The Bank of the Future

When traditional distribution vanishes and data is open.

Banks are under pressure in the age of digitization. The emergence of open-data environments allows FinTechs and API-aggregators to potentially damage the 1-1 relationship banks have had with their customers.

New ecosystems are developing, with category dominators in e-commerce and social media extending their reach into financial services. Digitization is migrating sales and origination to the point of need and transaction, allowing others to intermediate. The core strategic question for banks is how to maintain their spot at the top of the relationship pyramid as relationships fragment and disintermediation threats come from many fronts, and how use data to their advantage.

A quick look around the world of financial services forecasts the shape of a future bank. The dynamics vary by region, whether China (financial-services eco-system plays by companies such as Alibaba and WeChat), Europe (strategic modularity in the wake of open-data access regulation centered on flexible ‘plug-and-play’ platforms), or the U.S. (FinTech collaborations for point-of-need and point-of-transaction reach and value-added capabilities). But the very different regional trends are likely to converge (with local customization) to create the shape of the bank of the future—which is likely to be built around four ecosystem pillars:

  • Cross-category ecosystem partnerships to bring more value to customers;
  • Distribution partnerships through FinTechs and point of sale owners;
  • Product partnerships to bring best solutions to customers;
  • A portfolio of data providers integrated through a value added analytics-and- insight capabilities.

And all of that built on flexible, plug-and-play, API-based ecosystem core orchestration platforms, with a land-grab for relationships underway.

In an expanding world of product specialists, agile platforms and savvy aggregators, banks need to act strategically to avoid commoditization as they build the bank of the future.

China: Cross Category Monetization

In China, dominant category leaders such as Alibaba and Tencent have expanded into financial services through Alipay and WeChat, which is leveraging its 700mm+ users to offer a range of payments and insurance products. WeChat began as an instant messenger, went on to revolutionize shopping, and is now the basis of a connected life. Over 300 million credit cards are attached to WeChat accounts.

When a dominant force like WeChat enters financial services, traditional providers are pushed into the second tier and lose control of their customers. It’s not just that Alibaba and WeChat are finding new ways to monetize their existing customers; they are leveraging their dominance in one category to enter totally new categories, creating value by continually expanding their ecosystems. And they are using payment flows and capabilities, and loyalty networks, to create stickiness in areas far beyond their initial core category.

Europe: Strategic Modularity And Open-Data APIs

European regulators are requiring banks to allow open access (e.g. PSD2) to their customer data (with permission) to external parties, such as investment-recommendation services or account aggregators. Similarly, the UK Treasury is developing a framework for an open-banking standard, allowing third parties to access customer data through APIs. Germany is mandating access through FinTS.

This leads to an emerging ecosystem of interdependent relationships facilitated by modular platforms that use APIs to share data and deliver services. As modular products fragment banking relationships, banks are struggling to hold onto customers who are apt to cherry-pick services from different providers. Banks are scrambling for value-added integration capability to retain the first spot in the client relationship by building flexible plug-and-play platforms (such as BPCE-Fidor). Banks are using FinTech partnerships to reach customers where they are and at the point of need. Figo, for example, already has integrated many relevant financial players and is becoming a platform for aggregation, advisory, dynamic account switching and cross-product optimization services. Most banks have now picked their platforms, and are actively building product and distribution ecosystems in an open-data environment. Banks like Barclays and Deustche Bank and others are building out their APIs with speed.

U.S.: Distribution At Point Of Need

As banks move towards an asset-light model, the physical footprint will gradually diminish. The future is about being where the customer is, when the need occurs along full journeys and beyond banking, rather than drawing the customer to branches. Banks are increasingly using other partners and non-proprietary channels to distribute products and services—such as car dealers, retail outlets, realtors.

In partnership with digital car-buying service TrueCar, for example, JPMC’s Chase Auto Direct layers auto financing onto online car shopping. Approved borrowers that applied online are routed to a network of Chase-affiliated dealerships, where they find loan paperwork ready. For home-renovation and construction borrowers, Fifth Third Bank uses Greensky as a loan origination tool, and then makes funds instantly available for customers at POS with contractors or merchants.

Call to Action

To maintain their spot at the top of the relationship pyramid, banks need to develop explicit and comprehensive strategies across all of the four pillars of the ecosystem-based bank of the future, and make critical core platform decisions. Banks should develop a virtual-distribution strategy with FinTechs and other partners to reach people at point-of-need or point of transaction. Banks should partner with leading new platforms, like Figo, Fidor or Tally, or build them. They should review their category position and opportunities to monetize relationships through new cross-category value. They should push into account switching and cross-product optimization to add incremental value to their existing customer base despite fragmentation. And they should decide where to manufacture and where to distribute, and lock up the right partnerships. In an expanding world of product specialists, agile platforms and savvy aggregators, banks need to act strategically to avoid commoditization as they build the bank of the future.