Chris Hoover Mauro Macchi

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Market dynamics, evolving customer expectations and behaviors, and the emergence of digital competitors are converging to necessitate a fundamental change to what banks do—and how they make money.

In this new environment, simply being better at what they currently do won’t be a viable strategy for growth. To thrive, they must adapt their business models and turn digital disruption into digital differentiation.

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Customers think differently about banking services in the digital age. Recent Accenture research1 has identified three emergent consumer personas, which are differentiated by their attitudes toward cost and pricing, as well as their interest in new kinds of services (see sidebar below).

WHO ARE BANKS’ CUSTOMERS IN THE DIGITAL AGE?

NOMADS are highly digital and primed for new banking models. They value self-service, and look for new ways to access products, advice and services.

HUNTERS are more loyal to traditional banking models. Yet, even they expect high-quality digital experiences.

QUALITY SEEKERS look for quality in both new and traditional services. They are open to automation and will adopt new tools if they enhance their experiences.

DISRUPT ED

BANKING,

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What these customers want, how they engage, and what they are willing to pay for are turning the concept of “traditional” banking on its head:

BRANCHES ARE LESS RELEVANT. Sixty-six percent of banking customers now execute half of their financial transactions online.2

TRADITIONAL SERVICES ARE BEING DISINTERMEDIATED. Seventy-one percent of customers are willing to receive automated support.3

CUSTOMER LOYALTY IS INCREASINGLY ELUSIVE. Fifteen percent of customers in mature markets (and 23 percent in emerging markets) switched banks in 2016.4

VIRTUAL BANKS ARE STEALING CUSTOMERS. In 2016, more customers joined online-virtual banks (19 percent) than left (8 percent).5

OTHER NONTRADITIONAL BANKING PLAYERS ARE WAITING TO POUNCE. Thirty-one percent of all customers (and 41 percent of Gen Zers) would consider purchasing banking services from an online provider, such as Google, Apple, Facebook or Amazon (GAFA).6

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FIGURE 1 Banking Future Growth Value Analysis (As percent of enterprise value)

GAFA

49%

40%

20%

-11%

FinTech Bank Digital Leader

Bank Digital Laggard

Source: Accenture Research analysis on Capital IQ data, March 2017.

THE FINANCIAL IMPLICATIONS OF THESE TRENDS ARE STARK. Our analysis has shown that new competitors could ultimately erode one-third of traditional bank revenues in North America in just a few years.7 The prospects are particularly bleak for banks that have not yet launched aggressive digital transformations (see Figure 1). But digital prowess is no guarantee of success. That’s because digital levels the competitive field. As technologies advance, new players will enter the scene rapidly. Even the most digitally savvy traditional banks will lag behind competitors who do things fundamentally differently.8 To survive, banks will need to beat their nontraditional rivals at their own game.

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Traditional banks can no longer just strive to be better at what they do. Within a few years, their current business model, which calls for them to provide a full range of banking services and channels by default, will no longer be sustainable. To win in the digital economy, today’s banks will need to engage with customers in new ways and connect with broader business ecosystems to offer more than traditional banking products.

Based on our analyses and client experiences, we believe four business models are poised to reshape the industry. These models are now possible to pursue because of the maturity of the technologies that will enable them. They differ not only in the services they provide, but also their market focus, the manner in which they make money, and how they evaluate their performance (see Figure 2). Importantly, none of these models is mutually exclusive. A bank may pursue one model, or select aspects of each to deliver a truly differentiated service. Whether they are applied in isolation or in combination, we anticipate these business models will deliver the majority of banking revenues in just a few years.9

Because transitioning to these new models is a multiyear journey, it’s critical that banks begin their migrations today. Those that wait will be left behind.

WILL DEFINE THE FUTURE OF BANKING

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DIGITAL RELATIONSHIP MANAGERS. These banks are fully integrated, top to bottom, inside and out. They use data insights to facilitate, manage and differentiate seamless, personalized and relevant customer experiences. Importantly, they optimize physical and digital channels, turning them all into productive assets to offer financial and nonfinancial solutions, not products. In this regard, Digital Relationship Managers will take what Accenture calls the Everyday Bank model10 to new heights. They will do so by delivering highly fluid, personalized and experiential Living Services that extend from banking to areas as divergent as housing, travel, health care and beyond. In so doing, they position Everyday Banks as dynamic, digital financial managers delivering individual relevance, not mass appeal.11 Ping An, with approximately 90 million customers,

aims to become China’s leading personal financial service provider by occupying a position at the center of a vast digital ecosystem. With an integrated platform, Ping An brings together traditional insurance, banking and investment services and nontraditional financial services in the areas of health, shopping, transportation, housing and entertainment. Its nontraditional lifestyle businesses serve as a channel for selling core financial products. In 2014, more than 11 million customers migrated from nontraditional finance products to one of Ping An’s core finance businesses.12

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DIGITAL CATEGORY KILLERS. These banks identify a winning niche and focus their energies on doing that one thing very well. Their success in a given category depends on continuous product and service innovation, as well as their ability to maximize distribution of best-in-class products and services through multiple channels—including channels owned by banks that have adopted other business models.

Betterment (for wealth management) and Quicken Loans® (for mortgages) are examples of companies with this killer instinct.13, 14

OPEN PLATFORM PLAYERS. These banks relinquish their core products and, instead, use their digital prowess to connect business ecosystem partners—including former competitors and emerging FinTechs—with a platform that allows them to interact with customers, and create and sell their products and services. For Open Platformers, efficiency in managing (and onboarding) ecosystem suppliers and partners is critical.

Berlin-based solarisBank, which bills itself as a tech company with a banking license, provides a modular banking platform upon which its partners can build state-of-the-art financial services—from mobile, peer-to-peer payment services to consumer financing. Within its first year of operation, solarisBank attracted more than 20 companies to its platform.15

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UTILITY PROVIDERS. These banks operate behind the scenes, providing either end-to-end product solutions or standardized transaction processing to other banks (or organizations that act like banks). Utility providers use advanced technologies, robotics and automation to keep overhead low. They build scale by packaging and provisioning compliant financial services at very low margins.

Bank of New York Mellon chose this business model and shed its noncompetitive lines of business to focus on the B2B world of investment management and asset, issuer and clearing services. Today, BNY Mellon serves 80 percent of the Fortune 500, 75 central banks, 90 percent of global central bank reserves, and half of the top 200 life/health insurance companies.16

FIGURE 2 Four future banking business models.

Source: Accenture.

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Because pivoting to a new business model is not something that will happen quickly, banks must begin the journey today. Three actions can improve their likelihood of success:

BE BRILLIANT. Traditional banks are notoriously inefficient, with cost-to-income ratios typically above 60 percent.17 Any path forward must begin with banks shoring up core business operations to drive their cost-to-income ratio to a healthier 40 percent. The goal is to “stop the bleeding” and create a stable foundation from which to pivot or grow. Key components they need to get right include personalization of customer service, multichannel integration, and digital channel enhancements. It will also be imperative for banks to use new metrics to measure value in the digital age (see sidebar below).

PREPARING FOR THETRANSITION

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BE REALISTIC. Most banks will be tempted to pivot toward the Digital Relationship Manager model because they believe it is an evolutionary, not revolutionary, step. The truth is that few will thrive under that new business model. Banks must realistically assess their abilities to deliver the broad array of core banking services customers now demand. In all likelihood, they will come to the conclusion that their future success does not lie in offering universal services for everyone, but in delivering a narrower, dominant service, platform or product that meets a specific need for customers or the financial (and nonfinancial) sector.

BE BOLD. Once banks have decided the direction they want to go, they need to jettison those parts of the value chain that will likely be disrupted. This may involve abandoning certain lines of business or even certain customer segments and, instead, focusing on those areas in which they excel and are most likely to maximize future value.

A NEW LENS ON VALUE

Traditional banks have historically compared against peers by using a standard set of key performance indicators, including return on equity, return on assets, loan growth, and cost-to-income ratios.

When they compete against digital players, these traditional measures of success are no longer sufficient. They must be augmented with new KPIs such as share of trust, share of mind, data value, digital platform value, ecosystem value, simplicity and even basic awareness.

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It’s an understatement to say that banks are now competing in a market that is more challenging than any in living memory. The pressures—from customer demands, digital disruptors, regulations and other market forces—will only become more intense. New business models are emerging that will level the playing field and allow traditional banks to successfully compete with their banking and nonbanking peers. Within these models, there are plenty of opportunities for winners to thrive. The greatest success will go to those who begin their transition now.

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ON THE FUTURE BANKING

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JOIN THE CONVERSATION @AccentureStrat

www.linkedin.com/company/accenture-strategy

CONTACT THE AUTHORS

Chris Hooverchristopher.hoover@accenture.com Raleigh, North Carolina, United States

Mauro Macchi mauro.macchi@accenture.com Milan, Italy

NOTES1 Accenture, “Beyond digital: How can banks meet customer demands?” 2017.

2 Accenture Strategy 2016 Global Consumer Pulse research.

3 Accenture, “Beyond digital: How can banks meet customer demands?” 2017.

4 Accenture Strategy 2016 Global Consumer Pulse research.

5 Ibid.6 Accenture, “Beyond digital: How can banks meet

customer demands?” 2017.7 Accenture, “The Everyday Bank: How digital is

revolutionizing banking and the customer ecosystem,” 2015.

8 Accenture Research analysis on Capital IQ data, March 2017.

9 David Edmondson, “Banking innovation: Everyday banks disrupt the status quo with living services,” Accenture Banking Blog, May 5, 2016.

10 Accenture, “The Everyday Bank: How digital is revolutionizing banking and the customer ecosystem,” 2015.

11 Accenture Interactive, “The Era of Living Services,” 2015.

12 Ping An 2015 Annual Report and Accenture analysis, 2015.

13 www.betterment.com 14 www.quickenloans.com 15 www.solarisbank.de 16 www.bnymellon.com/us/en/timeline.jsp 17 Ethan Bratton and Francis Garrido, “Cost-to-income

ratios of banks worldwide,” S&P Global market Intelligence, April 7, 2016.

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