A New Digital Age for Banking Ecosystems

What are the current trends shaping the evolving banking ecosystems and the core drivers for the industry’s digital evolution?

‘Widespread adoption of digitalisation’ - a phrase that many within the banking industry would define as a pivotal moment of change from which it would never look back. As high speed innovation creates new customer demands and competition, global IT budgets in the sector need to meet the predictions of a surge of up to US$297bn by 2021, to combat the challenges facing the industry. 

Microsoft defines success for financial services facing the challenges of digitalisation in the coming decade, as depending on “how well they transform ‘business as usual’ with technology to create new value, becoming indispensable partners in increasingly interdependent networks and complex value chains that cross business and industry boundaries.” 

To maintain a competitive advantage, companies must embrace new business models that combine agility and security with trust at the heart of their strategies. “The business imperative—in an industry of inherently and increasingly abstract products—is to innovate, demonstrate relevance, and deliver value on a foundation of trust,” says Microsoft.

With more than US$327bn paid in fines by the 20 largest global banks, for mis-selling financial products since 2012, Accenture argues that “the agenda for banks is clear: finding a new relationship model to rebuild trust if they want to secure sustainable growth.” It is important that, while the banking industry has always been adaptable to disruption, the pace has accelerated significantly in the last decade. Or, as Microsoft states: “when changes happen quickly, the bigger picture is often overlooked”.

One strategy both Accenture and Microsoft identity as being a possible way to rebuild trust is ‘customer-facing ecosystems’. These multiply customer interactions to transform them into hyper-relevant and personalised experiences, with 88% of banks believing that ecosystems will be an important way to interact with customers in the future, as well as 89% seeing customer facing ecosystems as the main driver of future value. “Banks that offer these integrated, contextualised experiences go beyond traditional financial needs and meet broader customer needs. They support their customers, becoming hyper relevant in their customer’s everyday life,” stated Accenture. 

Customer facing ecosystems: a network of interlinked companies

Within the banking industry, Accenture identifies five different options for organisations to develop and launch an ecosystem.

1. Life moments orchestrator

With this type of ecosystem, banks can orchestrate ecosystems around specific life moments, offering partners access to their customer base in exchange for fees.

2. Marketplace orchestrator

This type of ecosystem allows banks to operate as a marketplace orchestrator through white labelling or co-branding. Marketplace orchestrators sell non-financial products to customers.

3. Third party ecosystem participant 

A third party ecosystem is where banks can join a third-party platform to offer banking products to third-party customers.

4. Open banking platform

Open banking platforms allow partners of banks to incorporate products, data or specific processes in their value proposition. With this ecosystem partners can leverage open application programming interfaces (APIs).

5. Referral platform

This banking ecosystem directs rejected customers to other providers, such as a large bank sending a small business to a designated online finance platform. However this ecosystem is not hosted on a third-party platform.

Creating value from banking ecosystems

Within these five ecosystems there are typically three ways in which banks create value from:

• Expanding primary relationships: by driving hyper-relevant experiences via these ecosystems, banks can benefit from increased value of extended relationships with other financial products and increased cross-selling.

• Generating new revenue streams: by orchestrating an ecosystem or opening their infrastructure, banks can offer their ecosystem partners access to their customer base and data in exchange for fees. Over the next three years this value is expected to account for over 10% of incremental revenues generated by ecosystems.

• Reducing customer churn: Third party ecosystems can help banks to deliver more meaningful customer experiences, taking them beyond traditional relationships. This ecosystem is expected to help reduce churn rates by up to 10% in the next three years. 

Key drivers changing the banking ecosystem landscape

Coming back to the widespread adoption of digitalisation within the banking ecosystem, there are multiple drivers accelerating the proliferation of this technology and the transition towards a more customer facing ecosystem. These include: 

Customer attitudes

“Digital attitudes among customers affect demand for integrated propositions,” states Accenture. In the recent decade, Microsoft has seen millennials become “decidedly more entrepreneurial in mindset than any previous generation. They want to be in control of their own finances and are far more willing to embrace a self service model. They are more likely to question prevailing wisdom, eschewing a one-size-fits-all mentality, preferring instead to assemble their own solutions from diverse service providers.” 

Technology

“In our fully mobile, app-driven world, customers demand simplicity and are far less complacent when confronted with structural inefficiency,” Microsoft affirms. “They want services that are on-demand, integrated, and friction-free. They expect consistent, intuitive, and meaningful experiences.” Also agreeing with Microsoft, Accenture explains that “legacy systems stand in the way of a smooth transition to a digital environment and hamper the progress of innovation.” 

Competitors

In the industry, non-banks and challenger banks are starting to offer products that used to be exclusive to the financial services, companies like Facebook, PayPal and Apple are disrupting the banking ecosystem and thus increasing the  competition. “From an ad hoc digital wallet to real-time payments, the blurring of industry lines and encroachment into traditional banking territory is the new reality. In an era when the irony of “too-big-to-fail” is lost on few, credit unions and community banks are capitalising on consumer sentiment by focusing on niche market segments,” comments Microsoft. In order to remain competitive, “launching ecosystems in industries characterised by the presence of large incumbent players may help ensure that new offerings rapidly reach a wider share of customers. As such, banks operating in countries with high concentration rates across industries have larger incentives to be first movers to secure partnerships with the largest industry players and hence gain rapid customer adoption,” adds Accenture.

Regulations

With the rise of fintechs, banks are facing challenges when it comes to regulations, “Fintech startups, born in the cloud and far less constrained by regulatory requirements and legacy cost,” says Microsoft. “They target some of the most profitable areas in financial services while also delivering better customer experiences. In extreme cases, fintech solutions offer services completely outside of the monetary system, such as bitcoin that, if successful, may call into question the very need for banks.”

The foundations for progressing banking ecosystems

In order to remain successful as digital banking ecosystems continue to rise, PwC explains the need for a culture and mindset shift when it comes to collaboration and partnerships. “It’s new ways of thinking that are required. One that places the customer experience and user journey at the forefront, in order to map a course for new products, services and ways to connect. That kind of thinking may be the natural perspective of fintechs and new entrants, and it’s time to see if traditional banks can join them,” comments PwC. 

Core elements banking ecosystems need to focus their attentions on in order to remain competitive amidst fintech and new entrants include:

Data

Mastering data and leveraging breakthroughs in technology such as cloud platforms, analytical capabilities, and augmented intelligence, can create levels of customer engagement and operational efficiency that were unimaginable before. “Using information in meaningful and straightforward ways has become the new standard in this digital era. But first, internal and external data must be aggregated, integrated, and made available to the right person at the right time via the right channel,” says Microsoft.

This can be done by using intelligent marketing tools to transform data into actionable insights. “The value of an ecosystem can be found in the number of interactions among partners, as well as in the data shared with the orchestrator. Operating such an ecosystem requires sophisticated marketing and analytical capabilities to aggregate multiple data sources —leveraging external data as well as internal data—and extract actionable insights, which can then be translated into personalised commercial promotions in a timely manner through the most appropriate channel for each customer,” adds Accenture.

Agility

Customers are increasingly looking for intuitive experiences, a partner that understands their needs and can anticipate when their assistance is needed. Data, relationships and trust are the most valuable assets for maintaining a competitive advantage. Creating an ecosystem of trusted platforms will help provide seamless, reliable and secure services.

Experiences

Bringing it back to the continuous driver facing digital banking ecosystems is the experience. Traditional customer interaction methods have created general apathy and disengagement between the ecosystem and customer. “Younger generations in particular are much less likely to have patience for time consuming processes and sub-par customer service experiences,” says Microsoft. “Understanding this customer behavior and offering tailored products and responsive services, lays the foundation for a more relevant and trusted relationship. Rebuilding confidence fuels trust—leading to adoption and, ultimately, loyalty.”

Customers are increasingly looking for intuitive experiences, a partner that understands their needs and can anticipate when their assistance is needed. Data, relationships and trust are the most valuable assets for maintaining a competitive advantage. Creating an ecosystem of trusted platforms will help provide seamless, reliable and secure services.

Experiences

Bringing it back to the continuous driver facing digital banking ecosystems is the experience. Traditional customer interaction methods have created general apathy and disengagement between the ecosystem and customer. “Younger generations in particular are much less likely to have patience for time consuming processes and sub-par customer service experiences,” says Microsoft. “Understanding this customer behavior and offering tailored products and responsive services, lays the foundation for a more relevant and trusted relationship. Rebuilding confidence fuels trust—leading to adoption and, ultimately, loyalty.”