The effects of digitisation are changing the banking and finance world in an unprecedented way. Banks are faced with new digital technologies, operating models, new customer demands and expectations, as well as new competitors “born in the cloud”. The market borders as we knew them are blurred, and the sources of income are under threat and pressure — a clear sign that the traditional business models are not as effective any more. These changes are challenging and stressful for European banks. However, they also offer new opportunities as banks realize the urgency to redefine their ways of thinking and operating.
Banks in Europe need to:
- Clearly define their business model going forward
- Have a comprehensive and stringent approach to move into the business model they’ve selected
- Determine core competencies and decide what will differentiate them from the others in their market segment
Banks are already challenging themselves about their current income sources and how they can be maintained in the new market climate. In the disrupted financial markets, traditional banks are influenced by three basic things: low-to-negative interest rates, increasing regulations, and new non-traditional competitors such as FinTechs, and global data-led disruptors like Amazon and Alibaba. And, let’s not forget the shift of power to the consumers, whose needs are re-shaping financial offerings.
It’s an overwhelming and multi-faceted change. One “anti-stress” pill for banks could be re-examining their respective banking business models to clearly decide and follow up on their core competences, which should differentiate them in the financial market. By deciding on a set of key competences, banks can define the area — let’s call it their “mission” — they want to focus on moving forward and develop in that direction, leaving all other distractions aside.
Based on this strategic decision, a bank’s further functions and investments will be categorized as either “supporting differentiation” or “being a support function”. For the former, the bank will focus on agility, speed and excellence, and for the latter, the focus will be on cost efficiencies, scale and standards. Together with this distinction, banks will decide on what they call “their own” and which parts of the digital transformation and operations they want to benefit by leveraging external contributions such as expertise, technological capabilities and scaling effects.
Different missions; different models
Let’s look at some examples of successful banking models with regards to focus and mission.
In the following example, the bank is focussed on a specific customer segment — doctors and pharmacists — targeting their respective demands. Taking a 360-degree and life-cycle perspective on its clientele, the bank extended its traditional services — checking or savings accounts, wealth management and loans — with new offerings such as platform services, where doctors looking to retire can find successors, or aids for selecting and obtaining medical equipment. The bank is also offering student loans to medical sciences students, sponsoring and offering information on medical studies, as well as asset management for health insurers. So, the bank is focussing on clients from a full life-cycle perspective, which does not mean that it needs to provide its own offerings for all identified needs. However, it needs to have a platform to do so.
What makes this bank a market leader is its comprehensive and ongoing process to identify, review and address existing and emerging client needs. Given the completeness and required agility of this focused business model, the bank strengthened its business capabilities further by doing a complete IT overhaul, including a core banking transformation and outsourcing its IT operations. The bank followed the simple mantra of focussing on strategic differentiating fields. So, it stays focussed on the business model and its clients, while leveraging the expertise and scale benefits of its IT partners.
A second example is a less comprehensive banking business model focussing on just a few products and services for the general retail market in the bank’s geographical area. This bank’s strategy is to provide mass banking products with a personal touch, while offering online or call centre services at a low price with a distinct client focus, which also prevents cost-inefficient complexities.
Following this business model, the bank specialized in offering a selection of a few services and products. The result was profitable market share growth and a customer base increase, enabling further investment in strengthening its competitive edge. By following a “we are close to you” mantra, the bank is catering to its clients’ standard banking needs, improving the overall customer experience.
In this bank, half of its employees are providing services through call centres and the other half through the IT platform, so another key element is the motivation of employees. The bank made sure that everyone on each level is motivated to follow the “we are close to you” mantra, not just to help with client retention, but to bring in innovation and higher quality. On its transformation journey following a “low cost, low complexity” model, the bank decided to care equally for its customers and employees — leading to outstanding business results.
This example points out another essential ingredient for success: the human factor. When digitally transforming, successful models point out that the employees are as important as the technology. Investing in them, motivating them, helping them develop new skills and capabilities is a common success factor characterising market leaders.
Focus to succeed
The new digital environment might be confusing and is certainly complex. Finding a way out of the digital labyrinth requires strong strategic thinking and focus. Sit down, analyse your strengths and capabilities, decide on your strategic direction and focus on what will help your organization stand out among your competition out there.