Digital Banking Transformation Takes Complete Rewiring

Amazon, Google, and others are chewing into banking services in clever new ways. Consumers clearly love all these new choices. How can financial institutions compete? Only by rethinking everything.

According to a global study from Accenture, two in five people are “digital nomads” — people who prefer a DIY approach to managing their finances.

“They’re open to the idea of self-assembling their own suite of banking products from component parts — like a prepaid debit card, a robo-advisor and a personal financial management app,” Accenture says in their report.

This boosts the viability of new banking models in banking, the report’s authors argue. According to Accenture, there are now four “platform banking models” financial institutions must consider as they pivot to an open banking strategy:

  1. Proprietary platforms using open APIs can make data accessible to developers so they can offer financial products directly to customers.
  2. In a joint venture model, a single provider may encourage collaboration among fintechs to create and control a shared interface.
  3. A licensing platform enhancing “network effects” by where one entity create a single interface around a variety of providers.
  4. In a shared platform, no single party controls development, and multiple parties may bring the interface to producers and consumers.

Accenture cautions that more people are enrolling at online-only digital banks — 19% globally today. Futhermore, 31% of all consumers and 41% of Gen Z say they would consider buying banking services from a “GAFA” company — Google, Apple, Facebook, and Amazon. Ultimately this represents a serious competitive threat to traditional banking providers. If they don’t figure out how to become part of the digital nomads’ world, they could eventually see their market share erode to zero.

Tectonic Technological Shifts Accelerate Digital Transformation

Peter Sidebottom, Managing Director for North American Banking & Capital Markets Strategy at Accenture, recalls how 15 years ago, the only way financial institutions could expand into new markets was through mergers, acquisitions, and good old organic physical expansion. Today, digital is arguably the best — possibly the only — route for future expansion.

How are banking providers responding? Sidebottom says many traditional financial institutions are working hard to get to the point where they can launch an all-digital bank.

“It’s on everybody’s agenda,” says Sidebottom.

The focus has evolved away from simply pushing what institutions already do into a digital-banking mold — a new, virtual storefront applied to the same old model — and instead into building digital banks based on end-to-end digital capabilities, Sidebottom explains. Institutions that want to win will be those able to personalize services by rethinking its approach and infrastructure down to the core operating system, according to Sidebottom.

Nearly one in five players in the financial industry entered the market since 2005
Number of players in the financial industry (2005) 24,000
Players who have left (sold, closed or merged) -8,300
New subsidiaries of incumbent banks +400
New banks licensed after 2005 700
New payment providers/platforms +1,900
Fintechs (both B2B and B2C) +600
Number of players in the financial industry (2017) 19,300

Source: Accenture

Many of the institutions that replaced traditional players came into the field with more specialized intentions, often payments-related. They are picking off traditional players one product at a time; they aren’t trying to simply become new me-too banks. The learning curve to be a full-service player is both steep and long, so the odds favor the narrower niche player who selects a category with a strong potential payoff.

Making the Transition: The Path Forward Is Paved With Data

Accenture thinks the turmoil facing senior leaders in the banking industry will not subside for another five to ten years. There will be major shifts in what markets expect and what providers can deliver in that time, and Sidebottom doesn’t expect any “new normal” to develop for a good long while.

For instance, traditional institutions have long thought of themselves being in the “money” business. But Accenture says that notion is outdated and must be retired. A big part of the banking industry’s digital revolution is data. According to Sidebottom, data analytics will be a major factor determining who wins and who loses.

What will it take to get there? A shift in spending and strategic priorities, for starters.

“Digitization in banking is still relatively slow,” says Accenture in its report. “Banks spend around 70% of their IT budgets on traditional IT services (such as maintaining core legacy systems) and only about 30% on non-traditional solutions related to digital transformation, such as cloud or data analytics.”

Think about the GAFA model, where large sets of data represent their core strengths. Most financial institutions aren’t there yet, but Sidebottom says that the industry will eventually “have leaders who deeply understand data science.”

Such shifts would help to usher in a time where data would drive development of new services, become the heart of other new services, and assist in the personalization of services for consumers.

In the meantime, many institutions have not yet made key strategic decisions because “they require a level of technological understanding that most executives in the banking industry simply do not have,” as Accenture explains.

Strategic Roadmap and New Business Models

Accenture outlines the following three business models that traditional banking providers can choose from in order to be relevant and grow:

  1. Use digital to expand market share through rapid deployment of better and cheaper versions of existing services. The fastest way to do this is to partner wisely with digital platform players.
  2. Generate more revenue from existing customers by identifying and offering new value-adding services they want. Some banks, for example, are providing data to small- and medium-size enterprises about consumer purchasing behaviors.
  3. Develop new kinds of services and businesses beyond banking—things like consumer lifestyle tips or purchase-related tools and resources (think home, auto or big equipment) or entrepreneur-centered platforms for small-business customers.

Strategically, Accenture says banking providers must understand the structural changes in the market and determine which business models will work best, where competition is likely to come from and how best to ignite the rapid evolution necessary to get there.

“Be crystal clear about where incremental revenue growth will come from through the business-model choice,” says Accenture. “Create a technology and operating model aligned to the destination business model.”

And above all else, Accenture says they need to stop doing things that are simply distractions that sap scarce resources.

To accomplish all this, a change in perspective will be needed, as traditional institutions partner with more new fintech players. Accenture says that success here requires “giving up exclusive ownership of customers” — something most banks and credit unions are comfortable with. And, as Accenture points out, financial institutions’ caution here isn’t unreasonable. Giving up some part of the control of the relationship with consumers represents exposure.

However, Accenture adds that “in the near term, these partnerships can help banks reach new customers and demonstrate that banks can deliver the type of customer experiences that consumers have come to expect from digital players.”

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