The arrival of the Covid-19 accelerates the transformation of the business model.
Retail banking faces a crucial moment for its future as it is immersed in a wave of change, intensified by the effects of the coronavirus pandemic. Entities must manage a multitude of variables, such as the rapid change in customer behaviour, the uncertain economic situation, the intensification of competition, regulatory pressures and technological disruption at a time of falling profitability. A paradigm shift that, according to KPMG, will merge the current models into three winning options: universal banks, payment service providers and “invisible” agents.
According to the Futute of retail banking report, the financial industry is facing a great challenge motivated by trends that are not new, but which have been boosted by the health crisis. Moreover, change also brings new opportunities. KPMG analysts highlight how the future of banking must focus on driving differentiated propositions, for which the customer experience will be the pivot of the strategy to increase competitiveness.
“Becoming a connected bank requires commitment and determination. Achieving this has become more important than ever. It is the key to providing consumers with an enhanced customer experience, which is critical to future success,” the document states. The consultant stresses that the market has been flooded by a wave of growing neo-banks. Without the burden of legacy technology and operating with greater agility, these new players can deliver a personalised experience, as well as the interaction required by a generation accustomed to an intelligent digital experience.
This increased ease of profitability for neo-banks, thanks to an increasingly large and unique customer base, has impacted on the business of traditional banking, which must decide where to emulate competitors or partner with them to maintain competitive advantage, says KPMG.
The cornerstone for traditional banking to succeed in the future requires a connected operating model. KPMG points out that there are currently institutions that provide a full service (Banco Santander); specialise in certain products, such as mortgages (Monzo); provide consumer credit or credit cards (MasterCard, Capital One); facilitate payments or transfers (PayPal); and digital portfolios (Patym).
These five current models should be grouped into three to be viable. This would leave what KPMG calls universal banks. These institutions should focus their operations on the data they have in order to develop their own ecosystems that take advantage of their large customer base, so as to widen margins, reduce high operating costs and combat the downward pressure on their transaction fees and interest income.
The second model would bring together payment service providers, who must ensure that the unit cost of transactions is covered by revenues to ensure sustained profitability. This model should focus on specific customer segments and innovate to meet their needs. The open banking scheme can be their great ally.
Finally, there would be those banks that do not act as independent entities, but are “invisible” agents integrated into the devices thanks to the Internet of Things (IoT) to facilitate transactions. Having access to data from many IoT devices will also give the bank a deeper understanding of customers’ spending habits and credit needs. Such entities will connect ecosystems like those of Samsung and Microsoft and create and deliver technology applications and microservices.
The report concludes, however, that a key attribute common to all future banking business models will be a greater resilience to economic shocks, such as those resulting from the current pandemic.