Under Pressure – 5 Developments That Influence Business Modelling in the Financial Sector

Mike Schavemaker, Innovation Transformation Lead and senior innovation consultant at Royal Philips, and member of the FINDER Advisory Board, and Barbara Voelkl, FINDER PhD, share their thoughts on the current pressures incumbent banks are subject to in the context of business model innovation.

The content of the FINDER blog is not an expression of Royal Philips, nor created on behalf of Royal Philips. The content is created and contributed by private persons.

As a Russian proverb goes: “Still water undermines the bank”. Now put in a drastically new – and current – context and perspective, banks find themselves more urged to actively take position what financial services they want to explore, own or divest. Based upon our interviews with Investment Capital players, Tech players and Brick-and-Mortar banks we present 5 commonly found problems that pressure banks to recalibrate their purpose and venture inroads to Fintech and Tech in general.

Incumbent banks are currently pressured with 5 developments:

1. Negative Interest Rates

With negative to close-to-zero interest rates particularly in Europe and in the United States, the traditional revenue model is heavily challenged. If interest does not provide any income any more, outcome-based revenue models are on their forefront. Collaborations with Tech and FinTech companies find their chance here: They provide back-end solutions and fee-based opportunities to gain revenue, provide the infrastructure to lock in customers and achieve a high wallet share and automate processes for a higher customer loyalty and satisfaction.

2. Covid-19

With the banking ecosystem was in a cautious transition towards more digital servicing, it is still heavily focused on brick-and-mortar business. With Covid-19 resulting in lockdowns and social distancing while financial services from lending to savings become immensely important in financially instable times, the banking business is pressured to accelerate their digital and online services while adhering security and privacy standards.

3. Changing Customer Behavior

While naturally the digital native generation is applying a comprehensive digital orientation also into the financial service ecosystem, it is necessary to take a differentiated view rather than assuming a general “demand for digital” from a consumer perspective. For (i) small repetitive interactions – getting some cash, checking your balances – a strong appreciation for digital applications is seen. For (ii) once-in-a-lifetime events such as a housing mortgage, even digital natives seem to appreciate a trust-based relation with an actual human interaction. Taking a differentiated approach is thus necessary to gain wallet share.

4. Changing Employee Expectations

While young and experienced innovators are working at big tech players or founding their own FinTech, the organizational culture at incumbent bank is not per se attractive for the workforce needed to disrupt the business. With internal start-up spaces, separate task forces and a modernization of organizational behavior, banks need to start inspiring their workforce to stay relevant and attract human capital.

5. Legacy Technology

For a huge part, and interconnected to the aforementioned lack of skills, banks are sitting on legacy technology. Often built on monolithic architecture, banking technologies and infrastructure needs to be carefully but greatly revised – under honest consideration of in-house skills and cooperation with Tech and FinTech.

Having laid out the pressures on banks, we need to be cognizant that not all banks are alike. At the least, we need to distinguish Retail banks offering financial services to the general public from Commercial Banks supporting businesses with financial issues. But as another Russian proverb goes: “Who owns the bank owns the fish”.

In this proverbial perspective we have had several acknowledgements by our interviewed peers that Retail banking would likely be first to be impacted by the tech player’s ambition to ‘own the wallet share of the customer’ and have conversely the most prominent intrinsic motivation for overcoming the mentioned pressures. However, there is a tension here between their most precious strategic assets, i.e. trust and brand equity and the ability to create big-bang approach digital branches. Despite the reality of the pressures you see few digital branches being opened by the brick-and-mortar retail banks to channel the pressures to learning environments, like the traditional Sparkassenverband had done, creating its digital daughter Deutsche Kreditbank AG. On contrary, brick-and-mortar banks are exploring in reality very diligently their role and roadmaps evolving towards full digital players, in effect because they want to understand – beyond trust and brand equity – what other strategic assets they can develop to capture the value, churning into additional retention or sustained relevancy. Our observation is that this very dilemma similarly faced by product-based companies who want to provide digital services on-top of their product offering: you don’t know what services add value up-front, which will potentially alienate your existing customer base and what services do matter; let alone for which services you can additionally charge for.

Commercial banks in their turn are more opting for hybrid collaboration models with tech players, particularly in the B2B-domain. In this context, the tech players leverage their manufactured products like assets for their client-base, offering a suite of managed services beyond the standards of a typical financial lease. Often bundling the product-sell with extended services, leveraging the commercial bank’s bespoke infrastructure and capabilities beyond a typical operational lease. There they are tapping primarily into the changing customer behavior, being able to offer adjacent offerings, leveraged by fintech and exploited with tech. Of course, we can make additional cross-sections throughout the Commercial Banking domain, however we believe that Commercial Banks and Tech players have much more natural power leverage to create sustainable alliances, channeling the pressures upon them; simply because if they get the partnership right, they both profit from the increased wallet-share.

We will not ‘boil the ocean’ by discussing more types of Banks, simply as in these blogs we would like to provoke thoughts and trigger insights. We welcome you to provide your views in directly contacting us or leave your views in the LinkedIn message boxes. For now, I would like to thank Barbara Völkl for co-creating these blogs. I will surely miss her editing skills, our weekly synchronizations and the interviews we held with interesting peers thus far: all best with next (ad)ventures, keep on Innovating and always stay open for new perspectives from where ever they may come!

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