The Impact of Technology on New Business Models in Banking

Three distinct business models.

• In an enriched in-house model, banks that wish to focus on better serving existing customers can become users of third-party data and services. They would position themselves in the user role, using technology provided by others. The degree of openness begins with the sourcing of data (e.g., enriched transaction data) and continues with the use of services (e.g., analytics or specialized services such as investments). At the extreme, a bank could decide to outsource its banking technology completely and become a BaaS user focused solely on advising customers.

• In a partnering model, banks that have a more advanced technology platform can share their technology with third parties, become their partners, and thus reach new clients. They become a banking technology provider. The degree of openness can start with data (e.g., with premium, paid APIs) and continue through modular financial offerings in embedded finance to a full BaaS provider. Ultimately, due to competitive forces, only a small number of BaaS providers will succeed due to the effects of economies of scale.

• In an open model, banks may wish to distribute their services not only through selected partners, but also offer them to a broader set of potential clients, for example through a marketplace. In this case, the relationship with B2B clients would shift from direct (as seen in the partnering model) to indirect through the marketplace. This model could potentially have the greatest impact, depending on the reach of the marketplace. It also presents new challenges, such as the influence and bargaining power of such a marketplace. Similar to BaaS providers, only the most successful players would succeed in such a model, as the level of competition and transparency in such a setup is extremely high.

Every bank should ask itself a number of questions, such as: What type of business model is the right fit for us and our end clients? Can we use our existing technology, or do we need to completely rethink it? Do we want to work with partners and how far do we want to go? Do we have the capabilities to do embedded finance? How do we manage new risks? etc.

For some banks, these changes in their business model will mean a transformation from a closed, integrated ecosystem to a software business with a banking license. Such a big step requires organizational transformation, strong software development capabilities and an entrepreneurial spirit - qualities that have so far been more commonly associated with tech companies rather than with banks. In addition, incumbents must accomplish this transformation while still wearing a very tight regulatory corset, a disadvantage often not shared by nimbler Fintechs and TechFins

Author

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