At the beginning of the year, I was invited by the IBM Institute for Business Value (IBV) to join 44 IBM global experts—members of the Industry Academy and Academy of Technology—to reflect on key trends driving actions and investments across the industry in 2021. We identified 8 trends that will likely dominate and push banking and financial markets leaders to act:
- Muted financial performance
- Accelerated digital adaptation
- New cloud-based business architectures
- Escalating competition
- Operational resilience challenges
- Increasing open and free data
- Security and fraud risks
- New ways of working
Let’s explore the industry’s intensified competition both inside and outside of financial services, that which is blurring the line between banking and non-banking.
A decade ago, the fintech global startup movement found itself at the intersection of maturing exponential technologies and the emergence of new business models in financial services. Captive user experiences are start-ups’ competitive advantage, tearing down barriers to entry, winning clients’ trust on frictionless interactions, and hyper-personalizing contextual experiences.
Today, the London Tube can be entered by waving a smart phone, tapping a credit card, or unloading spare pocket change instead of holding physical travel documents. Spare money can be retained on digital wallets and invested on automated trading solutions customized with financial goals and ethical preferences.
Digital competitors have made significant inroads into payments, retail deposits, consumer lending, wealth management, and asset management, offering end-to-end customer experiences focused on convenience. Competition continues to escalate with Big Tech giants and other non-banking industries, such as telecommunications, consumer products, and leisure, which are offering digital financial services on cloud native platforms. Many of these competitors bring innovative thinking for user-oriented engagement within nonbanking ecosystems, offering a truly customer-centric perspective to banking that adapts to changing client expectations and market conditions, without the burden of legacy technologies.
Banking and financial markets are besieged (but not yet conquered), as financial institutions strike back by creating innovation labs, building links with fintech ecosystems, and advancing new platform-oriented offers. As artificial intelligence (AI) models and advanced analytics continue to improve, banks can prioritize better use of data and analytics, digitize end-to-end internal processes, and invest in front-end innovation to leverage key advantages of platform economies. Banks can also contextualize user experiences inside competing industries to generate business value.
It’s a blurry business
Today’s competition is intensifying and changing in nature. Platform players are moving their strategies “outside-in,” expanding their businesses to include financial services by leveraging privileged touchpoints with banking clients. Platform companies, such as Facebook and Apple, have been flexing their digital muscle. They leverage the power of their non-banking ecosystems to reduce friction between customer value chains across multiple industries, including banking and financial markets.
Platform companies connect with banking clients by embedding financial services inside their customers’ digital lives and businesses in a progressive process that bundles travel, commerce, entertainment, communication, and many others.
China has been at the forefront of this transformation. Alipay and WeChat are used by over 1 billion Chinese residents to communicate, make payments, book a restaurant, buy insurance, and even hail a taxi on a digital venue that resembles a “super-app.” In recognition of their pervasive capabilities, the digital prowess of these companies has attracted stricter regulatory oversight, triggering a holistic review of digital financial services.
Competition is also shaping collaborative models and forming partnerships between banks and Big Tech. For example, Google recently announced the launch of Google Plex checking accounts, as an initial partnership with 11 financial institutions (3 big banks, 4 community banks, 2 credit unions, and 2 digital banks). The intent is to facilitate entry to a digital banking relationship based on a 360-degree view of customers' payments and financial management activities.
Financial institutions that partner with Big Tech players beyond banking interfaces understand the advantages of embedded products and services within a non-banking ecosystem platform. The choices for a strong digital capability will likely be to build, acquire, or participate in external platform models in ways that allow financial institutions to retain value and remain relevant—but for how long? As customers adapt more and more to a digital life, is it the digital enabler that becomes the primary source of trust?
Striking back
Leading institutions are taking the reins to innovate “inside-out” and retain ownership of client engagement on non-banking platforms. Successful responses to intensifying competition is clearly illustrated by developing differentiated value propositions that address new models for consumption of financial services.
The recent IBV “2021 CEO Study: Find your Essentials” reveals CEOs’ key objectives over the next 2-3 years. They will likely focus on shared purpose, open ecosystems for platform access, and secure sharing of data. By tapping into partner ecosystems, banks’ can expand their source of revenues and optimize the competitive advantages that open innovation enables.
The firms that aggressively pursue and establish flexible partnerships can proactively provide real-time responsiveness and relevant customer feedback, which are essential with shaping a relationship and defining a differentiated experience. Evidence from the CEO Study indicates that banks are taking a more outward-looking perspective to improve performance.
For example, the State Bank of India (SBI) launched an online marketplace named YONO (You-Only-Need-One), which connects the bank to non-banking client journeys offering lifestyle products. The convenience is a one-stop-shop solution for their banking, shopping, lifestyle, and investment needs, capturing the customer at the moment of decision. Clients can onboard seamlessly to a digital bank with access to a financial superstore for investments and other services. All services are connected end-to-end by AI-advanced analytics generating timely customer insights that lead to tailor-made offerings and campaigns (see, “The rise of a financial tiger”).
DBS Bank is another example. With a goal of “making banking invisible,” DBS Bank offers online marketplaces for multiple lifestyle needs, from property and travel, to cars and utilities. In a recent IBM interview, DBS Bank CEO Piyush Gupta affirmed that, “If you can embrace agile setups, experiments, and constantly nurture a learning culture, then you become adaptive and nimble, which means you can respond a lot more quickly to opportunity and changes in the environment.”
Payment providers have also responded to demands for better customer experiences, fueling the need to modernize and digitally transform. Payment contextualization is typically the starting point to re-build customer engagement inside non-banking ecosystems.
Consumers have heightened expectations that digital payments can be fulfilled immediately using any device, network, and channel. Partnering within and across ecosystems on open banking platforms permits sharing the costs of running business-critical, yet standard, operations.
In late 2020, US fintech start-up Stripe teamed up with four banks to propose offerings to merchants and vendors that use Stripe's platform for the small business marketplace. Stripe's clients will be offered Federal Deposit Insurance Corporation (FDIC)-insured debit cards and bank accounts through banking partnerships.
Leading banks move “inside-out” connecting with consumers on non-banking platforms. They leverage new cloud-based business architecture, underpinned by data and AI, to operate intelligent connections across practically any businesses and any users. Essentially, they compete with omni-intelligent connections, on omni-businesses, and omni-users value-generating interactions.
To stay relevant, banks that define a clear sense of purpose and marry this purpose to the success of their customers, beyond the digital touchpoint, can be winners in the platform economy.
An action guide for the road ahead
Innovation is never simple, especially when attempting to transform established business models inside-out. Innovation is a journey that requires inclusive culture and open mindsets to align multiple stakeholders’ interests through a continuous process made of design thinking, convenient customer journeys, quicker processes, and fast-tracking approvals. A good starting point is to explore and leverage the four pillars of digital transformation:
- Build a digital bank and transform the business model around core business and purpose
- Create a financial hub that blurs the line between business units, and display a 360 view of client across bank products and services
- Launch an online platform that engages clients in non-banking activities to stay relevant in key segments of their personal and business life
- Enable end-to-end (E2E) digitization of bank processes and customer journeys.
A strong digital capability foundation is founded on purpose and anchored on trust. It requires the trust of your employees, customers, partners, and of regulators in the reimagining of your business. It also requires shifting the organizational mindset with well-informed—and always bold—moves that matter.
Digital platform players have realized the power of building around customer ecosystems, reducing friction across industry value chains to deliver on customer needs. Financial institutions can learn—by going beyond banking—to integrate their products and services into customer ecosystem platforms. Building or participating in platform business models allows financial institutions to capture a greater share of the broader value incorporated into ecosystems.
It takes courage to bet on a big idea–that moment is now.
To learn more about how to set up a platform strategy to digitize financial services on user ecosystems, you can download the IBV report, “Banking on the platform economy".
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