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Banking Services Transformation: Unlocking Exponential Value
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Highlights
- As financial institutions strive to identify new avenues of sustainable growth to thrive in the new normal, we believe that the future of banking will see the rise of boundaryless banking that goes beyond traditional constructs to explore new opportunities.
- To drive the boundaryless banking agenda and enhance business outcomes, banks must become smart.
- In addition to a boundaryless and smart strategy, achieving sustainable growth will also require banks to embrace a humane approach toward multiple stakeholders, including customers, communities, and the larger economy.
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Abstract
The banking industry has had an eventful two decades leading up to the current pandemic.
Most of these events, like the dotcom-inspired spread of banking at the turn of the century or the financial crisis of 2008, were shifts that were triggered from within the industry. These events made banking safer, more accessible, convenient, and well-regulated. As the financial industry settled into a rhythm of continuity with these advancements, the pandemic came along, bringing change in every aspect of life and business. A significant effect of the pandemic is that it offers banks unique and unparalleled opportunities to evolve further.
New ways of working and accelerated digitalization have opened endless possibilities offering new growth opportunities. To capitalize on these opportunities, banks must adopt a boundaryless mindset in redefining their business, engaging with customers, and developing their execution approach. Embedding resilience and building an autonomous and cognitive business will make banks smart and maximize business outcomes that ensue from the boundaryless mindset. As banks pursue these new growth opportunities, driving sustainable growth will necessitate a humane approach to address the interest of not just customers but a larger set of stakeholders. Read further to understand how banks can evolve into boundaryless, smart, and humane organizations and define a new trajectory for sustainable growth.
Charting the future from a robust baseline
The turn of the century brought on rapid change with the dot-com era.
New players entered the banking industry, and existing players were able to expand into new offerings, markets, and lines of business. Advances in telecommunications and computing transformed finance across the globe, giving millions of people and businesses access to banking. Globalization drove the expansion of economies, which in turn fueled further globalization. Then came the financial crisis in 2008, capping the irrational exuberance of the previous period. The interconnectedness brought on by technology and globalization meant that the impact of the collapsing housing bubble and derivatives market on the US banking industry was felt all around the globe. After the initial bloodbath in the markets, order was gradually restored, and the banking system was strengthened with tougher regulations. Subsequently, the rise of digital technologies, including the advent of cloud-enabled business and the rise of fintechs, led to the further democratization of banking.
Innovative and agile banks must look outside their traditional boundaries and exploit these opportunities while redefining their role in the macrocosm of community, industry, economy, and environment.
When the pandemic broke out in early 2020, it was a potent trigger for further accelerating trends such as democratization, digitalization, and innovation. Now, over two years into the pandemic, the initial shocks and uncertainty have given way to more clarity on the way forward for banks.
In most mature markets, banks have reached saturation with traditional businesses. Digitization, which the banking industry has embraced widely, will soon cease to be much of a differentiator, forcing banks to think of new ways to grow. A notable, though unexpected, the consequence of the pandemic has been a range of opportunities driven by new ways of working, industry structure, customer behavior, and new responsibility that banks must assume. However, capitalizing on these opportunities will require banks to chart a new trajectory guided by three key principles — boundaryless, smart, and humane.
A preview of banking in the future
Let’s examine through a few examples how new opportunities will shape the future of banking.
Take the example of auto finance. Governments worldwide are promoting the adoption of electric vehicles (EVs) and with the rising customer demand, banks see an opportunity in financing EVs. However, banks’ role here is often merely limited to financing the EV. On the other hand, EV adoption is not yet widespread due to inadequate infrastructure around charging stations and clean energy, as well as range anxiety. To facilitate a large-scale transition to EVs, leading to carbon footprint reduction on a bigger scale, banks must build the infrastructure to increase EV adoption. Building this infrastructure will require banks to break traditional boundaries and create an ecosystem bringing together manufacturers, partners, auto dealers, energy companies, battery providers, and others from across industries. This kind of ecosystem will ease the EV adoption concerns of customers. Additionally, this gives banks an opportunity to offer banking services to partners in the ecosystem, thereby multiplying value through the network effect. What started with auto finance can grow into offering a range of banking products and services to a larger set of customers resulting in exponential growth. By pushing the boundaries and creating extended value networks, banks will be able to play a role in meeting the larger collective responsibility of fighting climate change while tapping into new opportunities.
In the commercial vehicle leasing space, banks offer financing options bundled with maintenance services from dealers. With the advent of connected cars, there is greater scope for expanding the engagement between banks and customers. Banks can offer insights and advisory services that can enable fleet owners to monitor driver behavior, improve load management and fleet utilization, and enable peer comparison and benchmarking for various parameters, including decarbonization to cut emissions. By extending the scope of engagement and enabling newer customer experiences, banks will be able to generate more value for customers.
Another area where banks can play a key role in is supply chains. Many banks offer supply chain finance programs that are sponsored by lead customers who facilitate the financing of their suppliers. With the changing industry structure where specific sectors like health care and infrastructure are gaining prominence, banks should play a responsible role in promoting these sectors. In such a situation, banks can adopt a new role to sponsor the sector or industry-specific supply chain financing programs. Banks can derive insights from their customer base, transactions, and counterparties to identify buyers and sellers in a particular segment and bring them together, thereby identifying and creating new supply chain relationships. This way, banks can nurture a new supply chain model enabling smooth and easy access to finance while promoting new relationships and value networks that benefit a specific sector or industry.
These examples illustrate how finance and banking services sit at the core of any ecosystem providing products or services, putting banks in a unique position to become orchestrators of these services.
Preparing for the future
We believe that the future of banking (see Figure 1) will see the rise of a boundaryless approach that goes beyond the traditional constructs of banking to explore and capitalize on new and uncharted opportunities.
This will mean adopting a humane approach, with banks assuming a responsible role in protecting customers against vulnerabilities, promoting and revitalizing businesses, industries, and economies, and positively impacting the environment.
Figure 1 - The guiding principles that will help banks drive sustainable growth
Evolving into smart organizations will drive the boundaryless agenda and amplify business outcomes, while embracing a humane approach will ensure sustainable growth.
Creating new possibilities
Being boundaryless begins with shifting the underlying paradigm of the business of banking as we know it.
The way the bank is modeled to service customers, generate revenue and manage risk will need to be recalibrated. The future of banking will largely depend on how banks create unique customer-centric propositions based on individual customer contexts and banks' strengths. In order to deliver this kind of continuous innovation in customer experience, banks need to push the traditional contours to expand the boundaries of customer engagement. To achieve this transformation, banks need to break the barriers of existing execution capabilities and become more agile and responsive – key success factors in tapping new opportunities. We visualize the boundaryless banking model spanning three main dimensions—business paradigm, customer engagement, and execution approach (see Figure 2).
Figure 2 - The three main dimensions of boundaryless banking
Business paradigm
It is becoming increasingly clear that the confines of an enterprise, however large it may be, are no longer enough to deliver the exponential value banks seek. Redefining the business paradigm of an enterprise requires a systematic approach and alignment with a purpose well beyond the traditional business agenda. Banks will need to uncover new opportunities for value creation and revenue generation, which will entail a shift in the business paradigm. By meeting customers’ unstated needs and offering services beyond banking spaces, banks can extend their reach by driving consumer and business behaviors to expand the scope of their business. For instance, driving EV adoption or promoting green homes will allow banks to find new avenues to create value. This, in turn, will mean redefining their business models – rethinking their value proposition, revenue streams, and functional capabilities. It also means thinking beyond traditional and linear value chains in order to establish value networks that enable all players in the ecosystem to benefit from the growth they collectively generate.
Customer engagement
Customer banking journeys have a purpose: owning a home or car, saving for life goals, or growing a business. Moving forward, banks should seek to enhance the value of their customer engagements by charting new journeys. Banks will need to anchor themselves to the customer’s purpose rather than being limited by their own products. Achieving this will require banks to adopt insight-led customer engagement — gauging and understanding needs across the lifecycle stages of distribution, sales, and service — to create hyper-personalized customer journeys through innovation and differentiation in the way they engage with customers. Other industries are also experimenting with such ideas. Paradigms like ‘precision medicine’ in healthcare or ‘precision farming’ in agribusiness are all attempts at using technology and data to deliver the most optimal and personalized solution to the customer.
We believe banks will achieve better outcomes by focusing on hyper-personalized customer journeys rather than personalizing core products. Product personalization must be adopted on a fit-for-purpose basis for specific customer segments. Banks will need to continuously identify and analyze customer segments, assess their needs, and develop cohort-specific capabilities.
Execution approach
The barriers to becoming boundaryless can be overcome by recasting the execution approach, driven by the adoption of appropriate technology and fostering an innovation culture guided by contextual awareness. The ability to orchestrate new execution models is significantly enhanced by working in an ecosystem comprising fintechs, transformation partners, associated businesses, and more. As banks prepare to tread the boundaryless path, they must embrace a self-governing execution model embedded with the controls to manage risks and costs as well as ensure quality of service.
There are abundant possibilities for banks to push boundaries in reaching out to customers and offering new services beyond the traditional banking space. For instance, banks in many parts of the world are offering green mortgage solutions that nudge homeowners to adopt energy-efficient homes. While there is a certain level of product and process configuration banks need to undertake to offer this product, adopting green homes will be more successful if banks can advise and help homeowners retrofit homes to make them energy efficient. Banks can enable this journey by creating an ecosystem of partners that can offer services aimed at making homes more sustainable.
The banking-as-a-service model, a natural corollary of open banking, and the possibilities it opens up, aptly illustrates the boundaryless approach. With this model, banks can offer services to an unlimited number of customers through third parties. An example of this could be banks offering account services to clients of a third party that specializes in taxation and business advisory.
By embracing the boundaryless approach, banks discover new opportunities, enable differentiated experiences, and become more responsive to customer needs and market conditions. The boundaryless approach to execution can orchestrate cross-enterprise and cross-industry capabilities instilling the agility required to deliver on the opportunities.
Amplifying business outcomes
By adopting the boundaryless approach, banks become agile and responsive.
The boundaryless approach opens up enormous opportunities that banks must respond to in transformative and disruptive ways. This response, however, can expose banks to potential risks and losses. Additionally, macroeconomic factors, regulatory changes, and developments in adjacent and other industries could disrupt banking. Given that banks are central to financial stability, they must proactively address the systemic risks that may arise from becoming boundaryless by building a high degree of resilience.
To amplify the outcomes of becoming boundaryless, banks need to become smart. Banks must look at three force multipliers to become smart – establishing a resilient enterprise, developing autonomous business execution capabilities, and building a cognitive foundation
The boundaryless approach will require banks to operate on a new scale and scope; building an autonomous business will be key to delivering on new opportunities at an optimal cost and with enhanced agility. To respond appropriately, banks should enhance their capability to gain deeper insights on customers, their behavior, and market trends, as well as internal operations and performance metrics. Embedding intelligence across the enterprise in multiple dimensions will facilitate a speedy and precise response. To amplify the outcomes of becoming boundaryless, banks need to become smart. Banks must look at three force multipliers to become smart – establishing a resilient enterprise, developing autonomous business execution capabilities, and building a cognitive foundation (see Figure 3).
Figure 3 - The force multipliers banks must adopt to become smart organizations
Resilient enterprise
The accelerated pace of change exposes banks to heightened risks, with consequent impacts on profitability, customer experience, reputation, and compliance. Embedding resilience into design and execution ensures that the momentum of becoming boundaryless does not dissipate. Policies need to be implemented to assess and manage evolving risks arising from rapid digitalization, complex technology landscape, and increasingly elaborate ecosystems. Other critical business metrics like quality of service, costs, customer experience, and operational efficiency need to be monitored and controlled. To achieve this, banks must embed controls as the first line of defense in every line of business (LoB), as opposed to delegating it to functions like risk management and audit. Increased digitalization and remote customer engagement also pose challenges around data privacy, data protection, and cybersecurity, in turn necessitating resilient business practices and capabilities to create a secure bank.
Autonomous business execution
Automation and orchestration of new capabilities adopted by banks from across and outside the enterprise, will be a differentiator that significantly amplifies business
agility. End-to-end digitalization covering business processes, human tasks, and integration with ecosystem partners is the essence of an autonomous business model. Autonomous business execution is fundamental to quicker time-to-market, simplified customer and staff experience, efficient service delivery, error reduction, and cost and effort optimization. Banks must automate internal closed-loop controls to achieve these business metrics.
Cognitive enterprises
By being sensitive to internal and external environments, banks can capture the pulse of customers as well as markets. Data-driven insights are a crucial prerequisite, which includes gaining insights into customer segments as well as individual customers and their life or business stages and bolstering it with industry and market trends that influence these customers. This will help them develop new products and services, continually recalibrate business functions, and devise innovative business models. Apart from this, a cognitive enterprise enables early identification and extensive risk assessment and aids in rapidly developing the right response to adverse events.
These three force multipliers will amplify every aspect of a bank’s business, leading to efficient capital and balance sheet management. We are already witnessing examples of such amplification - banks are utilizing customer data, industry insights, and macroeconomic parameters to better understand the needs of business customers. Structured data insights and topic modeling of unstructured data, which forms the bulk of customer and market knowledge, give banks the ability to understand emerging trends and proactively design appropriate products. Another way banks can be smart is by embedding controls in the credit origination and administration functions to enhance credit quality, drive compliance with policies and regulations, control costs, and mitigate risks.
Multi-dimensional approach to drive sustainable growth
A boundaryless and smart strategy will need to be accompanied by a humane approach toward multiple stakeholders, including customers, communities, and the larger economy and environment, in order to drive sustainable growth.
Banks need to realize that embracing a humane approach is not merely limited to being empathetic and equitable to individual consumers but extending it to all stakeholders. With the growth and sustainability of banks linked to the macrocosm they operate in, being sensitive to the needs of these stakeholders and playing a responsible role in nurturing them (see Figure 4) are key imperatives. This, in turn, will help build sustainable business models, policies, and practices with well-defined outcomes. The outcomes could take the form of carbon footprint reduction, development of a specific industry or sectors like infrastructure or education, and elevation of particular communities.
Adopting a humane approach toward individual customers and communities will have a localized but significant impact. The humane approach must also extend to businesses and industries with impact at a regional or sectoral level. At a macro level, being humane must include solutions that address climate change and contribute positively to the environment as well as the economy. Being humane should not be viewed merely as a social responsibility.
Figure 4 - The humane approach to banking
Consumers
Enabling easy access to banking services to meet the needs of various consumer segments has been a focus area of banks. Banks are loading value-added advisory services onto traditional products to help consumers across various life stages. Contextually-rich engagements across acquisition, distribution, and servicing channels are characterized by convenience and multi-channel access with an optimal mix of remote and in-person engagement. Banks must put in place initiatives that prevent mis-selling, guide customers along the life of a product or service, and assist them when they face financial hardship.
Communities
Banks must integrate their corporate social responsibility initiatives into their core business through purpose-adapted processes and specialized products that help address local needs as well as capitalize on specific opportunities. Banks could offer special packages to help communities grappling with downturns in native industries, the effects of a natural calamity, or other local adverse events. For example, a particular community dependent on the mining industry will need to be helped if there is a sudden downturn due to unexpected events. Another example could be helping an agro-dependent
community take advantage of favorable weather conditions through targeted offerings like advisory, easy finance, and access to new markets.
Businesses
Businesses, particularly small and medium businesses (SMBs), are major participants in an economy and significantly contribute to wealth and job creation. Businesses need easy access to credit and other banking services to function efficiently. Traditionally, business banking has not been a priority for banks as it is considered a low-margin business. However, this trend is changing with banks adopting digital technology to engage and service business customers cost-effectively. The pandemic has forced many businesses into difficulties due to subdued demand, and many of them have had to close down. Banks will have to play a responsible role in helping this segment recover and grow by offering a multitude of banking and beyond-banking services.
Notwithstanding the effect of the pandemic, banks will need to explore newer means of engagement with businesses. Besides banking services, banks must offer value-added services like business fulfillment services covering invoicing, payables and receivables management, payroll, business and financial advisory, market and product intelligence, and access to marketplaces while facilitating technology know-how. By offering these value-added services, banks will be able to meet their responsibility of promoting businesses that drive economic growth and employment, in turn resulting in positive societal impact.
Industry
New industries such as ecommerce, healthcare, education, and technology are gradually evolving into core sectors. Banks will need to tailor new funding and banking services such as private debt, cash management services, and payment services to fit the requirements of these segments. Similarly, banks must offer advisory services to traditional sectors like manufacturing, construction, agriculture, and energy to help them respond to market changes and adapt to digital business models. Banks must assume the responsibility of nurturing both traditional and emerging industries as these sectors will drive growth and help achieve geopolitical priorities in the emerging world order. Judicious capital allocation and the provision of beyond-banking services such as advisory can help revitalize these industries.
Economy
The changing behavior of customers and businesses coupled with geopolitics is shifting the pattern of economic activities and supply chains. Economies have to adjust quickly to these shifts through appropriate strategies. And here’s where banks come in. Governments depend on banks to implement economic strategies. Banks have an important role to play in promoting growth initiatives aimed at value creation, enhancing production and industrial output, efficient resource management, indigenization, and employment generation. As a responsible stakeholder in the economy, banks must promote cross-industry initiatives and establish platforms to enhance trade and collaboration, in turn driving economic growth.
The changing behavior of customers and businesses coupled with geo-politics is shifting the pattern of economic activities and supply chains.
Environment
Climate change has evolved into a potential systemic crisis and banks are now making it a key element of their strategies with a sound execution plan. Banks need to develop climate related policies, define specific practices and guidelines for each line of business, create greener products and solutions, move toward zero carbon footprint operations, and adopt financial disclosure norms. For instance, banks will need to lay down sustainable financing policies aimed at responsible capital allocation and establish processes to assess the impact of a business on the environment. Similarly, banks must embrace green mortgages and promote green practices among customers by offering appropriate incentives across product pricing and terms and conditions.
Toward inimitable and inclusive growth
As banks attempt to chart a unique trajectory for growth and sustenance in the new normal, boundaryless, smart, and humane are the pillars that will guide their path.
How banks embed these principles into their business, taking into consideration their specific context, will greatly influence their future. The course adopted by each individual bank will determine how it creates and executes its own inimitable and inclusive growth path.
