Collaborative, partnership-driven approaches define the bank of the future—but for traditional banks, the shift to openness requires enormous changes throughout their organizations. How, then, can this be accomplished?
The foundation for the new shift is banking as a service (BaaS). Like all “as-a-service” things, BaaS is an open, fluid business model that aggregates products and services from in-house and third-party providers—and in so doing lowers costs as it attracts more customers. It’s an approach Amazon has refined to a high art, Fiat is following for connected cars, and Schneider Electric for smart cities. BaaS also provides banks a springboard for the future: Through the open approach, banks have a ready platform to try out new ideas and continuously improve.
What’s occurring today to fuel the rise of banking as a service? The convergence of three disruptive trends, each of which represent significant shifts on their own—and upheaval when taken together.
The first is the ascendancy of millennials and their love of accessibility, convenience and speed. Think Amazon and Netflix. The second force is fintechs. Laser-focused on millennials, fintechs are adept at digital technologies and benefit from a relaxed regulatory framework. What’s more, they’re growing rapidly: Over the last two years, fintechs and non-bank institutions raised $19 billion in capital—90 percent of it aimed at profitable banking segments such as payments, peer-to-peer and consumer lending, as well as wealth management.
The upshot? As banks chart their digital futures, business and consumer lending are their biggest concerns.
Regulatory shifts form the third disruptive trend. Governments and regulatory bodies across the globe are focused on pricing transparency and open banking standards—thus compelling traditional banks to digitize quickly.
Transparency-driven frameworks such as the European Union’s Revised Payment Services Directive require banks to reduce barriers to entry and make financial data available to third parties via application programming interfaces (APIs). Collectively, the regulatory changes threaten to strip banks of $660 billion in profits over the next half decade.
While this may sound like a lot to wrestle with, there is good news: Getting to openness (and resultant success) isn’t a linear process. In this article, we’ll outline five aggregation strategies that your bank can start work on today.
Five resolute responses
Many traditional banks stand well positioned to externalize services and aggregate capabilities with new entrants. The following aggregation strategies can help prepare financial organizations to thrive within the banking as a service model and to provide the innovative, data-driven services that represent the bank of the future:
Take a “frenemies” approach. Partner with the disruptors. Actively pursue and foster relationships with fintechs and non-banks. Choose partnerships that leverage each parties’ capabilities and create a mutually beneficial digital ecosystem. When JPMorgan Chase launched its small-business loan service in 2016, it collaborated with OnDeck to use the online lender’s platform rather than build out the infrastructure from scratch. Chase ensures its value-add in the strategic partnership. However, to retain control over the customer relationship, the loans are Chase branded and maintained on the banks’ balance sheet.
Create a banking platform. A plug-and-play platform lets partners co-build, innovate and deliver consumable financial services. The construct is akin to Android or Apple iOS operating systems: They’re crucial to device usage but not applicable for every app or service. Choose a segment and focus on quality. By leveraging a layer of universal APIs to collaborate with fintech and non-bank ecosystems, banks become vital players through a licensed, regulated platform that services can plug into. Germany’s online Fidor Bank has pioneered open APIs in banking. It launched the first direct-to-consumer marketplace that lets customers choose among solutions from 50 providers to meet their financial needs. Any API-enabled organization can connect to its platform.
Double down on slow money. Our research found that money falls into two categories for consumers: fast and slow. Fast money includes everyday finances, such as checking accounts and paying bills. Slow money refers to more complex financial matters, such as pensions and investments. While access to the short-term pool has become nearly frictionless and largely dominated by fintechs, traditional banks can capitalize on slow money through their historical advantage in the capital/asset management and investor portfolio management. To better serve consumers’ slow money needs, we expect to see banks undertake two important paths. One is a restructuring that will enable them to enhance the customer relationships at the heart of slow money. The other is striking up partnerships that let them tap into fast-money services and offer them to customers.
Own the customer experience and journey. Banks can remain at the forefront of the trust quotient by communicating more effectively and consistently through consumer touchpoints. That includes customer-facing applications, but also better API support to take banking services directly to customers, a la Mint. Simply put, many customers prefer to entrust their business to well-established brands. That preference favors banks and keeps them a central part of the modern customer experience.
Become the bank of the future. That is: To maintain a central role in the digital ecosystem, become a contributor to the API-led and open banking programs that will soon come to define banking and financial services. With a holistic strategy, banks can advance their partner ecosystem, determine the means to monetize and meet the expectations of younger consumers.
As collaborations and partnerships redefine banking, financial organizations can use aggregation strategies to embrace open models—and appeal to tech-savvy customers. The key isn’t to accomplish it all in one fell swoop but to get started on the journey. Let’s begin today.
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