Banks being forced to find different revenue and operating models
Robert Jan Prins, Director of the Financial Solutions & Services wing of Centric, reflects on the changes in the financial industry and how the IT company supports organisations in the new playing field.
Traditional banks are slowly but surely disappearing from the financial industry landscape and are being replaced by apps. For the majority of customers, it is extremely convenient to be able to do their banking on their laptop, tablet, or smartphone. To be able to provide these customers with interactive and personalised services 24/7, many banks are turning themselves into IT companies – research has shown that 25% of all bank staff are IT professionals. Today’s core processes such as payment transactions have become a commodity, i.e. a process that can be out-sourced or automated. Banks are already doing so on a large scale, leading to yet more job losses in their administrative operations. This sweeping consolidation is leading to small banks closing down or being swallowed up by larger companies, while banks that do have large-scale operations often decide to downsize to become more effective and efficient.
Measured in terms of FTEs, banks are getting smaller. However, banks are also facing an increasing regulatory burden in the areas of compliance, security, and industry regulation – both on a domestic and on a European level. All these new rules and regulations have to be incorporated into and configured in systems, while there are fewer people available to do it. And last but not least, margins on financial products are lower than ever. The conclusion is that banks’ traditional revenue model – especially given the current climate of historically low interest rates – needs an overhaul.
Banks are basically forced to ponder their raison d’être. If a bank wants to stay relevant and competitive in the long term, it is going to have to transform into a ‘new bank’ – a bank that stands out on the front end through state-of-the-art services for customers; 24/7, interactive, and personalised. Customers expect real-time online transactions, with dashboards and portals for instant insight into, and preferably also management of, their assets. To make that happen, partnering with FinTech firms seems like the only way to go. These companies have the capability to launch new products and services straight from the drawing table, unhindered by technical debt or legacy issues that traditional banks often face. However, FinTech companies do not (yet) inspire the kind of trust that still gives well-established banks the edge over these newcomers. This is why it is essential that they work together.
All in all, banks will have to find a suitable answer to all the above developments and find different revenue models. Such a new revenue model must be based on the front end, i.e. where the bank interfaces with customers. The quality of customer contact is, however, determined by the entire chain which calls from flexibility of the underlying infrastructure. One issue would be to merge a bank’s own data with external data to create a comprehensive customer profile. But there is also the very practical issue of complying with requirements imposed by industry regulators. Only when the entire chain is perfectly aligned, can banks start working on a unique and differentiating user experience.
To be able to respond quickly to changing customer demands, companies need to be lean and mean. If banks manage to farm their generic non-differentiating processes out to external parties as much as possible, they will be able to focus on the front end and make the difference there. Centric is such an external party. We in-source back-office processes for things like payments, savings, securities, loans, and cards. And we will ease a lot of the burden involved in rendering account to industry regulators. Aside from these banking services, we take care of hosting, production management, and application and data management. And given such services are part of our day-to-day routine, we can provide continued support in this area.
Related: Top 10 technology forces that will shape financial services in 2020.
