The service distribution model has perhaps been the biggest banking change in the last decade, as online and mobile access has increased, and branch usage has declined. The first choice of channel access for the retail banking and building society sector moved from branch to website in 2019. Historically, the extent of physical branch coverage limited a firm’s customer base. Telephone banking went some way toward addressing this but many services still relied on a branch-based infrastructure.
The online access we have now changes the dynamics of successful financial institutions. The ability to offer services to customers on demand, at the right time and at the right place, becomes as important as the product itself. To achieve this, banks need to base their services around the customer’s online habits, which means integrating them with other marketplaces as Banking as a Service (BaaS). In this type of model, non-banking organisations can offer customers white-label banking services, such as loans, for added convenience.
How this works in practice will depend on the individual firm and their underlying strategy. Retail banks can choose how they want to compete in the future and how they want to integrate their services, for example by:
Banking as a Service relies on market collaboration in order to offer products to clients as they discover a need for it and in a way that is fully integrated into their online activity. While market collaboration helps build business under the BaaS model, it can also help banks operate efficiently. For example, the market can use distributed ledger technologies to manage data centrally and in real time – making it simultaneously available to all relevant firms and stakeholders.
Similarly, key operational elements can move outside the individual organisation to a mutualised model, to be managed collectively or by specialist companies. Examples include compliance services, know your customer/anti-money laundering checks, call centre facilities or the use of cloud applications. This lowers ongoing costs, simplifies infrastructure and helps firms focus on their core capabilities. Fintechs are exploiting these opportunities in order to solve specific operational problems, with greater efficiency and effectiveness than in-house providers.
Every firm’s operational architecture evolves over time, generally to meet short-term needs, such as new regulations or a shift in priorities. This typically results in layer upon layer of changes, creating a complex technical environment, with waves of change built on legacy platforms. Aside from being unresponsive to change, it also presents a barrier to the future ideal of integrated banking services. For mutual services to work, retail banks need to collectively step up their technology offering and strip back their IT architecture to make it simpler and more accessible.
Simplification is about establishing consistency, mutualising services and optimising the core capabilities of the bank. To achieve this, firms should review their infrastructure and consider:
This leaves a core set of activities that must remain part of the organisation, forming the remaining architecture. These activities should focus on the key elements that genuinely differentiate the firm, that are intellectual property or that include sensitive data. As a minimum, the core should focus on the following:
Brand and customer experience – this embodies the values and purpose of the bank, and should be carefully, managed and protected as a fundamental means of differentiating the business.
Finance and treasury management – statutory accounting requirements, along with the sensitive sub-ledger information, still drives a need for a general ledger. Treasury capabilities, managing cash flows and liquidity remain core competencies.
Private data and risk management – effective use of data will be integral to how firms differentiate their offering. Firms should extend their pricing and risk modelling for all available data.
Connectivity, orchestration and security – a key functionality of the bank will be the ability for the infrastructure to access, integrate and orchestrate specialist operational services, while remaining secure and resilient.
Recognising that banking services will be commoditised, retail banks need to review their brand and reassess their unique selling point. Customers want to access banking services as an integrated part of their online journey – as they discover the need for them – and retail banks must make use of emerging tech to keep up. As a starting point, banks should review their IT architecture and infrastructure to support future integration and remain competitive.