Most CEOs of the early 2000s bequeathed to their successors the same business model that they inherited from their predecessors. But when the CEOs of the following decade grappled with their biggest challenge – namely, how to stay relevant amid rapid change and uncertainty – the business model was often at the heart of the problem – and digitisation, invariably, at the heart of the solution.
Covid-19 has merely pushed this situation into overdrive. As the pandemic creates recessionary conditions with diving interest rates and rising credit losses, banks are searching for a model that will enable them to respond to the crisis today, recover from it in time, and build back a healthy business in the future. Evidence – such as the changing composition of the S&P 500 and similar leaderboards in recent years – strongly suggests that that model is overwhelmingly digital, and more often than not, is a digital platform. This is bad news for banks lagging on the digital front: not only have they already lost out, they’ll also find it extremely difficult to stage a comeback through the pandemic. On the other hand, the digitally evolved banks will widen the gap on competitors as they recover faster and better from the crisis.
Without exception, the banks we have spoken to say they are experiencing a sharp acceleration in digital adoption across customer segments. Customers are not only banking more on digital channels but also consuming more products digitally. Once the dust settles on Covid, customers may partially revert to physical banking, but a total return to how things were isn’t going to happen. In the meantime, the industry is responding to the demand for digital banking by digitising as much of the lifecycle, from onboarding to sales to service to engagement, as possible. The progressive banks are going a step further to recast their business into new digital models.
Banking business model options
A business model change may be approached at three levels – value creation, value delivery and value capture. By and large, the traditional universal bank is built on a pipeline model where the bank does everything, from manufacturing to selling to distributing, on its own, using in-house resources. This vertically integrated pipeline business model is breaking apart, giving way to fragmenting value chains and platform business models. Here, “business model” is an umbrella term covering customer focus or segment, distribution channels, products and services, ecosystem approach, the business applications landscape, operating models, and workforces (people and competencies). All of them are reshaping the banking business model to a greater or lesser extent.
Since the choices are finite, each bank needs to pick the one that is most relevant to its context and, importantly, that provides a clear point of differentiation in a commoditised market. Broadly, a traditional bank can choose to focus on a particular area within its existing model, or evolve the entire model into something new. Note that there would be some overlap between the two tracks.
Excel in a chosen area
If a bank does not wish to exit this model altogether, it can still make changes by choosing to focus on a particular area to excel in. For such a bank, the choices are to become:
• A scale leader through organic growth or strategic acquisition
• A value leader that leverages deep automation to be the most cost-efficient player in the market
• A customer experience leader providing personalised experiences at scale
• A product or service leader excelling in its niche
• A segment player serving a select set of customer segments or communities
Assume a significant role in the value chain
When a bank decides to evolve the pipeline business model to a platform business, where it relies on a vast ecosystem of partners to ply its trade, it can morph into:
• A manufacturing bank making best-in-class products that can also be white-labeled and sold to ecosystem partners – for example, Marcus by Goldman Sachs
• A value aggregator that curates best-in-class financial and non-financial products to fulfil more than just banking needs – such as Paytm in India and Starling Bank in the UK
• A distributor that only acquires and serves customers without assuming any middle and back office burdens – such as Moven and N26 in the US, and BankOpen in India
As mentioned earlier, there is often some overlap between the two approaches: for instance, a manufacturing bank can also be a cost-efficient value leader. Also, most incumbent banks will likely pursue different options in different business segments. And while each bank will chart its own path based on its unique circumstances, because of Covid, all banks, without exception, will feel the need to expedite transformation to survive the next normal.
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Puneet Chhahira, Head of Marketing & FinTech Engagements, Infosys Finacle