The traditional banking value chain has been bulldozed and is being rebuilt by digital-first players.
"Traditional banks should be looking at ways to componentise their products into micro-products which may be sold separately or with their re-bundled versions.”
Now we’re at a tipping point where better digital experiences in banking are a necessity but not enough to win. With digital-first players disrupting the sector with innovative propositions, incumbent banks can’t just aim to be the best digital versions of themselves. They must drive product innovation, embrace new roles in the value chain and implement holistic, operational change.
Doing this successfully will require rapid reconfiguration of traditional, linear business models such as:
- Those that sell only their own products, distribute products from other providers and deliver technology or business processes to others; and
- moving to non-linear models such as assembling new product/service offerings and embedding them into third-party services.
Key examples of this are buy now, pay later (BNPL) providers who embed their services into the merchant’s point-of-sale.
The catalyst for this change is simply that consumers are demanding more flexible and tailored choices. To enhance personalisation, traditional banks should be looking at ways to componentise their products into micro-products which may be sold separately or with their re-bundled versions.
Moreover, the layers in the value chain – from product manufacturing and proposition packaging to sales and distribution - are becoming uncoupled. Instead of the bank owning the entire chain, different parties’ own different layers.
A recent report from Accenture titled “The Future of Banking: It’s time for a change of perspective” shows digital-first players using non-linear business models and targeting specific roles in the banking value chain outperform those simply emulating traditional, linear models.
In Australia, 65 per cent of digital-first banking players are leveraging non-linear business models. They have unshackled themselves from vertical integration, making them dangerous competitors to incumbents.
These are the players distributing their products via other players in a “B2B2X” model. For example, using banking as a service (BaaS) models to provide white-labelled or co-branded banking products. Incumbent banks such as Goldman Sachs with Apple Card in the US and the partnership between ANZ and Cashrewards or Westpac and Afterpay are examples of this.
Globally, between 2018 and 2020 digital-first banks with non-linear models experienced compound annual revenue growth of 76 per cent compared with the 44 per cent achieved by digital-first players operating traditional business models.
The outperformance of digital-first players that challenge traditional models with non-linear approaches should serve as inspiration for incumbents wanting to achieve breakout growth. Banks have the capability and potential to disrupt themselves - and win - by breaking down the old value chain and reconfiguring its parts to offer new and better customer packaging.
Accenture’s analysis found the adoption of non-linear models by Australian incumbent banks could lead to additional growth of 3.4 per cent or $A17 billion of banking revenue by 2025.
Incumbent banks now have three options.
- They could choose to stay their current course, become the best digital version of themselves and take a bigger share of a shrinking market. However, growth on this path will inevitably stagnate as aggressive new players continue to reshape the industry and increasingly take revenue away from traditional models.
- They could be fast followers – monitor the trends affecting the markets and products they want to own, react quickly to innovations as they come to market and strive to hold and grow market share incrementally.
- They could choose to become leaders. This option is for the most ambitious banks – the banks of tomorrow. These banks will choose markets where they have a competitive advantage and seek to scale up growth by reconfiguring old ways of working.
This doesn’t necessarily mean a shift from today’s business model to a completely new one but rather an evolution from managing a single, vertically integrated business towards managing multiple non-linear business models and roles in the value chain.
As a starting point, leading banks should set their strategic direction by deciding which markets they want to own and evaluating which areas they are best in class - selecting their roles in the value chain and finding partners they could benefit and source capabilities and products from and aligning those strategic choices with the right operating model and technology capabilities to see success.
The strong performances and high valuations of a new breed of digital-first financial services players show there are abundant opportunities for players willing to see banking in a new light. Banks that master the discipline of managing multiple business models at once - and of packaging different capabilities and product components into innovative solutions - will be able to outperform the market and move from defending market share to targeting real growth.
Alex Trott is Managing Director and Banking Lead at Accenture Australia
Click here to read the full report