Blockchain technology can help banks redesign their banking processes

09 February 2017

Blockchain based technologies have the potential to disrupt the financial services industry, as reported by a host of industry players. Incumbent financial institutions have been exploring the potential of the technology as a means of reducing complexity, cost and improving efficiency. A new study finds that around 50% of surveyed companies have already begun to make strategic investment choices, with particular focus on cross boarder payments, digital identities and clearing & settlement.

Blockchain rooted technologies has been heralded as a disruptive force in the financial services industry, capable of undermining traditional businesses models and technologies currently employed in a range of key financial services transactions. Lowering costs, improving transparency and transaction speed are all cited as possible advantages. And, while the technology has considerable hurdles to overcome, a range of players, from professional services firms and incumbent financial services institutions, to the startup scene, are developing propositions.

In a new study, by Finacle (an arm of Infosys), the authors look into the key relationship between financial services institution and blockchain technology. The study involved a survey of more than 100 business and technology leaders from 75 small to large financial services institutions across the globe.

Financial services institutions working on blockchain

The study sizes up the current interest of financial services firms in FinTech technologies, dividing them into three categories based on their current relationship with, and investment in, the technology. Of the respondents, around 50% are ‘late adopters’, which means that they remain in ‘wait-and-see’ mode, preferring to bet on certainties when the technology begins to sufficiently mature. A further 35% are in the ‘early followers’ category, those that have identified potential use cases for blockchain technology and have strategies that may see up to $1 million invested into solutions. The final, and smallest category, are the ‘innovators’ – this category accounts for around 15% of the group, with full scale investment in potential solutions, and more than $10 million in investments already made.

Priority use cases testing and application for a financial institution

The research also explored the key use cases that financial institutions see for blockchain technologies. Respondent financial institution priorities, according to the survey, are in the areas of 'cost and complexity in business processes reduction' and 'to increase operational efficiency'.

‘Cross boarder payments’ ranks highest for potential deployment, scoring 4.1 on a scale of 5, followed by ‘digital identity management’ and ‘clearing & settlement’, both on 4.0. The areas of least priority include ‘repurchase agreements’ at 2.9, ‘otc derivatives’ at 3.4 and ‘open account’ at 3.5.

Who drives blockchain investment in banks and financial institutions

The research further looks at who are the main drivers of blockchain investments in banks and financial institutions. The list is topped by Chief Technical Officers (28%), followed by Chief Innovation Officers (23%). The third largest group, Line of Business Heads, comes in at 21%, while Chief Information Officers are fourth. Chief Digital Officer and ‘others’ follow suit.

The study in addition finds that many (50%) of the financial services institutions surveyed are opting to work either working with a FinTech startup or technology company, while 30% are leveraging a consortium model.

Challenges in implementing blockchain technology

Asked about the largest implementation challenges in the blockchain technology space, the respondents point at ‘readiness of ecosystem and need for cooperation within banks’ as the biggest challenge, with a score of 4.01, followed by ‘integrating blockchain applications with existing enterprise applications’, at 3.87. Further obstacles cited are that institutions have a ‘lack of governance models among stakeholders’, which comes third, and a ‘lack of maturity of blockchain technology’, which scores 3.12.

A ‘lack of clarity on regulatory requirements’ takes fifth spot with a score of 2.89, while the least cited challenge is ‘data privacy / security issues’, with a score of 2.67.

Opportunities in using blockchain technology

The biggest opportunity highlighted by respondents is the ‘potential for creating new investible assets’, which scores a 4.13 out of 5 on the priority score. 'Automation of process across enterprise’ takes second spot, with a score of 3.41. ‘Cost reductions’, which is cited as one of the main drivers for the technology, comes in third equal with ‘reduce settlement and transaction time’, both with an impact score of 2.9. The lowest impact opportunity mentioned by respondents is ‘improved transparency among counterparties’.

Sanat Rao, Chief Business Officer at Finacle, says, "This research reaffirms our belief that the blockchain technology has potential to help banks reimagine banking processes. The technology can help banks automate inter-organisation processes, significantly improve transparency and reset existing operational benchmarks. Several progressive organisations have already executed pilots to validate these propositions. We believe, in the coming quarters, the industry will experience greater momentum towards rolling out lab-pilots to real-life use cases."


The business and operating models of digital-only banks

04 April 2019

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.