The banking business model has proven to be resilient to disruption.
This is primarily due to the adaptability of incumbents (e.g., operating model innovations) and high barriers to entry. These barriers include stringent regulations, customers’ demand for trust in banking service providers, and the necessary capital requirements to start and operate a bank.
Tech trends and threats
However, innovations that change the way value is offered to consumers threaten the integrity and resilience of the traditional banking model.
New trends in financial service offerings such as embedded finance and decentralised finance threaten the integrity of the traditional banking business model.
Examples include Uber’s embedded payments and Afterpay’s cannibalisation of unsecured consumer credit. These trends also eroded the value of the ‘trust premium’ banks have held for so long. For example, Nano Home Loans, a non-bank fintech lender established in 2019, offers to approve home loans at highly competitive rates within 10 minutes of an online application; this value proposition has resulted in faster-than-system growth rates.
While fintech and innovators dismember the banking value chain, incumbents also face the very real threat of highly capitalised Tech Giants. Many with deep customer connections and loyalty, are stepping directly into financial services, potentially redefining the category. For example, although Google has abandoned plans to launch Google Plex (a transaction account for Google Pay), the proposition found strong consumer endorsement of innovative features that embedded financial services into everyday lifestyle choices.
Finally, regulators are deliberately adjusting their posture to increase competition (e.g., Open Banking) and reduce entry barriers (e.g. the Restricted ADI offers a limited risk fast track for small challenger banks to start operating as a bank in Australia).
Consequently, banks in Australia are (and should be) exploring alternative business models to deepen their value pools, entrench customer relationships and expand their value propositions.
As banks evolve their market role, they will also need to adapt their business models. Many of the innovations that have been a threat may also be a source of strategic strength as they incorporate them to complement their core.
Adapting the business model – platforms and ecosystems
Two new business models have emerged as digitalisation alters the relationship between service providers and consumers: two-sided platforms and orchestrated ecosystems of partners.
Although platforms and ecosystems are not mutually exclusive, they are distinct. Platforms reduce market friction by connecting suppliers with the consumer, while ecosystems orchestrate complementary value propositions focused on a pattern of customer needs.
Platforms and ecosystems schematic of relationships
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PLATFORMS*
Reduce market friction by efficiently connecting suppliers and consumers.
- Engage with platforms to solve a specific problem
- Interact with a platform as a marketplace, typically with filterable choice
- Consumers can sometimes also be suppliers
* Platforms can operate within ecosystems
ECOSYSTEMS
Orchestrate complementary value propositions focused on a pattern of customer needs.
- Engage with an orchestrated ecosystem across a distinguishable lifecycle of need (e.g., buying a house)
- Interact with curated products and services, with tightly focused options for each stage of need
PLATFORMS*
Reduce market friction by efficiently connecting suppliers and consumers.
- Typically offer products and services within the platform as a marketplace
- Compete with other suppliers also using the platform
- May be subject to non-financial incentives such as quality feedback
* Platforms can operate within ecosystems
ECOSYSTEMS
Orchestrate complementary value propositions focused on a pattern of customer needs.
- Offers products and services as part of a coherent ecosystem value proposition
- Participate within the ecosystem as a partner with the orchestrator
- Coordinates for shared value with the rest of the ecosystem, while benefiting individually
PLATFORMS*
Reduce market friction by efficiently connecting suppliers and consumers.
- Limited information shared between consumers and suppliers within the context of a transaction
- Proprietary technology orchestrates consumer/supplier matching and may profile some preferences
* Platforms can operate within ecosystems
ECOSYSTEMS
Orchestrate complementary value propositions focused on a pattern of customer needs.
- Data is shared across participants to continuously improve ecosystem's proposition
- Digital capabilties to enable integrated customer experiences (e.g. APIs, standardised data, CX standards)
By adopting these innovative business model options, banks can complement their basic banking model (deposits, loans, transactions) and market strengths (e.g. scale of customer franchise, valuable banking licenses, strength of balance sheet) with new value propositions to help differentiate and deepen customer relationships.
For example, Goldman Sachs pivoted to become more like a platform, expanding its portfolio into consumer banking by deploying the Marcus offering, including a credit card partnership with Apple. A goal for Marcus has been to establish banking-as-a-service – a platform business.
Meanwhile, DBS Singapore has built DBS Marketplace to orchestrate ecosystems of partnerships offering value propositions shaped to address specific lifecycle needs experienced by their customers, such as car ownership. This ecosystem model deepens the bank’s relationship with their customers and keeps value circulating within the ecosystem.
Essential building blocks for banking business models of the future
Three foundational capability building blocks are essential to establish either platform or ecosystem, business models:
Value orchestration
This includes establishing, coordinating and governing participation (partner management) while also measuring the value of involvement (ecosystems or platforms) to generate more value than the sum of the parts.
Data-driven insights
The ability to convert raw data into valuable insights on customers and operations. Harnessing the power of data can lead to continuous improvement, validation through experimentation and innovation (including accidental discovery through sophisticated pattern analysis); increasingly, this is machine-driven as AI and other advanced analytics tools become mainstream and accessible.
Digital inoperability
This refers to the ability to safely exchange information and drive functionality between participants, including orchestrating end-to-end processes across multiple participants.
Bringing these to life in a banking context involves building blocks that need to be augmented by the basic banking capabilities of financial management, payments, and risk management.
Payments are a significant capability for banks battling for consumer relevancy. Payments provide a cohesive capability for both platforms or ecosystems, and maintains a connection with the basic banking value proposition (cash, credit, and transaction). It also works to generate valuable contextual and behavioural data.
A roadmap for adapting the banking business model
In our research, Australian banks that choose to adapt and future proof their business model should start by exploring three steps:
- Assess capability maturity: Does the bank have the foundational capabilities needed to deploy the future business model effectively? If not, start work immediately as this is an investment with no regrets, while, in parallel, work on the other two steps.
- Evaluate the bank’s role in the market: How will the bank differentiate along the spectrum of an ‘utility bank’ to an ‘intimate bank’? This can be unlocked by looking at what strengths the bank already has (e.g., if its cost discipline, it may be more suited to a ‘utility’ play)?
- Identify adaptions to the current business model: Does the bank need to adapt its historical business model by incorporating a platform or ecosystem play?
Expand the boxes below to find out which questions to consider at each step.
❯ What capability gaps will prevent us from exploiting future banking business models?
❯ What are our options of accessing those foundational capabilities? ❯ How do we defend ourselves in the interim?❯ Should we be more a ‘utility bank’ or an ‘intimate bank'?
❯ What are the trade-offs and hybridised options that complement our strengths?❯ What do our target customers need from us?
❯ What business model options best suit our strategic ambitions and role in the market?
❯ How would our customers’ needs be best served?
❯ How do we architect our capabilities to differentiate?
A call to action for the banking industry
The banking industry faces a volatile future, but one that is rich with opportunity.
Australian banks that prepare to adapt their business models now by establishing the basic capabilities of the future and agreeing between the board and executive on the bank’s role will be best positioned to take advantage of those rich opportunities.
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