The banking industry is undergoing radical change. Incumbents, in addition to challenger banks and neobanks, which were once considered 'newcomers' themselves, are facing new competition as fintechs and firms outside of the traditional realm of banking aim to make use of offering banking and financial services. The emergence of embedded finance, driven by technological advances as well as heightened consumer expectations for more seamless retail experiences, is testing the long-held 'monopoly' of banks. But what is bringing this shift about? Where will this trend leave banks later on? Can they be displaced by non-banks, in directly serving customers?
Shifting industry dynamics
There exist several factors contributing to the changes happening in the banking industry and also the rise of embedded finance. Recent technologies, such as cloud computing and APIs, alongside positive developments in financial regulation and the emergence of open banking have completely transformed the financial landscape. According to Simon Torrance, member of the planet Economic Forum, the shift from traditional banking to modern and distributed banking will represent a rise in revenues from $3.6tn to $7.2tn over the next 10 years.
With businesses across all sectors facing competition and tight margins, embedding financial services into core offerings is definitely an innovative way of making services or products more desirable and more convenient. It also opens up entirely new revenue streams and opportunities for up-selling and cross-selling. Auctions, travel agents, construction firms, retailers and utility providers are just a few examples of non-financial companies which can take advantage of integrating financial services, for example flexible payment options or credit facilities, directly into their customer offerings.
Indeed, as the scale of opportunity presented by embedded finance becomes increasingly clear, some industry commentators, including Forrester, believe that this will possess a radical impact on the way forward for banks with some stating that it will leave them as solely infrastructure providers. In the recent report, “The future of banking is made on trust”, Forrester claims that: “Banks have a stark choice: own customers or power finance; few can manage both”.
The options available to banks
Undoubtedly, this interest in more seamless financial services to be available at the pos through any channel is really a key trigger behind an unavoidable and major change in the. And as a consequence, it is likely we will have an evolution becoming banks with lots of becoming 'infrastructure providers', powering finance through third parties. However, embedded finance isn't the only factor driving this transition. In recent years numerous banks, including Starling Bank, LHV and BBVA have also started to open their banking infrastructure and supply Banking like a service to enable enterprises and startups to unveil white label banking services. These developments offer banks important opportunities to open up new channels and provide a new way of being relevant within the evolving banking ecosystem.
But although some think that providing banking infrastructure is the inevitable future for banks, this needn't be their only destiny. On the other hand, banks that are willing to embrace this evolution of the profession are actually given an opportunity to widen their range of offerings and be employed in 'multiple modes'; providing services directly to their very own customers while also offering their services to customers via organizations in the form of embedded finance. In addition, for a lot of banks, there is an opportunity to open their infrastructure to fintechs to allow them to market their very own services based on that infrastructure, thus developing a completely new revenue stream.
Future-proofing organisational structures
However, to be able to flourish in operating in these multiple modes and providing these diverse offerings, banks will have to make some important changes to the manner in which they are currently structured. Banks are likely to continue to face increased competition from non-banks. To stay attractive to end users, they will need to rethink their core philosophy and adapt their structures and sections to better understand and respond to the particular needs of various types of customers.
Most banks today come with an organisational structure that is product-centric rather than customer centric and are operating in silos. Product offerings are usually made for broad brackets of customer types, such as students or small businesses. But this approach won't be sufficient if banks are to remain competitive within this new banking landscape. Banks have to take a much more granular and customer-centric approach and reorganize themselves so they focus on addressing the particular needs of consumers within these sub-segments. Only by setting themselves up to concentrate on diverse customer types and thru comprehending the specific needs and challenges each of these customers face, will banks have the ability to offer tailored services that address individual customer needs.