Source and whitepapper: https://backbase.com/resources/becoming-digital-first/?utm_source=linkedin&utm_medium=social&utm_campaign=Digital-First-Whitepaper-01-2019
Digital-first transformation in the banking industry is no longer a speculation on possible future outcomes. The so-called “fintech” era has come of age, creating tangible changes that indicate the future shape of financial services.
This whitepaper identifies the actions you need to take to transform your bank into a Digital-First enterprise. That includes changing a business model, culture, pace, and technology.
Smart Bundling and Adjacencies
The initial phase of the fintech era saw the emergence of many digital start-ups specializing in just one aspect of financial services (such as lending, international payments, investment advice). This was referred to as the “un-bundling” of the traditional banking model whereby banks provided a very wide range — in some cases hundreds — of different products. Inevitably some of the banks’ product lines would not be market-leading and could therefore be vulnerable to cherry-picking by new entrants.
There are numerous recent examples of banks joining with specialist fintech providers to enhance their consumer propositions. In some cases, this “re-bundling” enables propositions to move beyond the traditional, narrow banking domain to adjacent areas like investment, insurance (and even parking) so banks can play a bigger role in their customers’ ever-expanding digital lives. This move into adjacencies has been a key successful strategy for Chinese Tech Giants like Alipay and WeChat. WeChat famously started out as a social messaging network, but then added a payments capability. It is now one of the world’s most powerful payment brands.
Some major fintechs, such as Revolut, are even starting to add traditional core banking services as an adjacency to their initial specialist areas of focus. This approach is explicitly on the roadmap of other disruptors such as Marcus (Goldman Sachs’ fintech subsidiary).
From a bank’s point-of-view, smart bundling of Third Party capabilities for both traditional banking products and adjacencies, allows them to remain as the customer’s primary interface, and to offer better product features than they could deliver in-house. This approach is therefore more likely to attract and retain customers.
Even some fintechs that initially set about developing direct-to-consumer brands that compete with banks, such as TransferWise (cross-border payments), have recognised the hard work involved. For them it makes sense to partner with banks, tapping into their established brand and consumer bases.
Digital-First Banking for Digital-First Customers
We believe that digital disruption of banking will create a future where key financial services for Digital-First Customers (including SMEs and corporates) are provided by Digital Hubs.
The Digital Hub can be thought of as a platform people would interact with in a manner similar to Siri, Alexa or Google Assistant. It is the consumer’s gateway to their financial life. Machine Learning (and over time true Artificial Intelligence) is applied to leverage data on the consumer’s situation and interactions. In this way, their needs can be anticipated and where delegated permission has been given, acted upon.
Act now: how to become Digital-First
Two or three years ago, new digital technologies and their potential applications in re-shaping banking services were primarily a conference discussion topic, or part of experiments at the Innovation Labs of bigger banks.
What’s clear from the analysis above is that these technologies have become increasingly prime-time ready, and are indeed being adopted by digital leaders to gain material market advantage. The market transformation towards the Digital Hub vision is already underway.
The actions necessary to become a Digital-First Bank fall into 2 categories:
- Strategy & Propositions: defining future business models to drive customer value.
- Delivery & Operations: developing organizational capabilities to deliver new propositions with pace, agility and efficiency.
Making it real: we call this Digital-First banking
Incumbent business models are not efficient anymore as their cost-income ratios are too high and velocity of change too low. Hence, as introduced in this report — business models need to be transformed. Bold movers such as neobanks / challenger banks adopt a “New Digital First” business model that has a fully digital organisation and approach to bringing new products and services to the market. Some existing banks that are able to cross the chasm properly adopt a Digital-First business model and adopted agile practices — of which some will only focus on a very specific niched segment of the market in order to survive. Not changing in this respect will ultimately mean failure, or at best being commoditized to a banking services provider on top of which others create actual value-
