Do Banking Business Models Need To Change?

Banks may understand what technology is, but they struggle to know how to change their business model to leverage the advantages offered.

Global fintech expert Paolo Sironi discusses how business models need to adapt to unlock innovation in banking and finance in the latest episode of the iResearch Services podcast, The Thought Leader’s Voice.

The biggest issue in financial services

In the past decade, the financial services sector has seen massive changes due to regulatory shifts, digital transformation, geopolitical pressures, changing customer demands and the challenges presented by the COVID-19 lockdowns. However, they face an even bigger issue.

Mr Sironi, Global Research Leader in banking and financial markets at the IBM Institute for Business Value, and digital transformation author and commentator, says there is a problem deep inside the construct of financial services that needs to be fixed.

Views of banking giants

To explain the issue banks face, Mr Sironi echoes controversial comments from two banking giants with podcast host iResearch Services Editor in Chief, Rachael Kinsella. They are former US Federal Reserve chair Alan Greenspan and ex-European Central Bank President, Mario Draghi.

After the financial services firm Lehman Brothers defaulted in 2007/2008 and the system was brought to its knees in the great financial crash that followed, Mr Greenspan told the Senate Finance Committee that there was a flaw in the system. He said that institutions and clients were not rational, they did not always work in the best interest of the community and that the markets were not as efficient as previously thought.

He was disturbed that those systems that worked for 50 years previously were no longer effective and no one seemed to have a solution. The problem lay with the way the financial system was built and the associated business models.

Two years ago, Mr Draghi was asked to comment on whether negative interest rates, which had dominated European macroeconomics for years, could collapse and, in turn, bring down the financial system.

Mario Draghi said banks had to adjust their business model to the digitalization of financial services. Mr Sironi points out, “Adjusting the business model to digitalization doesn’t mean to digitalize the existing business models. It means to change the business models with technology, to conform to a new macroeconomic environment, to higher uncertainty, to different regulatory requests that came to the forefront in 2007 when the global financial crisis started.”

Macro areas of digital transformation

The world is now divided into three macro-areas of digital transformation.

• The United States is where digital technology was born 15 years ago and is the base of Silicon Valley and is very competitive in terms of technology
• In Europe, the European Commission cares about building a common level playing field for the capital markets union, and there is a great focus on protecting investors and consumers
• In Asia, however, the fintech revolution is being won, particularly in China and India, where most of the new business models have been born

Paolo Sironi’s role as a fintech expert is to understand the variety of business models, to appreciate that what can work in China doesn’t work in Germany right now, or in contrast, in Brazil, and how technology can help scale these business models. Also, he has to keep in mind that technologies, including Artificial Intelligence (AI) and quantum computing, are not all at the same level of maturity and are constantly evolving.

How banking business models need to change

In his latest book, Banks and Fintech on Platform Economies, the fintech expert examines how platform theory, born outside the world of financial services, will make its way inside banking and financial markets to radically transform the way firms do business. The book reveals the lessons learned from the fintech revolution over the last 10 years, what is happening now, suggesting future solutions.

What needs to be developed in the future is a digital platform for our financial lives, Mr Sironi says. “Those platforms will let you be capable of aggregating the full financial life of an individual to an unprecedented level.”

In the past decade, most fintech organizations focused on using technology to unbundle financial services, now they are all trying to aggregate them back to re-bundle them on the platform economy. That could not happen without technology and digital platforms.

But platform businesses are complex and not easy to run. In banking, they require a set of changes to help open the organization. They may also blur the lines both within and without a company, where a mix of banking and non-banking services and solutions may be required.

Technology cannot replace all human relationships and works better with some banking services than others. What is an effective solution for payments might not help in wealth management.

Therefore, for the financial system to succeed, financial services companies need to grade how useful technology will be in automation, communications and customer care; all at a lower cost.

In the commoditization of financial products, consumers may benefit from reduced margins, but banks can be faced with complex service issues. That is where technology comes into its own.

See the podcast for more of Paolo’s thoughts on unlocking innovation in banking and finance