Traditional banks in most developed markets are not going to have a Blockbuster moment — having their business model become irrelevant within a period of just a few short years. Despite the advances of fintech, there is just too much customer and regulatory inertia for such a radical shift to occur so quickly.
However, many banks are clearly suffering from disruption, in which profits are squeezed by new competitors, new technologies and changing customer expectations. Rather than a disruptive big bang, the real danger is that these banks will just fade out of the picture over time.
Research conducted by Accenture suggests that many consumers are ready to do without conventional banking relationships, preferring to assemble and manage their own portfolio of financial products and services, from mobile wallets to robo investment advice.
But the shift is more apparent in emerging markets. In southeast Asia, where traditional bank models never took hold, almost two-thirds of customers are ready to build their own banking experience from component parts. In modern banking markets like Canada, Australia and Scandinavia — which weren’t disrupted by the global financial crisis — the go-it-alone group of customers is in the low-20% range, but growing.
The willingness of consumers to look for banking alternatives reflects the fragmentation of what used to be a very vertically integrated business — banks controlled all aspects of the value chain, from the insured balance sheet all the way through to distribution and customer management. In Europe, that value chain is being broken up by new regulations like Revised Payments Service Directive (PSD2), which severs the link between underlying deposit accounts and payments.
In other markets, like the U.S., encroachment from fintech startups and GAFAs (Google, Apple, Facebook and Amazon) are creating disruption. For all the talk of the “Uberization” of banking creating a better customer experience, the real impact of Uber on banks may be that it is originating tens of thousands of small-business accounts for its partner Green Dot as it signs up new drivers.
As traditional bank models begin splintering, Accenture analysis suggests that up to 35% of market share may migrate to nonbank players over the next five years. That isn’t a Blockbuster-type implosion, but certainly a worry for established banks that are already under profit pressure from low interest rates and increased regulatory costs.
Many of these banks have responded with aggressive investments to become more competitive in a digital world. For example, Canada’s Bank of Nova Scotia is investing $1 billion in new technology and BNP Paribas is investing €3 billion ($3.37 billion) to build the “bank of the future,” leveraging the success of its digital-only brand, Hello bank!
But instead of questioning the fundamentals of their business model, many banks instead try to become a digital version of what they have always been. These “digital relationship managers” want to continue participating across the value chain, providing a broad product set to a wide range of customer segments — ideally playing the role of trusted adviser in both physical and digital channels.
This is a seductive approach, since it feels like incremental change and an evolution of what banks have always done. However, the reality is that new entrants are raising the bar on what it means to create a true digital relationship. For most banks, the seamless flow of information across channels, personalization of offers, and wallet consolidation incentives through relationship pricing are still aspirational. The promise of artificial intelligence is that it dispenses with traditional product silos and makes banking very simple for customers: invest for the best return, borrow at the cheapest rate and pay by whatever method is easiest and most rewarding.
Yet tearing down product silos and offering this type of straightforward but customized proposition is many years away for banks, especially those saddled with old technology and product-centric organizations.
While banks struggle to redefine their business, fintechs and the GAFA players are working from a blank canvas and could leapfrog what banks currently offer, grabbing market share in the process. Many bankers believe that the fintechs won’t want to have a regulated balance sheet. But until last month, there weren’t many people who thought that Amazon would want to own 430 physical grocery stores either.
The danger for traditional banks is they cannot just digitize themselves. If they don’t renovate their business model, they risk going the way of video rental stores and physical travel agents. In the mid-1990s, there were 34,000 travel agents in the United States; today that number stands at 13,000 after years of disruption by Expedia, Priceline, Travelocity and other digital players. Those that survive have a business model defined by a negative: “What can’t I do on a website?” Their response has been to transform themselves into travel advisory businesses serving niche markets, such as cruises, multidestination trips and group travel. Revenue per customer has gone up and the industry has survived, but the niche it serves shrinks every day.
Like the travel business, banks that fail to transform may suffer a slow decline, retreating into a niche defined by the type of banking that you can’t do on your phone. However, there are other options that involve making clear business model choices and then executing with precision.
A case in point is Bank of New York Mellon, which ditched its retail bank to build a category killer in asset servicing — a scale-sensitive business with a competitive advantage and superior profits. Another option is to retreat behind the curtain and provide balance sheet and product manufacturing to businesses with a stronger customer franchise. This may smell of defeat, but in a world where fee-based businesses are suffering from price deflation while interest rates are rising, being the custodian of the balance sheet may be a very attractive business model.
So, while the digital relationship manager model is seductive, it is only one option facing banks as they look to compete in a fragmented and increasingly competitive financial services landscape. In an environment where clarity of business model should drive investment decisions and go-to market strategy, the worst choice may be no choice at all.