtual accounts in Europe will depend on the impetus of the transaction banks in driving customer advocacy. While corporate treasurers might have some reservations on changing established and stable business processes, the long-term benefits of such solutions will be widely felt once there is enough understanding and adoption amongst the corporates.
- There is no &8220;one size fits all&8221; approach for using virtual cash management. The solution of choice for each bank must be qualified based on the specific characteristics of its client segments and local market considerations. As an illustration, in the real estate market, commercial rents are often a combination of different funding components such as rent, insurance, tax, fees, resulting in reconciliation challenges. Banks serving providers in this market should prioritize accounts receivable solutions for these client segments that can bring efficiencies in collections and allow easy administration.
- While the promises and benefits of virtual cash management are evident, there are clear ‘known-unknowns’ in areas such as tax, legal implications, KYC (know your customer) and data privacy rules that must be further explored. As market participants wrestle with such questions, the consensus is that incumbent transaction banking players must act with urgency and innovatively—to realize the full opportunities presented by virtual cash management.
The post Virtual cash management: A catalyst for new business models for European transaction banks appeared first on Accenture Banking Blog.
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4 Banking Business Models For The Digital Age
Digitization of the #banking industry is making new banking business #models possible. But, it is the combination of regulation and #technology that is making new business models a necessity.
There are 4 strategic options open to #banks, shown below. These vary in terms of the scope of banks’ own activities as well as in terms of profitability. The traditional universal banking model and the infrastructure provider model are both asset intensive and low margin, which makes them unattractive.
In addition, the universal banking model, in that it requires the bank to manufacture and distribute all of its products, is probably unsustainable. The aggregator model, top left, offers the possibility for very high profitability with low asset intensity, but will be difficult to defend. Thus, it is the vertically integrated but open platform model which offers the best route to sustainably high margins.
From a producer to a creator economy
If you have a spare 90 mins, you should definitely check out this presentation from Paul Saffo which gives an interesting take on the economic history of the last 120 years. Paul argues that the first part of the 20th century was the “Producer Economy”, where economic efforts were employed in systemizing production, organising people and capital in the most efficient way possible to overcome scarcity.
The most iconic image of this age is the Ford Model T, available in any colour as long as it was black. But, the peak of the producer economy came with the Second World War when the US economy was able to produce 8 aircraft carriers per month and a new plane every 15 mins.
Post the Second World War, the “Producer Economy” gave way to the “Consumer Economy”, where scarcity moved from production to desire and where it was necessary to foster the latter through advertising and credit. The peak of the consumer economy came with the financial crash of 2008 when the economy couldn’t be leveraged up anymore.
Today, Saffo argues, we are in the “Creator Economy” where the scarcity is consumer engagement (a “poverty of attention”) and the means to overcome it is to offer services through platforms, where the consumer becomes at once a producer and consumer.
Making the consumer a creator produces network effects, where the consumer’s input makes the product better – like Facebook where more users means more content and interactions attracting more users &8211; and leads to a positive feedback loop of increasing customer numbers and increasing engagement. The only way to stop the increasing returns to scale and tendency to monopoly in the creator economy is to create better platforms, as MySpace, Yahoo and other companies stand testament. Which is why, incidentally, Europe needs to get busy developing platform companies rather than trying to legislate against the ones that exist.
Banking in the context of the creator economy
How well does this model of economic history explain the evolution of banking over the same period?
Well, the first observation is that it is only really a model of the developed world, not the developing world. In the developing world, there is still a scarcity of banking provision as evidenced by the 2bn adults who don’t have access to banking. However, digitization is also helping to solve the problem of financial exclusion, by lowering the cost of banking and making it accessible anywhere and anytime (increasing the supply of banking to a point where the price meets demand).
But, as regards the developed world, Saffo’s history reflects very well the changing role of banking. Given the pivotal role of banking in underpinning growth in the “Consumer Economy” – underwriting the sustained rise in demand for consumer goods and, then, for housing (which successive rounds of de-regulation were happy to fuel) &8211; it explains why banking became so oversized relative to historical norms and relative to other sectors of the economy.
For example, in 1945, the year the Second World War concluded, financial services made up 2.1% of US GDP. In 2007, the year before the financial crash, financial services constituted 7.6% of the US economy. Similarly, in 1979 (the first year for which data is available), financial stocks represented 6.1% of S&P500 compared to 22% in 2007.
Seen in this context, it seems obvious that what we are seeing in terms of banks scaling back their activities and reporting lower profits is not solely the cumulative result of new regulation, changing competition and cyclical factors such as lower interest rates. Structurally, in the Creator Economy, we do not need such a large banking sector. And, in fact, banks have historically not provided many of the types of finance we need today, such as venture capital to start-up businesses, another reason why traditional bank lending is shrinking relative to alternative sources of business financing.
Not only is banking going to be a relatively smaller industry in the creator economy, but it’s going to have to evolve a lot to stay relevant.
The technology driven change
Banking is subject to the same technology-driven change as other industries and which make a creator economy possible. The internet has provided a platform for distributing goods and services that is global and cross-industry and which can be divorced from manufacturing, opening up banking to outside competition, especially from internet platforms.
Advancements in data science and AI make it possible to give faster and constantly-improving levels of online customer experience across much larger customer numbers, meaning companies with the best algorithms – and especially the most data – can dominate. And mobile has grown internet usage while simultaneously increasing the amount of time we spend online, making this the pre-eminent channel for customer engagement and extending the rewards to the platforms that succeed.
A new regulatory regime
But, as a heavily-regulated industry, regulation also plays a very important part in determining banking business models. It is the combination of new technologies and new regulation that is making new business models a necessity rather than just a possibility.
The open banking initiatives such as PSD 2 in Europe, which obliges banks to share customer data with third party providers where a customer requests it, are intensifying the battle for distribution which technology changes had already initiated. From 2018, aggregators can get access to customers’ transactional data via APIs. This will put them in a position to give ex ante recommendations based on customers’ spending behaviour which before would only have been possible by acquiring that data through some other means, such as offering a payments platform (like Apple Pay).
On the other end of the scale, system safer directives such as Basel III, by forcing banks to set aside larger capital buffers against risk weighted assets, have the effect of making regulated banking activities more expensive (and so likely to be provided increasingly by large-scale domestic commodities – see below) and pushing riskier activities outside of the banking industry. In many areas of banking, regulatory arbitrage is likely a bigger advantage to newcomers than faster adoption of new technology .
Other new rules, such as the transparency directives like MiFID II, are also likely to have impacts on business models at once encouraging consolidation among fund providers while opening up a bigger opportunity for automated investment services.
New strategic imperatives
Against this background of changing regulation and changing technology, banks must appraise the ongoing viability of their business model. In effect, we believe that all banks will be forced to adopt one flavour of the following four business models.
Do nothing
The first option is the ‘do nothing’ option. While this may be tempting, in common with so many industries undergoing change, this option is the most dangerous.
Most banks operate a full-service model today. That is, they provide retail or corporate customers with a current account and a range of own-labelled products and services on top, such as mortgages and credit cards.
The problem with this model is that there is a proliferating number of providers at every point in the value chain offering individual products at a lower price point, with less friction and better customer service. Trying to compete with these providers is impossible because of legacy software, but also because it would unpick a web of cross-subsidies where profitable products prop up unprofitable ones.
Rather than wait for this unsteady edifice to come crumbling down, banks should rationalise their products offering, concentrating on areas where they command competitive advantage or areas that are highly strategic (see later).
Become an infrastructure provider
Another option is to become a service provider to other banks or #fintech companies, as banks such as Bancorp and Solaris have opted to do.
The value proposition of such a model is to eliminate the need for others to engage in heavily regulated activities and take on the associated compliance burden, or – for a new entrant – even to have to apply for a banking licence at all. As noted earlier, regulation is pushing up the cost of doing regulated business and of compliance in general.
Such a model could be lucrative if the provider is able to achieve significant economies of scale, spreading the fixed compliance costs across a much larger volume of business. And such businesses will be run in the cloud to take advantage of the scale economies of shared infrastructure.
However, since the services provided are commodities and there is no room for network effects (where more users of the services makes the services better), this will not be a high margin business. What is more, since regulation is making cross-border activities more expensive, these infrastructure providers are likely to be domestic champions. How many providers can operate this model will depend on minimum efficient level of scale and whether there are limits to scale economies.
Aggregator
A more profitable model to operate would be one of aggregating financial services.
In such a model, a bank would turn itself into a distributor of financial services products. That is, a bank would not manufacture financial products and services but instead source them from an ecosystem of partners. In this way, the bank does not have to incur the costs of manufacturing products or compliance and can also provide customers with access to a broader range of products than if the bank tried to produce everything itself.
In order to make this model successful, the bank needs to become a virtual advisor, using customers’ data to help them make better financial and operational decisions – effectively providing a customer with the right advice and/or other service at the right time and across the right channel for the customer to act smarter. The bank monetizes this service, inter alia, by taking a small fee on all of the products and services the customer uses.
For a long time, the challenge to operating such a model was not technology – mobile has already opened up the channel to do so – but data. Without access to customers’ transactional data, it was difficult to provide truly value-added advice: for example, helping customers to set savings goals is much less useful if you can’t also help them to make savings. But PSD 2 is changing that by allowing third parties access to banks’ transactional data records. Now, internet platforms can add transactional data to the stores of contextual data they hold to be in a position to give very timely and relevant advice. Price comparison sites will be able not just to help you find the best deal, but tell you when you are eligible for such deals.
PSD 2 has effectively made banks online addressable in the same way that smartphones with GPS made the taxi market addressable to Uber or every home having a DSL line made AirBnB possible.
The aggregator model is definitely a model for the creator economy. A bank gains customer engagement by working with customers, helping them to better understand their financial affairs and the options open to them, but ultimately empowering them to make those decisions –making them a co-creator.
As a model for the creator economy, the aggregator model can be extremely lucrative. Operating such a model, a bank can generate massive economies of scale by potentially servicing millions of customers from the same software platform. But also, as a platform, there is the potential to generate network effects that could lead to increasing returns to scale.
Firstly, there are the two-sided network effects whereby larger customer numbers leads to a larger number of ecosystem partners which then, by offering the widest choice, attracts more customers and so. But, there are also the data network effects, whereby the bank learns more about how best to serve customers the more data it captures meaning it gives better and better services, attracting more data and so on. If the bank also opens up its platform for customer interactions with each other – with peers giving advice to each other, for example – then there are also interaction network effects enjoyed by the social network platforms.
The challenge with banks opting for the aggregator model is that it is difficult to argue that others couldn’t do it better.
Thin, open platform
A better strategic move would be to pursue a model that enables banks to both capture network effects and capitalize on their existing competitive advantages.
Banks competitive advantages are still numerous: trust (not as much as pre-crisis, but still more than many potential competitors), large customer bases, lots of data, strong execution capabilities across the value chain, access to cheap deposit funding and plenty of capital.
Moving to an aggregation-only model would mean leaving many of these advantages behind.
So, a better model would be a vertically integrated but open platform. It would be vertically integrated to take advantage of banks’ execution capabilities and by extension their ability to offer superior levels of customer fulfilment (a key reason why Amazon is becoming more vertically integrated). However, it would be vertically integrated but thin with banks only offering a small number of own-labelled products where these are strategically important like current accounts (for data, cheap deposits) and payments (data) or where banks have a competitive advantage (like secured lending). And the platform would be open to allow banks to offer products and services from third-party providers, as in the aggregator model, but as a vertically integrated regulated bank could be delivered faster and with less friction.
As we wrote recently, the theory that the internet giants are asset-light distribution platforms is wrong. Many started out as such, but few stay that way. What most tech companies find is that to maximise their success, to generate greater network effects and to prevent losing out to new platforms, they need to acquire many assets and, in many cases, become more vertically integrated.
PSD 2 has kicked off the platform race. Banks need to open up their distribution channels, to become aggregators, to have any chance of competing effectively. But, their best bet is to combine open distribution with the provision of a few strategic services sitting on top of a vertically integrated infrastructure. This seems the best way for banks to thrive in the creator economy.
This article first appeared on LinkedIn Pulse
The post 4 Banking Business Models For The Digital Age appeared first on Fintech Schweiz Digital Finance News – FintechNewsCH.
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Asset Managers Need to Adapt Their Business Models
As #fintech surges, Luxembourgers #asset #managers and servicing firms “are well-positioned to ensure that Luxembourg is in the driving seat for innovation,” according to Simon Ramos, partner of Deloitte Luxembourg.
In a new paper entitled ‘How can fintech facilitate fund distribution,’ Deloitte Luxembourg and the Association of the Luxembourg Fund Industry (ALFI) explore Luxembourg&8217;s vibrant fintech scene and further dive into the impact of new technologies on the distribution model of the asset management industry.With over 150 fintech companies based in Luxembourg, the domestic fintech scene has been flourishing, and new technologies, including #blockchain, artificial intelligence, machine learning, digital investment platforms, and peer-to-peer lending, are quickly emerging.
According to Denise Voss, chairman of ALFI, fintech will have a fundamental impact on the operating model of asset managers, distribution intermediaries and services providers. Fintech should not only allow the investment management ecosystem to increase in efficiency, it should also enable the industry to provide better customer experience and that, at a cheaper cost.
&8220;The asset management industry has a once-in-a-generation opportunity to re-imagine and modernize its distribution model to address market and operational challenges – for future and current investors,&8221; Voss said in a statement.
The new generation of investors will redefine the service level expected from asset managers by imposing more interaction with the brand, the report says. It notes that there is also a strong #need for online and enhanced execution platforms. This includes market insight, wealth reporting as well as social investment interaction with peers.
The report further dives into the key fintech innovation trends which are expected to redefine the industry.
Machine learning will enhance prediction-based portfolio management techniques.
Digital investment platforms and #robo-advisors will become more and more popular, especially in execution-only-driven D2C. They will also enable a strong investor education about products and #their related risks.
Peer-to-peer lending is on its way to become an alternative asset class.
Big data offers a lifetime opportunity for investment management actors to make use of and create value out of the enormous amount of information at their disposal. Possibilities include digital wealth reports, market intelligence, and peer comparison insights to the end investors.
Nevertheless, the increased digital interaction on online platforms will increase cyber risk, a top priority for digital businesses.
Asset servicing providers can leverage the benefits of blockchain #technology to offer a cost efficient and automated asset-servicing model.
Infographic via Deloitte
The report urges Luxembourg actors to actively drive the fintech innovation locally, as well as engage with disruptors, modernizers, and enablers in order to be ahead of developments and avoid relying on innovation from abroad.
The report advises for greater cooperation, calling for the investment management ecosystem to collectively explore initiatives in terms of enhanced online trading platforms, white label data analytics, managed services, regtech, blockchain or digital distribution passports.
The organizations foresee further growth and tech developments in the sector. It predicts that in the near future, many more companies offering technological solutions streamlining the current operating model and addressing the needs of new generation of investors, will be entering the market.
As fintech grows, so will competition. Hence, the report advises incumbent firms to #adapt to this emerging trend. A possible strategy would be for them to develop their own technological solutions. They can also collaborate with fintech companies or even absorb them in their business model.
This technological shift will be a challenge for incumbents but will also bring many opportunities.
Get Deloitte Luxembourg and ALFI&8217;s &8216;How can Fintech facilitate fund distribution?&8217; whitepaper: http://www2.deloitte.com/lu/en/pages/technology/articles/how-can-fintech-facilitate-fund-distribution.html
Featured image by Denphumi via Shutterstock.com.
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