Innovations that change the way value is offered to consumers threaten the integrity and resilience of the traditional banking model.
New trends in financial service offerings such as embedded finance and decentralized finance threatens the integrity of the traditional banking business model. Examples include Uber’s embedded payments and Afterpay’s cannibalization of unsecured consumer credit. These trends also eroded the value of the ‘trust premium’ banks have held for so long. For example, Nano Home Loans, a non-bank fintech lender established in 2019, offers to approve home loans at highly competitive rates within ten minutes of an online application; this value proposition has resulted in faster-than-system growth rates.
While fintech and innovators dismember the banking value chain, incumbents also face the very real threat of highly capitalized tech giants. Many with deep customer connections and loyalty, are stepping directly into financial services, potentially redefining the category. For example, although Google has abandoned plans to launch Google Plex (a transaction account for Google Pay), the proposition found strong consumer endorsement of innovative features that embedded financial services into everyday lifestyle choices.
Finally, regulators are deliberately adjusting their posture to help increase competition (e.g., open banking) and reduce entry barriers (e.g., the Restricted ADI offers a limited risk fast track for small challenger banks to start operating as a bank in Australia). Consequently, banks are (and should be) exploring alternative business models to deepen their value pools, entrench customer relationships and expand their value propositions.
As banks evolve their market role, they will likely also need to adapt their business models. Many of the innovations that have been a threat may also be a source of strategic strength as they incorporate them to complement their core.
Adapting the business model — platforms and ecosystems
Although platforms and ecosystems are not mutually exclusive, they are distinct. Platforms can help reduce market friction by connecting suppliers with the consumer, while ecosystems orchestrate complementary value propositions focused on a pattern of customer needs (Fig. 1).
By adopting these innovative business model options, banks can complement their basic banking model (deposits, loans, transactions) and market strengths (e.g., scale of customer franchise, valuable banking licenses, strength of balance sheet) with new value propositions to help differentiate and deepen customer relationships.
For example, Goldman Sachs pivoted to become more like a platform, expanding its portfolio into consumer banking by deploying the Marcus offering, including a credit card partnership with Apple. A goal for Marcus has been to establish banking as-a-service — a platform business.
Meanwhile, DBS Singapore has built DBS Marketplace to orchestrate ecosystems of partnerships offering value propositions shaped to address specific lifecycle needs experienced by their customers, such as car ownership. This ecosystem model deepens the bank’s relationship with their customers and keeps value circulating within the ecosystem.
Analysis: This article discusses how decentralized banking business models are threatening the integrity of traditional banks. I appreciate how instead of pointing out the problem and not offering potential solutions, KPMG explains how certain companies are adapting to this issue and making lemonade out of lemons. For instance, Huntington could benefit from embedded finance and decentralized finance models by partnering with various platforms to expand on the customer and differentiate themselves from other traditional banks. I believe this is something to be investigated, and I question what type of propositions and relationships would work well for the Huntington customer. It will be interesting to see if they already have the technology necessary to assess data on what and where their customers are spending the most money. I think this could work really well in the collaborative spirit of today – brands continue to collab to expand their customers, so why can’t banks?
Citation:
Rethinking new business models for banking. KPMG. (n.d.-a).
https://kpmg.com/xx/en/home/insights/2022/04/rethinking-new-business-models-for-
banking.html
