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Banking Business Models

Future of Banking Business Models & What it Means for Service Providers

Advancements in technology put all current banking business models under scrutiny. With digitalization emerging as a universal trend, disruptive new entrants may fundamentally change the competitive environment, from how banks enable customer interaction to managing middle and back-office operations.

Innovation is challenging traditional processes across the entire value chain. Here are examples of game-changing disruptions that can be used in banking.

  • Gamification – Offers a meaningful and enjoyable customer experience.
  • Process automation – Offers large-scale cost reduction combined with increased flexibility and accuracy of back-office tasks.
  • Digital solutions – Offers solutions such as Robo-advisors that enable automated investment advisory services.
  • Biometric technology – Allows seamless and secure digital authentication.
  • Blockchain – Simplifies the payments and transactions world.

A Spotlight on Customer-Oriented Business Strategies

While large banks are reluctant to discard the vertically integrated business models that drive their profitability, banking must evolve from reliance on a single, vertically integrated business model to multiple non-linear models and roles in the value chain to succeed.

Owning an end-to-end value chain and selling your products no longer guarantee success. Creating value for customers offers new paths to differentiation and growth but requires flexibility and vision to reimagine and ‘package’ compelling propositions that focus on customers’ needs and intentions.

Future business models will emerge from three main strategies.

Banking as a Platform (BaaP)

It enables third-party fintech developers to build products and services with banks’ tools and infrastructure for creating customer experiences. Building BaaP architecture without constraints from legacy systems will create application stacks that are building blocks.

They are accessible to third parties through an API layer and mixed to create new products and services. The banks provide security, authentication, and compliance, while fintechs provide other capabilities and services.

For example, Yolt, an ING venture, aggregates ING and partner products, offering them to customers.

Banking as a Service (BaaS)

BaaS enables business through a unified digital channel. But they are not APIs. In this service-enabled approach, the platform owner offers specific services to enable third parties to provide their services.

For example, Ping An’s One Connect platform sources capabilities through the Ping An group and other companies, such as tech startups. Their clients use this under a SaaS model offering.

One Connect is becoming a leading provider of services to financial institutions in China, used by more than 480 banks, 40 insurers, and 2,400 financial institutions.

Banking as a Marketplace (BaaM)

Banks are now a marketplace that offers a range of financial products and services from other providers. Regulations like PSD2 enable banks to build open APIs to give others access to their customers’ information and use competitors’ APIs and innovative fintech solutions to create alternatives.

There are marketplaces where enterprises offer banking, fiscal, accounting, and legal services. When a customer needs a financial service that is not available with the bank, the bank refers the customer to a partner.

With BaaM, new entrants get to a level playing field where the BaaM facilitates transactions between the consumer and the producer, amplifying the network effect.

What Does This Mean for Service Providers?

With digitalization, specialized firms focus on specific parts of the value chain and challenge incumbent players. Here are five possible business models enabling each other in a particular banking ecosystem.

1. Trusted advisor

Service providers choosing this model will focus on economies of scope and gain a high share of their client’s wealth by building upon clients’ trust and operating beyond pure investment or transaction advisory services.

An open-architecture product portfolio encompassing proprietary and third-party products is a prerequisite for offering advisory services focused on client needs. They offer tailored value-added services, financial education, or work with real estate agents, corporate finance advisors, and philanthropy experts to deepen client relationships and increase client loyalty.

2. Product leader

‘Product leaders develop innovative products and command premium prices. They enable banks to gain market share quickly and maintain a first-mover advantage where product quality and performance are key.

Central to their value proposition are superior insights into technological and financial engineering developments and the capability to translate client needs into new products.

3. Transaction champion

Transaction champions exploit economies of scale with other providers, banks, or non-banks. They build on a standardized offering at a low cost to end clients and third parties by white labeling, act as transaction consolidators, and offer custody and depository services.

Integrating into an extensive network as a correspondent financial institution allows them to offer connectivity that smaller banks may not maintain by themselves. Additionally, they may benefit from the value chain disaggregation by becoming the banking platform for unlicensed new entrants.

4. Managed solutions

Players choosing this model provide specific banking solutions to providers. For instance, their specialist offering allows banks and non-banks to break up their internal value chain and source capabilities from the ‘managed solution provider.’

Their focus is to become a solutions provider than providing single services, like regulatory insights, specialized investment advice, and non-core processes like Know Your Customer (KYC), tax, and payments.

5. Universal bank

Universal banks achieve scale in their business lines to achieve low-cost levels and efficiency. They offer product offerings across retail, corporate, private, asset management, and investment banking. Their key value proposition is maintaining control over front-to-back processes and reducing value chain depth to 50%.

The aim is to provide ‘universal banks’ with greater flexibility to tailor to client needs, particularly by offering sophisticated products and services leveraging capabilities across business divisions. Their diversified business mix will reduce the revenue volatility if the bank can manage the complexity efficiently.

To conclude, service providers/banks must do the following:

  • Assess their capabilities, strengths, and weaknesses and compare them against peers.
  • Understand recent developments and industry trends and share across the organization.
  • Consider varying future scenarios considering current uncertainties, and assess each business area against them.
  • Prepare for inevitability and imminent changes facing the industry irrespective of scenarios.
  • Conduct honest discussions about the scenarios and suitable business models.

Draup’s sales intelligence platform can help banks and financial institutions implement cutting-edge solutions to build deeper relationships with customers and analyze data monetization opportunities.

Service providers can use real-time insights to identify automation trends through rigorous analysis of data points. Draup’s insights from the Signals Cast app to explore trending use cases and guide service providers to proactively identify the right opportunities, win customers, and retain existing ones.