From banking system to ecosystem

Buying a car used to be a matter of going to a yard, choosing a make and model, and driving off. But the business has changed. Car yards – and actual cars – are often loss leaders for the real revenue streams: car finance and ongoing servicing charges.

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But even that model is built on a false premise: that people want a car. More fundamentally, unless you’re a collector or driving enthusiast, what people want is mobility. They want convenience, security and value in getting from one place to another.

"Ecosystems are not just emerging in the auto business. In financial services too there is a growing consensus they will be key to delivering value in the future.”

Now, McKinsey & Co argue, rather than an auto industry we should be thinking in terms of a “mobility ecosystem”.

“Technology is transforming every facet of the auto industry, from the way cars are made and how they run to how they are bought and sold,” McKinsey says. “As disruptive new players and services materialise, a modern mobility ecosystem has emerged as well, built around end users’ needs and preferences.”

So the future of the auto industry may be an ecosystem bringing together elements like driverless cars, car shares, car alternatives, sales and finance sites and other options to get from A to B.

“These shifts were going on before the COVID-19 crisis, but the pandemic has underscored how integrating business and technology delivers value,” McKinsey says.

Total experience

Ecosystems are not just emerging in the auto business. In financial services too there is a growing consensus they will be key to delivering value in the future. And Amazon is probably the pre-eminent example of an organisation that has created an ecosystem.

Just like the car industry, the financial services industry has to accept customers are not after a home loan or an overdraft or a credit card or a term deposit. They want a house or a television or a small business. Or even a car.

It is the total experience and the value it brings which will attract consumers – and deliver more value to the organisations which satisfy that desire. More likely, that will be a network of organisations. An “ecosystem”. The business case for an ecosystem is the whole is worth more – to the customer and to the organisations, large and small, providing the products and services – than the sum of its parts.

As it is in other industries, the ecosystem model is driven primarily by customer demand but that demand is being fed by new technology which draws together wider data, application programming interfaces (API), open platforms and specialist solutions.

In financial services, the shift is being further driven by the reduced economic attractiveness of parts of the industry; increased consumer comfort with fintechs and third parties; the technologies like APIs and Cloud; and new data capabilities and legislation (including open banking and privacy laws).

Embrace alliances

According to Tim Dring, EY’s financial services head, if traditional banks are to maintain and grow their place in the financial services value chain they need to embrace ecosystems by forming partnerships and alliances with third parties across increasingly open platforms.

“Platforms and ecosystem models that allow for seamless interaction between customers, banks and third parties should also be considered as part of the broader business strategy.”

The concept of an ecosystem, drawn from the study of complex biological systems, may seem a stretch but the idea makes perfect sense. It recognises no one organisation in this digital age can do everything to satisfy the customer hence the total experience is more valuable than the sum of its parts.

Consider Amazon: originally an online bookseller, it is now the centre of a global marketplace for products and services but it has thousands of partners – all with the common aim of enlarging the marketplace to win more customers.

Even Amazon’s much studied financial services strategy is less an attempt to enter a new market and attack traditional banks than it is a recognition that partnering with payments specialists and fintechs makes the marketplace – the ecosystem - more attractive.

Beyond tradition

Historically, banks tried to be all things to all people but they did it themselves and all too often the relationship was transactional. But even then there was a recognition that more engaged, long term, satisfied customers were more valuable to the bank and shareholders – a notion of a rudimentary ecosystem.

The proxies used to measure this lifetime customer value had names like “share of wallet” and measurements like number of products per customer. But these didn’t capture the real value of engagement and nor did traditional banks do a great job of satisfying the essential desire of customers. They offered a home loan but not the full service behind finding and owning a home.

Globally, several banks are well advanced in ecosystem thinking (as opposed to simply making diverse investments or one off partnerships which don’t necessarily support their core strategy.

In a case study, consultants Celent focused on the Taiwanese bank Taishin International. Taishin has launched new services, each of which delivers bank services to customers via third parties. According to Celent, the key to these is a careful consideration of customer needs beyond the traditional limits of the standard banking relationship.

Equally important is the nature of the relationship with commercial partners, necessary to bring the ecosystem to life: “Taishin’s strategy ultimately highlights one of the most important elements of any open banking strategy. Effective innovation can only occur where the focus is on product development and meeting customer needs. APIs are only an enabling technology.”

Long-term satisfaction

ANZ is also building out ecosystems. There is a recognition the banks of the future will create value by unlocking the value of data (theirs and that of others). They will adopt more “open architecture”. And ecosystems and market places that create value for all participants will become increasingly common and valuable.

Many of the elements of ecosystems are already in place at ANZ in areas of strategic focus like home ownership and starting and building a business. For example, Honcho is a partner for those looking to start a business. Valiant and Aider are partners in helping customers grow that business. Other partners and investments will feed into all the elements to strengthen those ecosystems that support the bank’s strategy of growing customer wealth by adding more value for customers.

In the long-term, it is that superior satisfaction of actual customer needs which will drive a lifetime value proposition. Ecosystems, across many industries, are ultimately a recognition of the true nature of customer preferences and what it will take to satisfy them.

The enduring question is who will be successful in monetising these ecosystems? The most value will accrue to the organisations which have the deepest customer relationships and in that regard banks are well placed because of their existing customer bases, the data they have for customers, their brand recognition and regulatory imprimatur.

Trust will be critical and while banks in recent times have suffered reputational damage, customer trust in their security and management of sensitive data is strong.

For traditional banks though, extending their partnerships beyond banking associations or global payments giants like Worldline to much smaller fintechs or firms with expertise in adjacent industries will be a challenge. They will need to choose which businesses to own and operate, understand where they have a competitive advantage, what they bring to the ecosystem and what that ecosystem brings to customers.

Meanwhile, balancing customer ownership in the ecosystem won’t be easy.

Andrew Cornell is Managing Editor of bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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