Digital disruption is entering a new phase—which means, if you will, that disruption itself is being disrupted.
The evolution of connected ecosystems means this: Multiple firms can now share data and services to provide unprecedented customer value. But this goes beyond rapidly increasing convergence and connectivity between people and technology. Regulatory directives fuel the emergence of ecosystems in the financial services space; these include the Payment Services Directive (PSD2) in Europe, Open Banking and SWIFT standards.
Far from being a threat, traditional banks must consider these ecosystems as significant opportunities to power innovation and go to market with greater scale and efficiencies. The imperative is clear: Stay relevant and profit from Digital Disruption 2.0.
The better part of partnerships
During disruption’s initial phases, banks primarily faced competition in specific segments. But in this next phase, we’re beginning to see digital firms access previously sequestered customer data and integrate their offerings with other firms. What does this mean? Simply, they will deliver more comprehensive financial services and drive deeper customer relationships.
If traditional banks remain complacent, they could very well lose exclusive ownership of financial relationships with customers. That will mean significant challenges in driving revenue growth, profits and return on equity (ROE).
Yet despite their nimble, innovative stance, digital firms also face challenges. Fintechs and “neo banks” grapple with rising costs to find customers; scarce funding; growing regulatory oversight. They must also look for new ways to scale and increase revenue and improve profitability.
Meanwhile, social media platforms and e-commerce firms want to enhance their customer experiences and provide greater value with relevant financial services—but remain wary of the associated risk management and compliance overheads. As a result, many are open to leveraging the inherent strengths of traditional banks that, with deep, extensive customer data—and strong expertise in compliance and managing risk—can help them forge ahead.
For banks, on the other hand, a digital firm partnership means utilizing the latest technology and services of these firms as they gain new capabilities to enhance offerings. Banks will also access new customer touch points in the extended value chain. What’s more, they’ll cost-effectively scale new services as they cross and up-sell existing ones. That makes for a strong business case to initiate strong partnerships between banks and digital firms to create or orchestrate customer-centric ecosystems.
The ecosystem opportunity
A connected bank that seizes new, digital-centric business models can launch innovative services at scale—and at a profit. Partnerships with fintechs, e-commerce firms, and social media platforms will lead to seamless, frictionless payments or overdraft services to a large customer base. After all, consumers’ lives aren’t all about banking—though money can touch nearly every part of them: how they shop online, interact on social platforms or engage in gaming activities. And by establishing or participating in a global blockchain system, banks can offer new ways for corporate customers to efficiently manage cash. That can open the door, for example, to handling multiple currencies based on the real-time flow of goods to multiple other firms at any point in a corporate customer’s supply chain.
Unlike many fintechs, banks remain at the center of multiple financial and information systems: from credit bureaus to payments processors and data providers. That presages a place at the ecosystem’s center where they can launch exclusive services with innovative revenue models that outdo fintechs and other digital competitors.
Yet no single approach guarantees banks will succeed in any ecosystem. Different banks must choose different strategies and levels of integration, accounting for:
- their inherent strengths,
- core business models,
- regulations,
- competition, and
- technological maturity of their customers and markets where they operate.
However, efficient leveraging these extended value chains and ecosystems means this: Connected banks can ignite new revenue growth as they improve profitability and ROE. In fact, a recent McKinsey report, Remaking the Bank for an Ecosystem World, states that banks that can successfully orchestrate a basic ecosystem strategy could raise their ROE to about 9 to 10 percent. Those that go even further and create their own platforms could elevate their ROE to about 14 percent—far above the current industry average.
The connected tech connection
Technology reigns in connected ecosystems—and connected banks must invest in modern, interoperable and scalable core systems. This enables quick development of new services and extension to new channels and ecosystems. But to get there, banks need to revamp legacy architecture to enable easy upgrades to both front-end and back-end systems.
Additionally, connected banks must customize their systems—and strategy—around agility and the delivery of digital capabilities. This will help future-proof business, deliver faster and better innovations, and drive customer value. The systems must also comply with global standards and protocols while enabling the bank to offer and consume data and APIs securely, transparently and efficiently. Open banking represents a major goal here: enabling third-party developers to build applications and services around the financial institution.
In sum, connected ecosystems offer big opportunities for banks and digital firms as they navigate Digital Disruption 2.0. For banks to compete and win, they must re-shape their business and technology to successfully combine digital with agility, scalability and interoperability. This alone can help drive profits. But banks must act now. Otherwise they will be forced to change at much higher costs and risks—and once again, find disruption acting on them.
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Chet Kamat is CEO and Managing Director of Oracle Financial Services Software Limited, a majority owned subsidiary of Oracle Corp. and part of Oracle’s Financial Services Global Business Unit. He brings more than 25 years’ experience in financial services, consulting and business transformation to his role.
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