FinTech 100

How to Change Your Business Model

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The financial services industry continues to be challenged by a number of factors including regulatory/compliance changes and constant cost pressure. In addition, formerly reliable sources of revenue are drying up, especially in the U.S. and many European nations. Therefore, financial institutions should be thinking more strategically around how to redefine their business model in this new era including identifying new sources of revenue and cost containment.

To accomplish these goals, however, financial institutions need to take a good, hard, objective look at their current business model and begin to take some bold steps to move in the direction of their current and potential customers.

However, from our discussions with financial services professionals over the past year, we have come to the unfortunate conclusion that most bankers have not yet recognized that the world as it was pre-2008 no longer exists. It appears we have gone back to business as usual: a small upgrade here, a software tweak there, and let's leave the hard decisions for the next guy to make.

Unfortunately, these are exactly the types of decisions that we believe bankers, as well as their solutions providers, need to reject. Instead, we see a need for dramatic shifts in the banking business to adjust to current and future demands, especially as technologies such as mobile are changing the landscape and have put consumers in charge of when and how they want to deal with financial institutions. Change for the industry can no longer be incremental and slow moving as more nimble competitors continue to offer new products and services.

While regulation does not make for a level playing field, that is not to say that banks need to sit on the sidelines pining for the good old days. Here are a few of the proof points we see as to why banks must adapt.

• End User Transformation — The consumerization of IT has the net result of mobile smart devices and apps touching most if not all commerce applications. In addition, end users today have higher expectations for the companies they choose to do business with including bundled products, 24/7 cross channel capability, consistent interactions, greater customization and preference recognition.

For financial institutions, these new expectations necessitate a redefining of numerous areas including customer centricity, customer service, and customer preferences.

Ultimately, the challenge for companies is how to develop the products and services necessary to deliver value based on these new expectations. Therefore, companies need to think strategically about key areas of interaction impacted by changing technology including their solution strategy, OS environment, and cost effective access management. In addition, companies need to determine the level of personalization and customization they will deliver to their end users.

• Enterprise Transformation — Once organizations have decided how they will address their external end user demands for products and services, a key next step is to look inwardly at their ability to deliver. This includes a review of crucial departments such as operations, customer support, marketing, product management, and policy administration to make sure they are aligned to support the new end user. A critical component of this review is the employees themselves, who must have the skills and tools to deliver quality and service to their customers. For example, in some departments there might be a need to use smart mobile devices; either their own or supplied by the organization.

This bring your own device (BYOD) debate is currently taking place in most if not all companies today and has a profound impact on how IT can and should support both current and future employees.

• IT Transformation — The increasing number of access channels, mobile devices, and end user/employee expectations presents particular challenges for IT.

For financial institutions to be successful today, IT can no longer dictate how end users and the enterprise interact but instead must understand the changing dynamics brought about by these technologies and adjust accordingly. This takes true IT and business alignment which starts with understanding the changing business issues in the marketplace.

Once IT has this knowledge and understands the value of supporting this model within the enterprise, it can review the organization's policies, tools, and technology decisions to help differentiate their organization.

Buffeting this need for change are back-end systems that continue to show their age as data processing throughput increases alongside the number of new requirements that need to be reflected in legacy technology environments — new products, new channels, new risk management reporting mandates, and so on. Incidences of operational outages and failures have been well publicized in the past and will become even more frequent as legacy core systems are taken to the point of breaking.

Against this backdrop of legacy infrastructure, changing technology, and real business need, we believe solution providers are in an ideal position to help financial institutions focus on the future and build a more cooperative environment that will be more efficient and allow banks to create truly differentiated services. For these providers, partnering with IT will be critical to success. Some key areas to start include:

• Change the IT operating model to drive cuts but also work across channels for more effective decision making around IT choices.

• Implement technology solutions that provide a single view of the customer through secure integrated channels and a consistent experience.

• Provide key business information such as tracking customer sentiment, usage, and profitability through analytics.

Realistically, however, we believe most financial institutions in the near term will continue to implement relatively minor changes within existing business silos to manage short term profitability expectations.

The unfortunate result will be a continued erosion of profitability under existing business models. For those willing to move more aggressively towards the future, we believe the time to do so is now.

David Potterton is vice president of research for the Global Banking, Insurance, Capital Markets and Risk Management practices of IDC Financial Insights.

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The FinTech 100 and the Top 25 Enterprise Companies in FinTech are an annual ranking of the top technology providers to financial services companies worldwide. This special report is a collaboration of the editors at American Banker and Bank Technology News and the analysts and researchers at IDC Financial Insights. The rankings are researched and compiled by IDC Financial Insights. Public relations support is provided by The William Mills Agency.

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