Decades ago, banking was based upon relationships. Most customers knew their bank manager personally and transactions were conducted by a member of the team in the bank. But as the years passed, technology made online banking and apps possible. Remote banking was not only possible, but it was also convenient and cost-effective, and the industry focus moved toward product development. Then, a couple of years ago, COVID-19 spread around the world and lockdowns increased the need for online services and remote banking transactions. Research on the Future of Financial Services conducted by iResearch Services in 2021 found that since the Covid-19 pandemic hit, 1 in 2 UK customers (54%) are less likely to attend a bank or a physical banking place of business, with similarly high figures in other countries surveyed.
Relationships are the new product in banking
But, now, relationships are at the heart of banking again, says fintech expert, Paolo Sironi, in the new iResearch Services The Thought Leader’s Voice podcast, Unlocking innovation in banking and finance.
With the commoditization of investment management, reduced trust from clients, demanding regulation and intensifying digital competition, margins have shrunk, according to Mr Sironi, who is Global Research Leader in banking and financial markets at the IBM Institute for Business Value.
Investment managers are searching for more clients and advisors are looking to automate routine planning and administration tasks so they can devote more time to advising clients about important financial decisions. Margin compression, when the costs of a service rise faster than the sales price, reducing profit margins, is even more prevalent in Europe than in the United States.
So, products that used to be at the center of the marketing mechanism and the propositional value for clients, are being commoditized and that is forcing the industry to figure out how best to differentiate and distinguish their services and client relationships.
Differentiation using human elements and technology
This differentiation should involve both the application of technology and human relationships. Technology enables companies to be there, where and when the client needs to consume financial services. The trick is to do so without friction and hassle. Using transparent human relationships, companies can differentiate their products by building trust with clients.
The importance of transparency in banking
A relevant non-banking example is a personal story, detailed in Mr Sironi’s new book Banking and Fintech on Platform Economies. The young banker was helping his brother in the 90s to build the ‘Amazon of Italy’ and sell the best of Italy’s furniture, fashion, food, and travel. However, the Amazon of Italy never took off, despite its sleek web design and lofty ambitions. Mr Sironi later realized what had gone wrong. Amazon Chief Executive Jeff Bezos said it was a book distribution channel with a difference. Publishers were complaining he didn’t understand marketing because he allow users to publish both positive and negative reviews. They wanted him to just publish positive reviews because that helped sell more products. But Mr Bezos said Amazon was not a traditional distribution channel. His role was to advise the clients on the best book to buy, but he could not put the book in their hands, smell the paper, open and read the pages. The way he resolved this gap between their intention, the motivation, and the execution was to use reviews to build trust. He used other analytics to improve the relationship and the engagement on the platform.
Transparency in banking builds a differentiating element because trust binds the relationship together and enables clients to consume financial services more autonomously. As trust grows, the understanding grows, and as data-driven banking produces more opportunities that benefit the client, the relationship becomes stronger. But the trust element based on transparency is the one that differentiates banks going forward on the platform economy, says Mr Sironi.
Are new banks at an advantage?
This does not necessarily mean that new banks and industry disrupters have an advantage over traditional banks. Mr Sironi says that has seen a lot of new fintech banks that want to become product marketplaces. They think that by selling products that have transaction fees with lower and lower embedded commissions, the ‘apple’ should become bigger. But that does not always follow.
The advantage new banks have is in understanding how to build a business based on more agile, lean and less expensive technology. They are more cognitive. Banks may have issues stemming from complex business processes developed over many years, but they have the human relationship that is so important now. Some of the most prominent fintech businesses have learned that they have to bring the human relationship inside the framework. Banks are learning how to transform their infrastructure with cloud technology, not just to ‘lift and shift’ what they do, but to start embracing this new way of thinking.
Value in the middle
The convergence between the strength of a bank and the strength of the fintech is where most of the value is for clients.
The relationship – the engagement element – needs to take center stage to transform the way revenue is generated. What the banking client is really paying for is accessing the platform, whether it is a contextualized platform from a non-banking perspective or it is an advisor relationship that is built around human and digital relationships. So banks generate revenue in ways the client can see, which forces them to be more transparent, more trustworthy, and more frictionless, says Mr Sironi. This doesn't happen overnight, but it is happening now at different intensities around the world, according to the jurisdiction, the regulation, and the client adaptation to digital services. That is the direction of the industry.
Contextual banking and conscious banking
Banks and fintech businesses are using platform economies to build the Banking Reinvention Quadrant. By intensifying the “information quotient” and the “communication quotient”, higher business value spaces can be reached on platform economies.
There are two strategies to this. One is called Contextual Banking Platform Strategy and the other is called Conscious Banking Platform Strategy. These are explored in more detail in Paolo’s book Banks and Fintech on Platform Economies. Contextual and Conscious Banking.
Contextual banking offers a connected banking experience where the customer is presented with offers and updates at the right place and time. Conscious banking is where the bank’s role is visible to the client and starts from the fact that they need to demonstrate value. Then they can accept this new direct, more transparent, and visible relationship.
This is favored by some banks in particular in Asia-Pacific, in Latin America and State Bank of India (SBI). State Bank of India used to be a very traditional bank; with 350 million customers - that is bigger than the total US population. They realized they needed to leap forward into the digital future. So, India has been investing a lot into coding and digital identities, the units of payment systems, and so SBI decided to build ‘you only need one’, which is a marketplace like Amazon, but that is based on a digital wallet. That enabled them to create a digital payment mechanism and a digital bank, which helps them to offer investment and insurance opportunities. This is an example of a bank that created an ecosystem platform to onboard clients in a different way and provide a mix and match solution in India’s regulated market.
Wealth management planning
An example is where banks are building a conscious relationship with clients in wealth management planning, which is the new ‘secret sauce’. If you need to build a personalized relationship with a bank, it is difficult to do so just on investment products, it needs to involve products that meet the needs of people in other areas. That means their loans, their mortgage, their debt, and their human capital. The problem is that a lot of these things are not very profitable for the bank. But it can be done if the bank combines them into a ‘financial wealthiness’ discussion. This new business model is a planning exercise centered on wealth management discussion but covers these other areas, too.
In Switzerland, UBS and Credit Suisse no longer receive most of their revenue from core banking and credit services, but from ‘management relationships’. This is based on products that are getting more and more commoditized. it is a mix between digital orientation and human advice and that is an indication of where the industry is going. Other examples are what Morgan Stanley did after the global financial crisis, shifting from an investment bank to one of the largest wealth management institutions, and Goldman Sachs, which is attempting a more ambitious, but similar route.
Connecting with customers key to the new revenue mix
Thought leaders and industry watchers need to be attentive to understand how the revenue mix is shifting and the involvement of technology in the transformation of the relationship in contextual banking and tap into these new models of conscious banking on platform economies.
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