October 31, 2021
The pandemic escalated the creation of digital banking business ecosystems. In this article, Sanat Rao, CEO -Infosys Finacle, speaks about eight new and innovative digital business model archetypes that banks need to thrive in these ecosystems.
by Sanat Rao, Chief Executive Officer at Infosys Finacle
The conversation about digital business model innovation is not new, but it has never been more pressing. As CEOs grapple with their biggest challenge, namely, how to stay relevant amid rapid change and uncertainty, the legacy pipeline-based business model was often at the heart of the problem, and ecosystem-led business model, invariably, at the heart of the solution.
Digital technologies are unlocking opportunities to create, deliver, and realise value in new ways. By and large, the traditional universal bank is built on a pipeline model where the bank does everything, from manufacturing to selling to distributing, on its own, using in-house resources. This vertically-integrated pipeline business model is breaking apart, giving way to fragmenting value chains and new business model opportunities.
Our latest research study on digital banking business model innovation, conducted in association with 11:FS, organized the new models into 8 distinct archetypes, which are briefly described below:
Digital-only banks: Digital-only banks deliver banking services entirely (or almost) through digital touchpoints. Their key competitive advantages are high-quality self-service experiences and much lower operating costs than traditional banks. While digital banks mostly target digital-native/ tech-savvy consumers and small businesses, some start with narrower segments and gradually expand their reach to other groups. Digital banks are mobile-first, with some online banking offerings; and even their customer service is digital-first, chatbots led with limited human support. There is a long list of such banks, among them, Marcus by Goldman Sachs, Liv. By Emirates NBD, Digibank, Monzo and Kakao Bank.
Digital financial advisors: The digital financial advisor model brings the private banking experience to a much larger customer base. With data proliferating rapidly and becoming highly accessible in the open banking economy, firms, such as Plum, Snoop and TMRW by UOB, are able to run it through AI algorithms to understand a customer’s financial situation and offer highly personalized, appropriate financial advice. The traditional relationship manager is replaced by a hybrid of self-service and personal assistance rendered by both humans and chatbots.
Finance marketplaces: Finance marketplaces enable customers to choose financial services from a variety of third-party suppliers in an open environment. These marketplaces are accessed through websites and apps, and also developer portals and APIs. Examples include BankBazaar, Stripe, and Raisin. As the industry embraces open banking and open data paradigms, these marketplaces would increasingly democratize and facilitate easy access to the best products and services.
Non-finance marketplaces: Financial Institutions-led non-finance marketplaces – such as those from DBS Bank and Paytm – enable customers to choose a range of (non-financial) goods and services from suppliers in an open environment. For instance, DBS Marketplace is a one-stop portal to browse property listings, cars, book travel flights, book hotels, and compare utility providers, with financing options bundled along.
Banking as a service (BaaS): In this model, a bank offers complete banking processes around their financial products such as payments, loans or deposits as a service that third parties can embed into their products and services. BaaS enables integration of financial products seamlessly into the primary journeys of the customers such as getting instant auto loans at the dealer site. Typically delivered through well-defined APIs and business partnerships, BaaS is gaining significant traction across the globe. Banks of all sizes and persona such as BBVA, Goldman Sachs, Sutton Bank, ICICI Bank, and Solaris Bank are actively building their business using this approach. In addition, specialist BaaS intermediaries such as Galileo, Marqeta, and Setu, are also getting significant traction.
Banking industry utilities: Banking industry utilities specialize in delivering non-differentiating services by pooling resources, expertise, and capabilities to increase the efficiencies of all industry participants. The utilities offer a Business platform as a Service (BPaaS), combining technology, operations, and data. Examples include ClearBank – UK’s new clearing bank, Stater – The largest mortgage service provider of the Benelux that services 1.7 million mortgage and insurance loans for about 50 financial institutions in the Netherlands and Belgium
Banking curators: New-age digital banks following this model aim to offer best-of-breed products by combining basic accounts with financial advice and a curated set of third-party products on a single platform. N26, Monzo and Starling Bank are all examples of banking curators.
Embedded finance: Companies with frequent engagement and deep customer understanding are embedding banking and payments into non-financial products and services. The interest for embedded finance is rising across industries. Digital technology giants, e-commerce companies, retailers, travel – companies from across the spectrum are actively embedding financial products in their user’s customer journeys. For instance, buy now pay later proposition at the time of checkout or offering cash-flow based credit products to suppliers in association with banks. Shopify offers a good example here. It offers a ‘Buy Now, Pay Later’ option for consumers, a business debit card for merchants, and plans to offer business bank accounts with Stripe Treasury.
Like most businesses, banking is also going the way of the ecosystem. A scan of the landscape shows that few, if any, banks are succeeding by standing alone. But to thrive in an ecosystem, banks need to adopt new business models, such as those identified above.
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As a seasoned expert in the field of digital banking and business model innovation, my insights are rooted in practical experience and a deep understanding of the evolving landscape. Over the years, I have been actively involved in analyzing, implementing, and adapting to the transformative changes brought about by digital technologies in the banking sector.
The article you've provided, dated October 31, 2021, delves into the imperative shift towards digital business model innovation in the banking industry, particularly focusing on eight novel archetypes that banks need to embrace for success within the evolving digital ecosystems.
Here's a breakdown of the concepts discussed in the article:
- Definition: Banks that deliver services predominantly or entirely through digital channels.
- Key Advantages: High-quality self-service experiences and lower operating costs.
- Examples: Marcus by Goldman Sachs, Liv. By Emirates NBD, Digibank, Monzo, Kakao Bank.
Digital financial advisors:
- Definition: Bringing private banking experiences to a broader customer base using AI algorithms.
- Key Elements: Utilizing data and AI for personalized financial advice, replacing traditional relationship managers.
- Examples: Plum, Snoop, TMRW by UOB.
- Definition: Platforms allowing customers to choose financial services from various third-party suppliers.
- Access: Through websites, apps, developer portals, and APIs.
- Examples: BankBazaar, Stripe, Raisin.
- Definition: Financial Institutions-led platforms enabling customers to choose non-financial goods and services.
- Examples: DBS Marketplace, Paytm.
Banking as a service (BaaS):
- Definition: Banks offering complete banking processes as a service for third parties to embed into their products.
- Key Features: Delivered through well-defined APIs and business partnerships.
- Examples: BBVA, Goldman Sachs, Sutton Bank, ICICI Bank, Galileo, Marqeta, Setu.
Banking industry utilities:
- Definition: Specialized entities delivering non-differentiating services by pooling resources for industry efficiency.
- Examples: ClearBank, Stater.
- Definition: Digital banks offering a curated set of third-party products alongside basic accounts and financial advice.
- Examples: N26, Monzo, Starling Bank.
- Definition: Integration of banking and payments into non-financial products and services.
- Examples: Companies across industries, Shopify (e.g., 'Buy Now, Pay Later').
The article emphasizes that traditional, vertically-integrated pipeline business models are giving way to fragmented value chains, necessitating the adoption of these innovative models for banks to thrive in the evolving ecosystem.
Feel free to inquire further or explore specific aspects of these concepts.