Well before COVID-19, the banking industry was grappling with huge challenges, including a frenetic pace of change; the pandemic only exacerbated the situation and increased the urgency of digital transformation. Microsoft CEO, Satya Nadella, captured the mood correctly when he said that, “We’ve seen two years’ worth of digital transformation in two months.”
But even without the pandemic, the inevitability of digital transformation is staring banks in the face. Consumer engagement has majorly become digital-first with 95 per cent of banking transactions occurring in digital channels. Not just that, with the increasing focus on third-party open banking avenues, it is poised for expansion that may minimise transactions through other channels.
The cost to income ratio of the top 1,000 banks in the world is around 50 per cent, way higher than the 33 per cent in the digitally progressed banks among them. In contrast, next-gen non-bank players are leveraging easy capital and digital technology to disrupt the market with new business models, such as platforms embedded with finance.
If banks are to reclaim that mantle, they must embark on an accelerated transformation journey. In fact, the only way they will survive, revive and eventually thrive in this environment is by digitising at speed and scale.
Little wonder then that they, and not incumbent banks, are the ones leading innovation: in the latest EFMA-Infosys Innovation in Retail Banking study, 74 per cent and 73 per cent of those surveyed said that leading consumer technology companies, and leading digital commerce platforms, respectively, would lead innovation in the banking industry over the next 5 years; only 30 per cent said it would be incumbent financial institutions.
If banks are to reclaim that mantle, they must embark on an accelerated transformation journey. In fact, the only way they will survive, revive and eventually thrive in this environment is by digitising at speed and scale.
Banks understand this very well: in the survey, 75 per cent of respondents voted “digital banking transformation” their top priority for 2021. Unfortunately this strong intent is not matched by execution; asked to describe the stage of their organisation’s digital transformation journey, only 7 per cent said it had been deployed at scale and was delivering as expected.
With the hope of helping banks scale digital in 2021 and beyond, we present herewith the 10 business and technology trends reshaping the industry that banks must take note of. We have arrived at this list based on the learning from our experience of serving banks in more than 100 countries. To be sure, a bank will not find every trend equally relevant; also a particular trend will not impact each bank the same way. Even so, this list is useful as a quick insight into the biggest developments and influences in the banking world.
Business trends
- Scaling digital business model innovation – to create new value and stay competitive
- Scaling digital engagement – to drive purposeful growth
- Scaling operational transformation – to bring down costs and improve profitability
- Scaling work, workplace and workforce transformation – to be the preferred employer for the best talent in the market
- Scaling risk management – to be more sustainable
Technology trends
- Scaling shift towards composable architecture – to evolve the technology landscape
- Scaling shift towards public cloud – to gain agility and scalability
- Scaling API-led possibilities – to open yourself to new age possibilities
- Scaling value with data and artificial intelligence – to enable better decisioning and engagement
- Scaling blockchain powered networks – to automate inter-organisation processes
The “first among equals” trend on this list is Scaling Digital Business Model Innovation, as it influences, directly or otherwise, all the others. Here, “business model” refers to combination of the following: customer focus or segment, distribution channel, products and services, ecosystem approach, business application landscape, operating model (including revenue model and cost structure), and workforce (people and competencies).
In practice, business model innovation occurs in one of two ways – first, by focusing on an area of excellence, such as scale, value, customer experience or product/service, without changing the basic model, or second, by evolving the existing model into something else, like say, a manufacturing specialist, pure distributor or marketplace/aggregator. While the options under each are mutually exclusive, they can overlap with those that are part of the alternative approach.
For instance, National Commercial Bank (NCB) and Emirates NBD are taking the first option to revise their business models. Saudi Arabia’s NCB – the nation’s largest lender – acquired rival lender, Samba Financial Group, to scale up its lending business to the third largest in the Gulf region.
On the other hand, Emirates NBD is going the customer experience route via Liv., its digital-only bank targeted at millennials. Liv. brings a “mobile and social first” approach to deliver a superior experience that covers not just banking, but also services, such as a curated daily feed of events, deals on food based on individual preferences, and other lifestyle-related offerings, with the help of a partner ecosystem that includes companies like Zomato, Fetchr, Voucherskout and Careem.
Other banks, such as Goldman Sachs and DBS, have created platform-based business models, in the form of a manufacturing bank and marketplace, respectively. Marcus by Goldman Sachs is a manufacturing bank that produces excellent products, which it white labels and sells. DBS has set up specialised marketplaces for pre-owned cars, utilities, real estate and travel. In India and the U.K. respectively, Paytm and Starling Bank are specialising as value aggregators, while in the U.S., Moven and N26 are acting as pure distributors.
Over the years, many incumbent banks fell behind new-age players, whose products, services, experiences and business models were superior to theirs. COVID-19 is further widening this gap. In 2021, laggard banks must focus on scaling business model innovation to recover their lost positions.
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