The banking sector has been changing rapidly for years. But never before has it experienced so much change along so many dimensions at such speed. Consider just one of these – competition. New players with very different pockets of strength than the big banks are collectively taking business away from incumbents. But someday soon, they will individually pose a challenge to banks’ core business because of their closer connect with customers, innovation capability, low-cost structure, superior talent, etc.
Examples here include GrabPay, the digital wallet from Southeast Asia’s ride-hailing leader, with 190 million users and 9 million GrabPay acceptance points in the Asia Pacific region, and a quarterly payments volume of US$3.8 billion in Q3 2022, up 22% on a year earlier. Shopify, which provides payments, point of sale systems and loans for merchants topped half a billion dollars in new loans for the first time in the Q3 2022 —a nearly 30% jump from the prior year.
This means that even the best organisations are at risk of being relegated to the background unless they take substantive, proactive measures. Staying relevant and undisrupted, and becoming better at what they do should therefore be the priority of banks the world over.
And no bank understands this better than DBS, recently voted the world’s best bank for the fifth time in a row. In a post, the bank said that it focused not on accolades, but rather on becoming a better bank continually.
But how can banks, which have been operating successfully for decades, become meaningfully better? After all the optimisation and transformation that they’ve been through, what’s left to do?
The short answer? Recompose banking.
A simple framework for recomposing banking recommends that banks think of how they would like to create, deliver, and recognise value in the future.
Recompose the creation of value for customers
Some years ago, if a bank wanted to create new value for customers, it would have to create a new product or service. And it had to do this on its own. But today, banks can simply build its offering on top of foundational capabilities sourced from a third-party provider. For instance, if a bank wants to launch a new mortgage product, it no longer needs to build a processing engine from scratch; instead, it can avail of a mortgage utility service from a provider such as Stater. The provider does the heavy lifting, including designing the product and processes, as well as managing operations and collections. The bank need only focus on sales, marketing, and customer engagement
Similarly, banks can offer a Buy Now Pay Later service by leveraging an external channel, such as UPI in India. This allows them to onboard millions of merchants at once, without having to reach out to them individually.
These examples help showcase how the vertical structure of banking value creation can be recomposed, enabling banks to focus on certain aspects while leaving the rest to their partner ecosystem. What’s more, recomposing value creation can also create additional value, as in the case of Goldman Sachs, which has derived far more from its partnership with Apple Card than it would have earned on its own.
Recompose value delivery to customers
Value delivery is changing even faster than value creation. No longer do banks need to acquire and serve customers through their own channels; today, there are a variety of partners providing origination and distribution services. RBL, one of the fastest growing banks in India, has really leveraged this option by originating more than half of its loan book through third parties. Goldman Sachs recomposed value delivery right from the start by relying entirely on a partner network to take its products and services to end customers. It partnered with Stripe to service sellers, and then got Shopify to work with them to distribute its (Goldman Sachs) products.
Embedded finance and associated developments, such as BNPL, are also ways of composing banking delivery differently. This trend is already underway with banks using non-bank, non-traditional channels such as Google Pay and Amazon Pay to distribute their offerings to a much wider consumer base.
Recognise value for the organisation and shareholders
Historically, banks’ revenue was mostly interest income, with some fee income. In recent years, interest income suffered as interest rates fell. However, despite the recent slow rise of interest rates, banks have still not managed to claw back their previous earnings. In fact, customer forces and regulatory strictures – such as the cap on MDR – are piling pressure on pricing, and stressing revenues further.
Clearly, banks need a new way of recognising value for themselves and their shareholders. Accelerating digital adoption is a solution since it can bring down cost to income ratios dramatically and increase the revenue per customer. And as banks recompose value creation and delivery through digital means, the resulting lowering of cost also means they can recognise more value for their shareholders.
The purpose of recomposing is to take a new approach to banking, in the manner laid out in the above framework, or otherwise. Thanks to technologies, especially cloud, API, and webhooks, banks can recompose their business quickly and at very low costs. Think Banking-as-a-Service, which enables banks to take a new product to market in a matter of weeks or months. In fact, it is possible to create an entire digital bank by simply recomposing services, without investing big money in technology, operations, talent, etc. What banks need when recomposing banking is a proactive stance, along with the right mindset, skillset, and toolset to put it together.