In 2018, Gartner predicted that 80% of heritage financial services firms will go out of business by 2030. US-based Bank Administration Institute (BAI) echoed the same opinion a year later. And then pandemic accelerated digital adoption universally. Banks rushed to embrace a digital-first strategy; in fact, they began re-thinking their overall business strategy. A strategic shift soon emerged: Riding on Central Bank-led financial inclusion initiatives, the BFSI sector saw a large influx of FinTech and Non-banking entities. These new age organizations, driven by innovative technologies and customer-savvy business propositions, are chalking exponential growth across segments, the difference is increasing rapidly.
Unsurprisingly, many banking products like payments, certain forms of deposits, lending (like mortgage, student loan, consumer loan, credit cards etc.) are moving out of banking systems. So, what the century-old banking industry should do?
Think differently. Now.
Traditionally banks have engaged in three main activities – safekeeping money, lending it, and transferring it from one party to another. In these activities, they mainly focused on their operations and processes. Consequently, the main recipient for these products and services – the Customer – lost importance over time. Just the opportunity the FinTech and Non-banking entities (like eCommerce companies) were waiting for. They stepped in boldly and started to address the basic problem in the ecosystem.
Thanks to their agile mindset and better product positioning, not only are Fintech’s crashing entry barriers for today’s savvier customers, but they also are far better prepared to ride the changing regulatory climate and wowing the digital-native global citizens, including Gen Z’ers.
Does this mean that traditional banks should give up and die! The answer is a resounding NO. The history of business is replete with organizations that adapted, reinvented, and reclaimed past glory.
What are the four survival strategies?
U-Turn journeys for traditional banks boil down to winning the battle for relevancy. For this to happen, the focus must be on four critical aspects.
- Modernize core capabilities
- Successfully collaborate with FinTech
- Create customer-centric products and services
- Construct nimble organizations.
These four levers must synergize to offer more effective services, superior branding, and cost-effective customer propositions.
Modernize core capabilities
Most large banks still depend on legacy applications when it comes to the core. This reality must necessarily change. How can this overwhelming transformational journey be done? By bringing them in line with business vision and addressing them as manageable parts.
Start by re-thinking the entire architecture and delivery capabilities. Then move to create a robust strategy that builds technical capabilities and supports seamless omnichannel journey and superior customer experience. Finally, provide superior customer experience using hybrid infrastructure strategy.
At the back end, core processing should be highly configurable. While often shy of cost-intensive core modernization, traditional banks need to align core application strategy with business forecast and market dynamics. How? By encapsulating monolithic architecture, re-platforming them to the cloud, or even re-architecting legacy applications with modern technologies like microservices.
The other growth driver – API banking – must be respected for its might. After all, the unleashed power of back-end infrastructure transforms banks from a cost center to a profit center.
Finally, banks need to create a highly configurable and scalable hybrid cloud-based infrastructure that offers Banking-as-a-Service (BaaS) for other banks and FinTech.
Successful collaboration with Fintech’s
Time and again, we see nifty Fintech’s reach pole position across product segments by innovating product offerings, getting their product placements right, and adding rigor to customer experience processes. But – and this is important – most FinTech’s still rely on Banks for back-end processes like payments settlement, account management, and loan disbursement etc.. What does this imply?
Simply put, banks should not consider Fintech’s only as competition. Instead, moving to a collaboration mindset can help banks offer better value to their customers. While the nature of collaboration would differ across use cases and the nature of regulatory compliances, there are distinct advantages when banks and Fintech’s play for the same team: it enhances brand recognition, offers newer products and features at a higher speed, reduces costs, and increases scalability.
Build customer-centric products and services
Modernizing core and finding new grounds for collaborating with Fintech’s works best as banks get hyper obsessed about their customers want (or what they don’t want).
Delivering products and services involves a deep understanding of customer pain points at every touchpoint of their journey. Successful remediation may begin by asking what customers want but ends with predicting their needs and also provisioning for them.
Said another way: right offer, right customer, the right moment, right channel. How can this be accomplished?
Analyze tons of customer data already available to the banks. It is key to probing customer needs and also in formulating successful campaigns driven by rich customer insights.
After all, customer-centricity is not limited to the right product and services but focuses on educating customers on financial knowledge to choose appropriate products. These are the approaches that solidify trust, transparency, and fairness in customer interactions in the long run.
Build a nimble organizational structure
Because of their heritage and nature of business, traditional banks collect rigidity in their systems and structure. Post pandemic ‘next normal’ era, most banking operations are digitalized. The speed of changes has increased phenomenally. Banks must embrace fundamental transformation or’ look inside’ to become relevant. What does this exactly mean?
It means creating smaller cross-functional teams composed of both ‘decision-makers’ and ‘doers. Besides, remote ways of working and the decentralized workforce are two shifts that will keep the banking C-Suite occupied for some time. Not only are these expected to reduce infrastructure costs, but they also assist banks by simplifying organization processes and graduating to AI-led banking.
Every industry goes through typical life cycle events: Growth-Maturity-Decline. During the maturity stage, the players require the right impetus to delay the decline stage. Traditional banks are at that point in the maturity stage. They need to re-think and re-shape the overall ecosystem, including operations, and lay claim to relevance in the new age.
The writing is evident on the wall. But who will be up for the challenge? Time will soon differentiate the ones that try and the others that ignore.
Originally published in Times of India