Focus on accelerated business models

The traditional banking value chain has been razed and rebuilt by early digital players.

“Traditional banks should look for ways to break their products into micro-products that can be sold separately or with their bundled versions.”

We are now at a tipping point where better digital experiences in banking are a necessity but not sufficient to win. As digital players disrupt the industry with innovative propositions, incumbent banks cannot simply aim to be the best digital versions of themselves. They need to drive product innovation, embrace new roles in the value chain, and implement holistic operational change.

Achieving this will require rapid reconfiguration of traditional linear business models such as:

  • Those who only sell their own products, distribute products from other vendors, and provide technology or business processes to others; and
  • moving to non-linear models such as assembling new product/service offerings and integrating them into third-party services.

Prime examples of this are buy-it-now, pay-later (BNPL) providers that integrate their services into the merchant’s point of sale.

Consumer demand

The catalyst for this change is simply that consumers are demanding more flexible and responsive choices. To enhance personalization, traditional banks should look for ways to segment their products into micro-products that can be sold separately or with their bundled versions.

Additionally, the layers of the value chain – from product manufacturing and proposition packaging to sales and distribution – are breaking down. Instead of the bank owning the whole chain, different parts own different layers.

A recent Accenture report titled “The future of banking: it’s time to change perspective” shows that digital first players using non-linear business models and targeting specific roles in the banking value chain are outperforming those who simply imitate traditional linear models.

In Australia, 65% of digitally-focused banking players are leveraging non-linear business models. They have freed themselves from vertical integration, which makes them dangerous competitors for incumbents.

These are players distributing their products via other players in a “B2B2X” model. For example, using bank-as-a-service (BaaS) models to provide white label or co-branded banking products. Legacy banks such as Goldman Sachs with Apple Card in the US and the partnership between ANZ and Cashrewards or Westpac and Afterpay are examples.

Globally, between 2018 and 2020, digital-first banks with non-linear models saw compound annual revenue growth of 76%, compared to 44% for digital-first players using traditional business models.

The outperformance of digital players who challenge traditional models with non-linear approaches should serve as an inspiration to incumbents wishing to achieve explosive growth. Banks have the ability and potential to disrupt themselves – and win – by breaking the old value chain and reconfiguring its elements to deliver new and better packaging to customers.

Growth opportunity

Accenture’s analysis found that the adoption of non-linear models by incumbent Australian banks could lead to an additional 3.4% or A$17 billion in banking revenue growth by 2025.

Incumbent banks now have three options.

  1. They could choose to stay where they are today, become the best digital version of themselves and take a bigger slice of a declining market. However, growth on this path will inevitably stagnate as aggressive new players continue to reshape the industry and take more and more revenue away from traditional models.
  2. They could be quick followers – watch for trends affecting the markets and products they want to own, react quickly to innovations as they hit the market, and strive to keep and gradually grow their market share .
  3. They could choose to become leaders. This option is aimed at the most ambitious banks, the banks of tomorrow. These banks will choose markets in which they have a competitive advantage and seek to accelerate their growth by reconfiguring old ways of working.

Starting point

This does not necessarily mean a shift from the current business model to a completely new one, but rather an evolution from running a single vertically integrated company to managing multiple business models and non-linear roles in the value chain.

As a starting point, large banks should set their strategic direction by deciding which markets they want to hold and assessing where they are best – selecting their roles in the value chain and finding partners they could benefit and by sourcing capabilities and products. aligning these strategic choices with the right operating model and technology capabilities to succeed.

The strong performance and lofty valuations of a new generation of digitally-focused financial services players show that there are plenty of opportunities for players willing to see banking in a new light. Banks that master the discipline of managing multiple business models simultaneously – and integrating different capabilities and product components into innovative solutions – will be able to outperform the market and move from defending market share to the target of real growth.

Alex Trott is Managing Director and Head of Banking at Accenture Australia

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