It's pretty fascinating to think about how far banking systems have come since the first currencies were minted. Back then, wealthy people needed a safe place to store their money, and ancient empires needed a financial system to facilitate trade, distribute wealth, and collect taxes.
Banks played a major role in all of that, just like they do today. From historic grain banks to the modern neobanking systems, credit cards and mobile apps that we use today, a lot has changed in the banking world over time. The one thing that has not changed is how much we rely on financial institutions for our day-to-day living.
The world of banking is always evolving. The advent of digital banking has completely transformed the way people do business, and it presents an exciting time to be a part of the industry. Despite the rapid pace of transformation, many banking institutions remain one-dimensional and static; this needs to change. Fintechs and technology providers are disrupting the financial services space by unbundling the banking value chain. Banks used to control the entire chain but now they are just players.
The next digital frontier is on the horizon
With continued innovation and competition increasing, the environment in which banks operate is rapidly advancing. Digitalisation and meeting customer needs with seamless customer experience have become the focal point of all industries aiming to find their sweet spot in the digital landscape.
Banks must adapt to keep up. Cashless payments, including cards and mobile solutions, have gained momentum in the past decade, with the Covid-19 pandemic further accelerating the trend.
Convenience and user habits drive the adoption of digital payments, with new players like BigTechs and super-apps offering integrated customer experiences. Traditional industries are merging, and non-financial businesses are partnering with fintech providers to embed financial services in their platforms, effectively making every business a fintech business. These digital platforms amass vast amounts of user data, enabling tailored customer experiences.
Key trends shaping the financial services market
Changing Customer Expectations: Customer expectations are continuously evolving, demanding highly personalised services that are accessible anytime and anywhere.
The Digital Revolution: The online world is converging with the offline realm, propelling us into the era of Web 3.0. This digital evolution harnesses the power of data to shape and redefine the customer experience.
Transformation of Ecosystems: Technological advancements have resulted in the unbundling of the value chain, giving rise to a multitude of new technology and Banking-as-a-Service (BaaS) providers.
Embracing Open Finance: Financial services are becoming more open, with open banking taking its initial steps and gradually transitioning into embedded finance.
Addressing the Climate Crisis: The growing awareness and severity of climate change have prompted banks to integrate sustainability practices into their operations, taking steps towards a greener future.
Economic Challenges: The global pandemic and geopolitical uncertainties have contributed to rising inflation rates and a fragile economy, potentially leading to an impending recession.
From Ripples to Waves: Innovation Reshapes the Ecosystem
Fintechs are unbundling the value chain
As the market changes, so do financial services. Traditionally, banks cover the full value chain across a variety of products, customer segments and geographies, managing all activities from distribution to the back office and financing.
On the other hand, fintech startups are revolutionising the financial services industry by unbundling the traditional banking model's value chain. Instead of trying to cover all aspects, these startups focus on specific product segments and niche markets, offering enhanced customer experiences and more efficient operating models. They often rely on third-party providers for non-core processes, allowing them to prioritise innovation and customised solutions for their clients.
While focusing on customer-specific solutions, these startups typically largely rely on third-party providers for running non-core (back-end) processes. Such fintech startups have created opportunities for new technology and banking as a service (BaaS) providers.
Banks now find themselves operating within a broader and increasingly complex ecosystem, where collaboration is key to relevance. This includes engaging with external partners to cover various aspects, such as regulatory licensing, operations, and specific product features. While estimates on the growth potential of the global BaaS market vary, experts generally agree that it holds significant future potential. As the platform model era rises, banks must recognise the importance of supporting their clients in seeking solutions beyond their own organisation. Embracing collaboration is unavoidable as banks seek to adapt to meet the diverse needs of their customers.
Benefits of Banking as a Service for Banks
BaaS benefits banks with revenue growth, improved customer experiences, innovation, cost savings, agility, and regulatory compliance support.
Increased revenue opportunities: BaaS expands product offerings, generating additional revenue without extensive infrastructure investment.
Enhanced customer experience: BaaS integrates third-party services for a seamless and satisfying customer journey.
Accelerated innovation: Partnering with BaaS providers drives rapid product and service innovation.
Cost savings, agility and flexibility: BaaS reduces infrastructure costs, allowing efficient resource allocation. This enables institutions to adapt quickly to market changes and easily integrate new features.
Regulatory compliance support: BaaS providers assist with navigating complex regulations, ensuring compliance.
Ukheshe is known as a Banking as a Service provider. We offer a white-labelled BaaS solution for banks that enables them to serve their clients seamlessly and more efficiently. Learn more about Ukheshe's BaaS offering here.
Open Banking maturing into Embedded Finance
One significant regulatory reform embraced worldwide is open banking. Open banking involves the exchange of data and services between financial institutions and third-party providers, aiming to enhance capabilities and improve customer experience. The potential applications of open banking are extensive and can impact all aspects of the customer relationship. Financial institutions can use open banking to enhance existing services or offer their capabilities to third parties in a white-label manner, particularly in the context of BaaS and embedded finance. By leveraging open banking, financial institutions can optimise the entire customer journey, from initial orientation and acquisition to post-sale customer care.
Supportive regulatory environments enable financial services use cases and business models that foster innovation while maintaining market competition rules. Policymakers globally are adopting an innovation facilitator approach, implementing initiatives such as innovation hubs, regulatory sandboxes, and flexible financial services licenses. These initiatives promote innovation, support startups, and facilitate mutual learning between firms and regulators.
Open banking showing its potential
As open banking matures, it is gradually maturing into embedded finance as services migrate outside of the mobile banking app and online banking portal. This intuitive customer journey enables financial services to become seamless and practically invisible as part of the customer journey.
Companies are now looking to leverage these opportunities and explore new business models by deploying embedded finance capabilities, whether to authorise credit records to prove loan affordability, insurance issued on transaction data, or a customised loyalty point scheme.
Conceptually, these are not innovative solutions, but what has changed is that open banking has provided the infrastructure and tools to create more meaningful, immersive experiences.
Exploring the future of banking and financial services
The banking/financial services industry is evolving with the shift of money to new markets and innovations. This process of breaking down the old to build the new is dismantling incumbents and paving the way for new players with advanced technology, services, and distribution methods. This transformation will ultimately benefit consumers and society, leading to improved customer experiences, cost-efficiency, resilience, inclusivity, and sustainability. As the industry moves forward, brighter times are on the horizon.
Better Customer Experience
Better customer experience is the key differentiator as back-office functions become commoditised, with a focus on hyper-personalisation, targeted segmentation, and deep client relationships, driven by customer data, advanced analytics, and startups setting the benchmark in solving specific customer problems.
A more cost-effective and profitable system
A more cost-efficient and profitable system is achievable through startups leveraging the latest technology, lean organisational models, and scalable cloud infrastructure, allowing for lower operating costs and improved unit economics, while legacy mainframes should be replaced to achieve these cost savings.
Rebuilding trust and stability: pathways for banks to navigate safely
Customer needs dictate the future, technology will drive the experience
Ultimately, the customer will choose service providers that best meet their needs, which will dictate the future of banks. Amidst lower barriers to market entry and switching costs, those banks that fail to deliver may soon find themselves behind. In order to stay competitive in the evolving financial landscape, banks must continuously innovate and meet the changing needs of customers, who hold power to shape the future of the industry, emphasising the importance of simplicity, personalised solutions, and digital connectivity enabled by advanced technology to deliver unique customer propositions in a cost-efficient manner.
Key elements for building a modern financial institution
Considering where most banks are today and while recognising that each bank presents a unique and individual case, we have identified seven critical elements for building the bank of tomorrow.
Customer-centric organisation: Banks must focus on solving specific customer needs by being present at the right time and place with simple and efficient solutions.
Data analytics: Banks should harness the power of data by implementing scalable and efficient infrastructure that allows real-time aggregation and universal access to data.
New ways of working: Banks must re-evaluate and redesign their operating model across processes, people, and technology to operate more efficiently and provide a seamless customer experience.
Focused organisation: Banks should focus on their core business and leverage core competencies while outsourcing non-core capabilities to specialised third-party solutions.
Technological competency: Banks need standardised, cloud-based banking capabilities and should consider a greenfield approach to avoid the challenges of migrating outdated legacy systems.
Digital leadership: Leadership at all levels of the organization should understand and embrace the digital economy, with a clear vision and shared understanding of the need for change.
Embedded sustainability: Banks should embed sustainability across their organization, setting clear targets and implementing ESG measures to address social and environmental challenges.
Source: Source: Banking of Tomorrow
Empowering the banks of tomorrow, today
In short, building the banks of tomorrow requires a comprehensive approach that encompasses customer-centricity, data analytics, new ways of working, focused organisation, technological competency, digital leadership, and embedded sustainability. Only by prioritising the customer and their evolving needs, embracing agile and efficient operating models, and focusing on core competencies while outsourcing non-core capabilities can position themselves for success in an increasingly competitive and rapidly changing landscape. The banks of tomorrow will be characterised by exceptional customer experiences, tightly optimised operations, and a strong commitment to social and environmental responsibility.