Banks have to adapt to a new and challenging environment or they will risk becoming obsolete. Banks have to prove at every step of the way that they are adding real value to the customer. Each financial institution has to find ways to differentiate itself in a financial world that is becoming more and more commoditized.
Pedro Pinto Coelho
Chairman and Chief Executive
Banco BNI Europa, Portugal
Open banking brings a lot of opportunities but also a lot of challenges with it. Banks are looking for new strategies to survive. Each strategy has its set of pros and cons. Please find below some of the most common strategies being used by banks:
The Renewed Model
With this strategy, an existing bank tries to renew itself by accelerating its digitalization. It launches new front ends and customer-centric platforms to attract the client. However, most of the time, the bank faces huge difficulties to move to a fully digital model that integrates the front and back end. The legacy infrastructure as well as the existing processes and staff mindset do not allow the financial institution to launch new products and services at the speed it would like.
The Startup Model
This strategy tries to create a completely new infrastructure and new offering focused on specific needs for the clients. However, client acquisition is the most challenging aspect in this case. Therefore, this model requires a large amount of initial investment to guarantee that scalability is reached within a number of years. Nevertheless, the choice of a good niche can guarantee a quicker payback period.
The Fragmented Model
The bank here will partner with fintechs that have a product or service they consider to be a unique proposition and can leverage on the bank’s client base. The challenge here is to guarantee that the bank network is able to sell the new product and service. On the economics side, the splitting of the value chain to allow each actor to have a decent return is key.
The Invisible Model
The banks that follow this strategy believe they can support a number of businesses that require banking services to cross-sell to their clients. More and more, the retail industry and a number of online businesses want to offer payments, lending and investment products to their clients without having to deal with the burden of managing a bank. The real challenge here is to make sure the bank is competitive enough in terms of fees and cost of capital to be attractive to these businesses that want to partner.
All of these models above are currently being explored, but banks should also have in mind that the “No Bank” model – where you can replicate a banking business in an unregulated environment – is becoming more and more common, particularly in the lending business. In fact, as long as the compliance side of the client is ensured and one does not require deposits to fund its business, we do not really need banks.
Open banking is expected to accelerate the pace of disruption in the financial services industry. In order to survive, banks need to see beyond their traditional territory.