The banking model of the future

By Joerg Ruetschi

The banking industry is under tremendous pressure. Since the global financial crisis, a series of stringent capital and regulatory requirements have been introduced that have not only substantially impacted profitability but put into question the viability of some banking business models. Although most banks have responded by undertaking waves of restructuring, profitability still remains subdued and in most cases below cost of capital.

This is partly due to the inflexibility of the outdated and fragmented technology platforms used by many banks - as business portfolios have decreased, operating platforms have become disproportionately large. While incumbent banks have been restructuring, a series of technology innovations have also come to market, disrupting traditional distribution channels and threatening banking value chains.

New players have started to establish themselves in payments, lending and funding, often providing services to previously underserved client segments. Although initially these new developments were focused predominately on retail banking, new entrants have begun moving into corporate and institutional space, disrupting analytical, advisory and investment services that were in many cases dominated by a small number of global players. These Financial Technology (FinTech) companies are often portrayed as a principal threat to incumbent banks and the potential end of the traditional banking industry in a new, fairer and more customer-centric world.

But while technology innovation has brought new competition, it also provides incumbent banks with the opportunity to transform their own operating models. Components such APIs (Application Program Interface), Cloud Computing and Distributed Ledger Technology (DLT) have started to be used in renovating banks’ technology and operating platforms, leading to the potential of a fundamental transformation of the operating model. These new technologies allow banks to replace their heavy core infrastructure with an open, flexible architecture, reducing their outsized cost bases and repositioning their businesses in line with their core capabilities. Technology innovation is not only enhancing customer experience, it is providing banks with an opportunity to complete their transformation journey and eventually regain profitability in the new post-crisis environment.


The banking model of the future

Core banking infrastructure is already increasingly being replaced by Cloud Computing and standardised, off-the-shelf software solutions are replacing often expensive internally developed banking applications. Open architecture solutions such as API will allow the banks to become global digital banking platforms, partnered with best-in-class service providers, who will utilise their core infrastructure and customer base (supported by key regulatory initiatives such as the Payments Services Directive 2). Customers’ digital data will remain saved on the banks’ digital platforms, fulfilling mandatory compliance requirements such as KYC, AML and facilitating simple processing. But they will have seamless access to best-in-class service providers.

Banks will be able to focus on their core capabilities, becoming more distinct from technology organisations – optimising the business as well as the operating model with focus on profitability.


A Deals-led transformation

Technology innovation and open architecture will accelerate the consolidation of the banking industry as digital distribution channels increase the scalability of services. This will lead to a competitive selection process as only a small group of global digital banking platforms is needed in this new world, connecting clients to the best-in-class service universe. Differentiation will happen on a regional or even a local level and in service areas where specific skills sets are required. Participants must assess their competitive advantage and decide which role they want to play.

In order to prosper, banking organisations need to fundamentally rethink their strategy, divesting non-strategic businesses and reshaping their operational platforms by partnering with the right service providers and acquiring the right technology solutions. The complexity of the service universe and technology applications, and the speed of development in FinTech, require deep insight in competitive dynamics and an ability to effectively manage the process. At PwC, we combine the deep FinTech knowledge and insight required to address these issues with established financial services Strategy and Deals capabilities to provide you with holistic transformation advice. Please contact us if you would like to discuss this further.

 Joerg Ruetschi|  Director, Strategy
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