Banking Industry: Where Are the New Business Models Headed?

In .Business Transformation, .Financial Services, Blogfest-en, Uncategorized by Baufest

Stating that new digital-native players are challenging traditional banks and even gaining market share from them is a story that by now feels repetitive.

Monday 4 - December - 2023

What’s interesting is recognizing how fintech companies, neobanks, and even large tech companies generate revenue through innovative business models and by offering more agile, accessible, and customer-centric financial services, which have already raised consumer expectations. By understanding these novel proposals, the new ways they provide value to consumers, and how they monetize services, we can anticipate the future of banking and banking systems. Moreover, these innovations, which have so far posed a challenge or a threat to banks, “could also be a source of strategic strength as banks incorporate them to complement their core.”

What is observed, at least in potential terms, is that digital banking business models allow customers to engage more and sign up for additional financial products, thereby exponentially increasing per-customer revenues.

So, what are the main shifts in focus that the new players in digital banking bring? Essentially, they change how financial services are integrated into people’s daily lives. Moreover, they tend to operate under the platform model. They focus on the customer experience and strive to simplify both the user journey and the features of the product or service.

Up to this point, new digital banking proposals worldwide have done a great job, especially in the onboarding process. However, it’s also true that from now on, they will have a lot of work ahead, as they must demonstrate their worth throughout the customer lifecycle with complex products such as banking for small and medium-sized enterprises, mortgages, investments, and financial management, among other things.

Banking Services

Beyond the distinctive focus brought by the new players, the reality is that there are several macro trends facilitated by technology that are reshaping the financial services ecosystem to varying degrees. Among them:

  • Embedded finance, defined as the integration of financial services (loans, payment processing, or insurance) into non-financial company infrastructures, without the need to redirect to traditional financial institutions.
  • Open banking practices, which provide external providers of financial services with open access to banking, transaction, and other financial data from banks and non-bank financial institutions, using application programming interfaces (APIs). This model has the potential to create a more competitive and customer-centric banking ecosystem

The open banking model, for example, gives rise to schemes such as Banking as a Service (BaaS), which allows fintech and other non-bank entities to partner with traditional banks to access their banking infrastructure and provide services such as deposits, loans, and payments.

In any case, what seems clear is that new open ecosystems based on partnerships, with intersectoral and complementary value propositions focused on consumer needs patterns, have the potential to deepen the relationship of banking entities with their customers and keep value circulating within the ecosystem. This collaborative model is in its early stages, and everything suggests that it will evolve and adopt forms that are not entirely predictable today.

Digital Banking

In a study conducted in the United States, 61% of consumers said they were “somewhat or very likely” to switch to a solely digital bank. The survey also revealed that, despite continuing to choose traditional banks as their main provider, consumers of all generations are using non-traditional financial tools more than ever and for more purposes. Additionally, almost half of consumers said they would probably use a banking service offered through non-financial companies such as streaming providers (48%), internet or wireless providers (48%), employers (47%), and national retailers or stores (46%).

On the other hand, another survey found that four out of ten customers now have an account with an online bank. Of these, 36% check their banking app at least once a day, and an even higher proportion (58%) says that online or mobile services are their preferred method of dealing with their bank. Furthermore, 67% say they would be tempted to use an AI-assisted system to manage their account. However, according to the report, the demand for a digital experience is also tempered by the fact “that many consumers still demand human interaction with their banks for various key issues.” Moreover, while consumers expect their banks to provide the intimacy of a personalized relationship, they also naturally want confidentiality and respect for the privacy of their data, which also draws a fairly thin line.

Personalized Financial Services

So far, modern digital banks have been able to capitalize on the changing preferences of millennial and Generation Z customers, who prefer to use digital channels. And they did so “by offering simple and convenient mobile and online banking services that meet the needs of tech-savvy consumers.”

Facing this challenging scenario, traditional banks don’t necessarily need to copy others’ strategies. But they would have to pay attention to some fundamental premises. For example, they could organize around the different needs of customers: entities must move away from focusing on their own financial products and services and put the customer at the center of their strategic designs.

Today, organizations in the sector have the advantage of being able to use technology and data to integrate more deeply into the lives of customers with real-time banking services. They have historical and current information about their customers, and new tools that allow them to move towards hyper-personalization and ensure frictionless experiences, which is also crucial in the new scenario.

At the same time, emerging technologies are revolutionizing digital banking itself. For example, new developments in artificial intelligence (AI) facilitate smarter financial management. With innovations such as chatbots and voice assistants, fraud detection algorithms, and solutions for process automation, AI collaborates to improve the customer experience and streamline operations in the banking sector. Meanwhile, blockchain technology optimizes security and transparency and enables decentralized finance (DeFi) initiatives.

Advanced analytics has also become a key tool in digital banking, allowing entities to understand customer behavior more deeply, improve decision-making, optimize risk management strategies, identify trends and opportunities, and develop more accurate predictions.

To provide outstanding and distinctive experiences, banking entities need to integrate existing customer data sets. They must harness data knowledge through agile technology stacks to reshape their business models and achieve hyper-personalization. And to do this, they have to strive to develop and plan data strategies.

Future Banking

Beyond the fascination that all these new developments and solutions may produce, ongoing digital transformation does not solely involve applying new technological tools. As an analyst indicates, the central point is to choose a business model suitable for the rapidly evolving digital landscape.

In this context, some suggest that economic forces and financial technology have put an end to the universal bank model, and that the banking of the future will be based on forming networks of specialized platforms that traverse different industries, giving rise to “ecosystems that meet customers’ needs in new ways.” From this perspective, the future of banking would be disputed in five competitive cross-industry areas: everyday banking, investment advisory, complex financing, wholesale brokering, and Banking as a Service (BaaS).

At Baufest, we continue to closely monitor the transformation of the financial services industry and collaborate to enable banks to transition to the financial services of the future. We help them use technological solutions and customer knowledge with much greater depth so that they can offer services when consumers require them, and even anticipate their needs.