Executives in financial services anticipate more shut-eye

17 February 2016 Consultancy.uk

Financial services industry executives are being faced with an increasingly complex landscape. Increased competition from cross-industry players and FinTech operators represents just half of the challenge, with new regulations, the need to update critical systems and the hovering risk of being disrupted out of the market are among the concerns keeping executives up at night.

In Capco’s fifth annual study of the financial services industry, titled the ‘No Sleep Survey 2016: Another Exciting Year Ahead’, the consultancy explores what is keeping executives in the Benelux up at night. The survey explores the headline challenges faced by the financial services industry, as well as sheds light on the key trends forecasted to impact the market in the years to come. 24% of the respondents works in wealth and investment management, 22% in corporate and investment banking, 21% are active in the retail banking segment, while the remaining 33% comes from the wider financial services industry.

Past five years of organisational challenges

Financial services challenges
The survey reveals that since 2011 the degree of organisational challenges have, across the board, been on the rise. Headcount productivity remains the main challenge faced by banks, with recent years showing a steep upwards trend. Increased competition too is of concern, and has been trending upwards since 2011, with in particular competition from advanced digital players regarded as a major threat. Cost control too is key challenge, up considerably on 2011. Challenges to costs and productivity are both related, according to the firm’s analysis, on trends in digitalisation and technology as well as regulatory changes to meet various transparency and capital demands. Top line growth and product innovation are among the top concerns, although they have seen slight declines in focus since 2014.

Competitive challenges

Competition is the result of a range of incumbent and new players coming to affect the market. 40% of respondents rank existing financial services organisations as the main risk to their business model. The second biggest threat (24%) comes from technology companies that are able to leverage large capital expenditure, strong brands and well integrated services. Interestingly, another recent study, by Capgemini, found that technology giants such as Google and Apple rank ahead of existing large incumbents when it comes to competitive threat. FinTech startups come in third in Capco’s survey, with 20% of respondents marking them as a risk – their innovative solutions pose problems in a range of sectors. Non-financial retail companies, such as groceries, petrol stations and captive banks (for instance with their roots in the automotive industry), come in fourth at 16%.

Technology challenges 2015 vs 2016

One of the focus areas faced by banks is technology. Not only does technology improve productivity, but it also represents a means to cut costs while providing a range of value adding services to customers. Last year the ‘replacement of legacy IT systems’ and ‘digitalisation and mobile offerings’ both came in at 21% in terms of major challenges, this year ‘digitalisation and mobile offering’ has squeezed ahead to come in at 24%, with ‘replacement of legacy IT systems’ coming in at 23%. ‘Data protection and security’ concerns are up slightly on last year, jumping from 17% to 20%. The demand for ‘system conformation with new regulations’ dropped slightly from 23% to 18%.

Client servicing challenges

Changing services
On the back of changing expectations in the market and cross-channel competition, banks are facing increasing pressure to provide excellence in their customer experience. The report from the consultancy finds that, when it comes to client servicing, ‘enhancing the customer experience’ is the largest challenge at 23% of the respondents, followed by demand for ‘multi-channel offering’ at 21%. ‘Competitive pricing’ and ‘customised product offering’ come in third and fourth respectively with 17% and 12% of respondents. According to the authors, competitive pricing was the third focus point for many organisations because of “recent interchange fee regulation which will put pressure on all transaction processing organisations.”

Digital services priorities

Asked for how technology will be used to enable CEX objectives, 31% of executives point at the creation of ‘personalised customer interfaces’. “There is a clear trend towards personalised interfaces that are adapted to customer segments that go beyond the traditional retail and private divide. Many banks are going further in that, by trying to building communities and empowering clients, for example, with entrepreneurs,” write the authors. Building spending analysis tools for clients comes in second, noted by 30% of the respondents, followed by ‘third party document storage in virtual vaults’.

Financial services challenges

Looking ahead, executives forecast a shift in focus from regulation and related implementations to technology related topics, such as digitalisation and IT modernisation. Even though the industry still finds itself amidst the aftermath of the crisis, the overall outlook is brightening up. “There is a clear trend towards a more positive outlook… and maybe, just maybe, senior executives will get a little more shut-eye than they have in recent months,” the authors conclude.

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The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

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.