In banking and financial services, a significant portion of incremental enterprise value will come from a broad variety of new ecosystem-driven business and operations models as mainstream payment systems continue to grow. Looking at retail banking only, based on our internal estimates, it could be anywhere from 10 to 40%. Certainly, large enough that it can’t be ignored.
As we talk to banks around the world, one of the most fundamental trends shaping the financial services industry across almost every corner and vertical is the shift from a closed-architecture technology industry to an open-architecture industry. This has been rapidly spawning a whole series of industry-changing evolutions from open-banking, embedded finance, banking-as-a-service to merchant-facing Buy-Now-Pay-Later, and this is only the beginning. This surge in innovation is the combined impact of two derivative trends that have caused this industry movement.
First, there has been a new approach to partnering, or “bundling”. For decades, financial institutions (“FIs”) have touted their financial services bundles under the guise of labels such as “one-stop shop,” “universal,” or “global” and through practices such as “cross-selling”. However, we’ve recently seen these FIs un-bundling their business models through various moves, including divestitures, re-orgs, wind-downs or on the other hand, launching greenfield platforms, investments in modern platforms, and co-existence strategies. Much of this has been predicated on API technology enabling FIs to re-bundle their products at the product, technology, and network layer. As a result, FIs now have access to a much broader set of solutions that can be tailored to fit their emerging needs, defined by customers, regulators and shareholders.
Second, there has been exponential growth in R&D in almost every aspect of the financial services value chain, including and certainly not limited to:
- Device, interface, internet
- Identity capture, biometrics and authentication
- Fraud detection
- Process automation and artificial intelligence
- Credit decisioning
- Risk and liquidity management
- Remote and collaborative work practises and data security
An open-architecture financial services industry is a significant shift from the operating model of the previous generation of financial services. FIs are now able to connect directly with external platforms to seamlessly create, process or distribute financial services to the end customer, without the need for any manual human intervention and thereby offer brand new “real-time experiences”. This shift therefore enables the birth of new business and operating models with the potential to significantly improve performance, productivity and therefore profitability.
The efficacy of this new state is conditional on multiple considerations including, for example:
- Customer consent to sharing data in a multi-party models
- Security/cybersecurity assurances across new vulnerable connections
- End-to-end governance of customer welfare from a regulatory perspective
- Commercial viability, i.e., is there enough margin for all participants to earn enough profit in order for the service to be sustainable
These considerations are significant topics that need to be discussed, tested and understood further. As the transition process unfolds in different ways in different markets, segments and at different parts of the value chain, this list will continue to evolve.
So, how is a re-bundling of enhanced components of the financial services value chain driving incremental value? Let’s look at its impact in a selection of meaningful areas:
Product – “Financial services, literally, at your fingertips”
Financial Services can now be embedded or intertwined into any real-life experience to create brand new product or service concepts that offer enhanced liquidity and/or risk management, in real-time. Why pay now when you can pay later? Why take financial risks when you can pre-emptively and affordably protect yourself? We will see a shift from the selling of traditional bank products (current account, savings account, term deposits, overdrafts, credit cards, mortgages) to overall better experiences across unlimited user journeys, a new state of frictionless banking. FIs will now be able to develop new commercial solutions with consumer, business, and government platforms to serve customers. We are starting to see a wholesale widening of the scope of the financial services industry.
Technology – “Finally catching up to the digital native-industries”
The Financial Services industry has been cast in the shadows by the trailblazing growth of social media, gaming, e-commerce, on-demand services, and on-demand entertainment industries who were all to a large degree, digitally native. The mainstream infrastructure for the FS industry was designed around people, paper, ink, branches, telephone lines and physical currency. As new technologies emerge and as they become more widely adopted, there will be new opportunities to create new multi-party value chains. This will bring together FIs, service providers, vendors, networks, and platforms, etc., in best-in-class combinations to:
- Automate processes and reduce cost
- Leverage intelligence engines to make better decisions in areas like fraud detection and credit assessments
- Better engage with customers to drive acquisition or retention
- Outsource infrastructure or processing to external service providers or vendors with specialist skills.
This re-bundling possibility offers banks significant new and advanced capabilities, efficiencies, and protections.
Network – “A true internet of payments and financial services”
Network access is one of the key elements that define but also limit the scope of banking. The ability to connect and access multiple networks of liquidity (bank accounts, wallets, funds, schemes, loyalty balances, digital asset accounts, etc.) and utility (merchants, billers, suppliers, public services, etc.) creates interoperability and increases the reach and utility of financial services. Traditionally, banks connected to the mainstream card scheme networks (Visa, Mastercard, Union Pay, American Express, Diners, JCB, CAFIS, etc.), Swift for interbank payments, national payment systems, billing systems, or ATM networks to achieve the basic minimum needs of its customers. In more developed countries, the major FIs can connect to these to solve for most use cases, but in many less developed markets, or in new segments such as gig economy workers, there are a large number of disparate value systems and networks resulting in a dependence on cash to provide the liquidity across payment venues. As we look into the future, there are many non-traditional value systems that FIs need to connect to best serve their customers and potentially create a competitive advantage to the less connected FIs.
With network standardisation through concepts like ISO 20022 (a standard for real-time payment authorisation), RESTful APIs, and real-time processing systems, networks can be more easily connected, and the end customer can benefit from more usage from their financial services providers, which increases participation and utility. Perhaps the new universal bank doesn’t necessarily offer everything, but connects to everything? Banks can increase their share of wallet and therefore, share of data capture.
Customer acquisition and distribution – “Do more, do it faster, and do it better – introducing the Super-banker”
The ability of banks and their partners to create integrated ecosystems can drive significant value by serving as a 1) sales accelerator that drives new business and 2) a force multiplier that helps distribute their products and services by a significantly greater rate. For example, FIs and vendors can accelerate purchasing decisions by building low-cost proof-of-concepts that enable quick demos or simulations and help win business. As another example, FIs can connect to third-party solutions to source and filter leads and broaden its reach from 1:1 to 1:many engagements. There are also many more and better tools available for customer service, customer relationship management, Next-best Action engines, etc. All of this creates significant efficiencies and, therefore, value.
Skills and sourcing – “The deepening of the “Trust Quotient””
The financial services industry has historically been a people business. People are trusting people with their wealth. And elements of that must be retained for it to continue to be truly trusted. But with so much automation and ‘frictionless-ness’, can people really trust it? While the human touch might be involved in some capacity, ecosystems can add material value by providing access to specialist human capital or even augmenting it with specialist software via SaaS models, thus making a strong case to supercharge the value of humans in the value chain of financial services. This can enhance financial experiences and increase productivity of the FI, which in the end creates enterprise value.
In conclusion, the re-bundling of the financial services value chain in a new open-architecture model and the creation of new ecosystem-driven products, services and capabilities has the potential to create significant value and increase profitability. It’s hard to quantify as the flood gates are only starting to open but we have enough precedents and parallels to suggest the impact could be significant.
Overall, next-generation ecosystem models can not only improve the efficiency of the IT spend and create absolute cost savings, but they can create new revenue opportunities and improve overall productivity. The result is a potential general improvement in all activities involved in the production and distribution of financial services and an improved experience for customers.
Interested in learning more about how your business can benefit from the new ecosystems growing in payments technology? Schedule a conversation with Episode Six.