Several societal changes are having a major impact;
Accelerated digitalization and persistently low interest rates increase the urgency;
Three opportunities for a future-proof business model.
The market conditions for financial institutions are changing at a rapid pace. The main changes, which according to our experts (will) have a major impact are:
In today's society, convenience, speed and simplicity play the leading role. The customer wants to have physical and online access to the best services with a personalized and frictionless experience. However, consumers are not always willing to pay for this.
Possession instead of usage
Partly driven by sustainability, the mindset of our society is rapidly changing from possession to use. The sharing economy in the form of 'as a service' is expanding. New generations have a greater need for meaning and purpose. Having access to resources gradually becomes more important than ownership.
Technology, legislation and new players
On top of these social changes, financial institutions are facing new mobile cloud services. New competitors in the form of fintechs, neobanks and neoinsurers are offering innovative solutions and alternatives, especially in the area of payments. Some of them offer free products by letting the user pay with their own data and personal data. This data is used to generate additional marketing revenue.
Greenfield FIs such as Revolut, Qover, Aion and Banx are popular. It is the largest startup sector in Europe in terms of invested capital. By 2020, €5.3 billion will be invested in startups, especially banking retail payment service providers. The year 2021 promises to be the next record year. This innovation area is partly caused by new legislation: PSD2, the Revised Payment Services Directive.
Fintechs, unlike banks, did see the value of customer transaction data based on payment traffic. For years, banks have neglected the opportunities to innovate the business model using this data. Payment traffic was not sexy and was often manned by administrative staff, trained for execution rather than for analysis. Financial institutions had gold in their hands with this customer data. However, the opportunity to better align existing services with customer needs and to develop new services was not taken. The focus was too much on products and the return on those products. New players have jumped into this gap, causing banks to lose their business advantage: over the past 10 years, non-traditional banks have attracted millions of customers. Studies show that over 80% of consumers think easy access and flexible banking would motivate them to switch to a new financial provider, rather than another traditional bank.
The current COVID-19 pandemic reinforces the existing trends of low interest rates and further digitalization. Low interest rates are causing permanently low profit margins, which in some cases even forces banks to introduce negative interest rates. COVID-19 also caused fundamentally changed consumer behavior. People are embracing the possibilities of mobile and online and are further becoming accustomed to simplicity, convenience, on-demand and personalized service. This increases the urgency for financial institutions to adapt their business models.
Jean-Philippe Thirion & Rob Smeets
The above social changes affect the entire society and have an impact on financial institutions. "The way financial institutions have realized their current position in the past therefore does not assure them of a healthy future," explains Jean-Philippe Thirion. "Banks, insurers, asset managers and pension funds need to reinvent their business model to survive. Past results are no guarantee for the future."
"The forces that drove financial institutions to where they are today will not bring them further anymore. Organizations must be transformed and business models reinvented to create new financial ecosystems.”Jean-Philippe Thirion
But, what are the opportunities for the future? Here are three directions according to our experts.
The financial sector is becoming increasingly complex with a growing number of players. Opportunities exist for financial institutions to work together - with each other, with new entrants and even ‘frenemies’ - in ecosystems. This means that further interbank cooperation is also required. Banks need to join forces and realize collaborations aimed at optimally serving the customer. Recognizing the value and potential of payment data is crucial. To be successful in future collaborations, banks need to make payment data central in their future business model. The centralization of data will enable banks to perform better analytics that in turn will allow them to serve their customers in a more targeted and personalized way.
To play a central role in society, financial institutions should not only be present with an app on the customer's smartphone, but also be physically accessible. Financial service providers will need to be locally tangible and connected. Banks in particular have been accelerating the elimination of their regional offices for years, partly from the perspective of cost savings. However, various customer groups of financial institutions feel the need for a local and physical presence, a counter where they can speak with advisors about housing, insurance, payments, savings and investments. In creating an omnichannel experience, cooperation with municipalities, tax authorities and other government agencies offers opportunities. Think, for example, of a bank counter in the town hall where customers - both private and business - can go for advice.
Bankers in particular need to start thinking and acting more like marketers according to Rob Smeets. "They need to put people and their life events at the center of their business, set up the business model based on marketing principles and use the available data to develop personalized customized services. They need to be data-driven, adding value for the customer at the right time with the right service.
Jean-Philippe Thirion is looking in the same direction: “The financial world has to convert from service providers to thoroughbred advisors, to butlers and stewards of the client's daily financial affairs. This is already the case today at banks such as Belfius where customers can take advantage of an ever-increasing number of integrated and sometimes non-financial services within its banking app. These services such as the purchase of bus tickets, service vouchers and mobile payments for parking, go far beyond traditional banking and insurance services.” The development of new services will require new risks and governance frameworks to ensure that operational risks are optimally managed. New services will also require new processes to measure and control the profitability.
In the Netherlands, Rob Smeets sees opportunities for financial institutions if they manage to turn their business model from the premise of 'owning resources' to 'accessing resources'. In certain areas, we can already see this happening in the consumer market. However, if you consciously think about this trend and its impact, you come to the conclusion that financial service providers have to respond to this trend now and adapt the business model, for example by developing integrated services". The major advantage financial institutions have over - for example - fintechs, is that banks offer a broad package of services. They have everything they need to offer integrated and event-driven services.
"Banks need to think and act more like marketers and connectors. By focussing on the 'life events' of their customers, they will be able to develop integrated services that help customers access and maintain resources in an affordable and simple way.”Rob Smeets
Compliance with laws and regulations is a prerequisite for future-proofing financial institutions. This is a hygiene factor that must be met by definition. This requires an organization with integrity and self-confidence that wants to excel in its gatekeeping role. On the one hand to prevent reputational damage for itself and the sector, but above all to safeguard the common interest of a clean and well-functioning financial sector.
Want to spar about the opportunities for your organization? Contact Jean-Philippe Thirion via email@example.com or Rob Smeets via firstname.lastname@example.org
This is the first article in our series on 'future-proofing financial institutions'. In the following blogs, we will discuss the required adjustments with regards to employees and the smart use of technology. These are all must-reads for policymakers in the financial sector who are looking for guidance regarding a future-proof strategy. Want to know more about TriFinance for the financial sector?