Following in the footsteps of the US-based non-banks, European businesses, non-banks, with large B2C and B2B customer bases and effective sales engines are actively looking into opportunities to strengthen their service ecosystems with banking products. Our recent engagements with both B2C and B2B businesses tell us that they are planning to enter the financial space with vigour and determination.
The last interesting group of fintech companies worth mentioning in this short overview are the data science and analytics experts ranging from TPPs with their open banking platforms, to companies like Moody’s Analytics. The insights and profiles these companies can create in a blink of an eye – based on PSD2 data combined with other data points – are often more accurate and valuable than the insights traditional banks have of their customers after serving them for years. Aptly, one banking executive recently stated that one of the biggest challenges for the traditional banks is them still being “stupid and not commercial enough”, and the lack of data-enabled culture needed to build and run modern data analytics units that focus on growing the business while managing risk. All in all, it seems like the best fintech start-ups and companies are the other winners in the disruption of the financial services industry.
Traditional banks must change gear to adapt to the open finance landscape
For traditional banks, the picture is more mixed. Positive news is the remarkable digital progress, including the giant leaps made due to COVID-19, with banks becoming fully digitised and creating modern foundations on which to build their futures. The journey, which for most banks is far from over, covers aspects like:
- Recruiting specialist talent to bring technology to the heart of banking
- Updating core banking systems and having a modern technology stack with cloud-based services, microservice architecture, and open APIs
- Digitising end-to-end business processes across all functions
- Excelling in end-to-end customer experiences
- Adopting agile methodology to drive customer experience and power time to market
- Building data-enabled capabilities and culture to digitally understand customers’ financial lives
- Managing customer relationships with a single view of the customer to provide top-of-the-line experiences with relevant and personalised interactions
- Introducing AI-powered intelligence to boost digital sales with hyper-personalised products and services
- Empowering customer-facing workforce – from advisors to private bankers – with digital tools to offer sophisticated digital experiences combined with the human touch where needed
- Senior leaders, including the CEO, creating a strong digital culture to achieve breakthrough performance.
In addition to the massive investments in digital transformation, banks have steered strategic cost transformation programs to reduce their cost base and free up capital to invest in future growth. Most major banks are now also purpose-driven – or at least they have a perfunctory purpose statement – and some have repositioned their brands for effective differentiation and greater relevancy. The ongoing branch closures and physical banking demise have made the customer experience less tangible and further increased the need for new technologies to build loyalty and customer advocacy. In late 2021, many banks are very different animals to their appearance in early 2010.
Despite all these efforts, the profitability of European and UK universal banks has remained lacklustre. Before the COVID-19 crisis broke, significant banks’ return on equity was on average less than 6%, falling short of their cost of capital. While COVID-19 hit bank valuations hard in the initial crisis phase, market sentiment has now improved. ECB expects banks’ return on equity to recover back to 6% by 2022. However, some banks – across geographical spread from purely local to pan-European market strategies – have consistently outperformed their peers and even delivered the best H1 results in 2021 due to their transformation efforts that were boosted by the positive impact of COVID-19 in areas like mortgage interest revenue and investment fees.
Increased competition across customer segments and product categories has negatively impacted both margins and market share. The massive digital investments have increased costs without immediate returns on investments as digital transformations tend to eat profits for years before the investments pay back. It is one thing to build a modern foundation, but quite another to understand and accrue all the potential business benefits from it.
Uncovering the future-fit business requires banks to embrace ecosystems
The challenge the banks face in moving towards greater relevance and profitability is that the ongoing digital transformation is designed for digitalising the core business, the market that will face further competitive pressures. It is also designed for closed-loop banking, which we know is at the end of its shelf life. It is not designed for success in the new open financial services market, which lives outside the banks’ physical walls. Nor does it support digital services or innovative business model transformation to connect banks to the outside world.