Part 1 of 3: Transforming the Banking Business Model to Thrive in the New Normal
As the financial crisis turns five years old, banks are still struggling to determine how they will return to the profit margins of yesteryear. Net interest margins in most economies remain dreadfully low, limiting the ability of banks to profit from the capital they can put to work. This limitation is being compounded even further by the pressure to avoid significant risks and a general lack of trust in the banking industry.
These challenges are necessitating conversations within banks on how they adapt their business models to what is being described as the “new normal.” However, many of the proposals surfacing are largely extensions to traditional banking models, or ideas that have been discussed in the past, but possibly not pursued due to the lack of pressure to change. We are still seeing banks attempt to improve responsiveness to marketing campaigns and offers, largely focused on cross-selling and increased share of wallet. They are working on more advanced product bundling and profitability, or relationship-based pricing. They are also trying to find new ways to generate fee-based revenue from customers, like charging for services customers have grown accustomed to receiving for free, some of which have turned out to be disastrous public blunders.
We are also seeing a tremendous focus on streamlining operations to drive down costs and improve cost-income ratios. This is being pursued in multiple ways, including reducing staffing levels, driving customers to lower cost channels, divesting of some business lines, pulling out of investments in new markets, consolidating systems, infrastructure and teams, and even de-scoping or flat out eliminating projects that had been focused on delivering new capabilities.
These efforts to reduce costs are being made even more difficult by increasing and continuously changing regulatory requirements. This is absorbing the focus and budgets at many banks, with anecdotal evidence indicating that as much as 60-80% of their “new project” IT spend must be dedicated toward regulatory compliance. This leaves a big gap in the ability to support innovation or pursuit of new business models.
Even the banks in many emerging markets, which have benefited from high growth rates and the opportunity to expand into new areas, such as serving the unbanked and expanding into wealth management, are not in the same position they were a year ago. As the hyper-growth is beginning to slow, they are finally seeing the effects of the drop in demand from mature markets, the slowing of growth in their own economies, and competition in their local markets.
So where does the banking industry go from here? Will banks continue to be straddled with the challenges of this “new normal”? Or is there a way for banks to return to their historical levels of profitability? The true answer probably lies somewhere in the middle, but the path to get there will not be through traditional banking products and services, nor will they be through the same business models banks have relied on for the past century. A recent Wall Street Journal article, “How Big Data is Changing the Whole Equation for Business,” said, “Businesses in a slew of industries are putting [big data] front and center in more and more parts of their operations. They're gathering huge amounts of information, often meshing traditional measures like sales with things like comments on social-media sites and location information from mobile devices. And they're scrutinizing it to figure out how to improve their products, cut costs and keep customers coming back.“ Banks must start exploring new business models and transform how they go to market. They must develop new, innovative products and services that add value to their customers in new and different ways.
This will challenge banks to expand the value proposition they offer to customers. That means going beyond just securely storing money, lending money and facilitating payments. Banks must evolve to help people spend their money more wisely and identify more ways to save. It means going beyond helping them grow their wealth, to helping them manage their finances and get more value for the money they have today. In essence, banks should be helping customers get more for their money, while simplifying all activities related to money - whether it is collecting, borrowing, spending, transferring, saving or growing it.
There are many companies in a number of industries that have driven large market valuations and generated significant revenue streams by deriving insight from information about consumers and their interests. And the most successful companies are providing a value-added service to both the consumers and their merchants. They are helping people find what they are looking for on the web and sharing those searches with merchants that may be able to provide people with something relevant to what they desire. They are enabling people to socialize with their friends while helping companies build communities to promote their brand and products. They are providing a way for people to publicize their thoughts and ideas, while helping merchants better understand sentiment and hot topics of interest.
This represents an incredible, yet untapped opportunity for banks. Undoubtedly, banks have better and more valuable information about consumers than any other type of company. Banks know the approximate income level of their customers based on how much gets deposited into their accounts on a regular basis. Banks know how much their customers spend based on what leaves their accounts. Banks know what companies customers spend their money with based on credit and debit card payments, online payments, transfers, and even checks written, which provides great insight into what types of goods and services the customer is buying as well. Banks even know exactly when customers make most of these purchases and where they were when the purchase was made. And with a little work, banks can determine some other very interesting insights into consumer spending behavior, such as:
- Categorization of spending, i.e. how much is spent monthly on groceries vs. dining out
- How much is spent monthly on entertainment, including a breakdown of spending on movies vs. restaurants vs. theater vs. concerts
- How much customers spend on non-discretionary items like rent or mortgage, utilities, and transportation
- Correlation and timing of purchases, for example every time they buy groceries, they buy gas/petrol shortly afterwards
But how should banks leverage this information? What new products and services can they offer as a result of this insight, and through which channels? And importantly, how do they offer their customer enough value so they are comfortable with the bank utilizing this information?
In Part 2 of this series, we will look at these questions, and also explore how big data technologies can provide improved capabilities to leverage consumer information in new and profitable ways.
To learn more about Smarter Digital Banking, join Marc Andrews, Vice President, Global Big Data Industry Team at IBM, for a webinar discussion of the new capabilities in mobile banking made possible by big data.
Date: Thursday, March 28, 2013, 2:00 p.m. ET, 11:00 a.m. PT