Extreme Digitization Is Changing the Banking Model: Is Your Bank Ready?

After three years of the pandemic, banks are waking up to a new realization: the game has changed. 

To be fair, the banking industry did not face an existential threat during the global lockdowns and ensuing pandemic misery. People relied on it more for loan extensions, disbursements of COVID-19-related financial assistance, and bringing stability amidst the panic. Many regulators put a pause on digital banking initiatives.

Yet, according to the 2022 Global Outlook for Banking and Financial Markets, an IBM Institute for Business Value study, the traditional banking model is under threat. And it requires banks to rethink or risk being sidelined.

Understanding the threat 

One primary and most apparent change driver is the emergence of Super Apps. “Most of the traditional banks face huge cost pressures, disruption of their business due to fintechs and cross-industry ‘Super Apps’,” said Gai Partha, vice president and senior partner for banking transformation at IBM Consulting. 

To compete, banks need to think agile and as an organization. They must find strategies to improve market share, ensure customer stickiness, improve net promotor score (NPS), and handle technical debt from legacy infrastructure. Their list of competitors has also expanded. They no longer compete with other incumbents; today, their rivals include fintechs, techfins, payment service providers, retail players, telco providers, and non-banking financial services (NBFC) players. 

Partha noted that banks had to examine high-cost income ratios and considerable debts on balance sheets. They also have to put up with onerous regulatory compliance, a growing cybersecurity unease, and shifting demands from a growing millennial customer base. 

The fact that the industry is still underperforming is also not helping. 

“The banking industry is still dependent upon the revival of world economies which are currently plagued by high oil prices, supply disruptions due to war in Ukraine, and high inflation caused by supply-side issues across the world. Most of the banks in APAC are just recovering from the effects of COVID-19 and the government's huge subsidy programs to keep the economy from faltering during the pandemic,” said Partha.

Of course, the biggest challenge is current inflation, particularly the Federal Reserve’s fight against inflation. This is slowing down mortgages and making various currencies depreciate against the USD. 

“This will cause problems to import-driven economies and will also cause a war in export prices. India’s current account deficit is extremely high, and this will create issues for banks,” observed Partha. 

Meanwhile, the cost of capital is soaring, and banks are seeing their spreads squeezed as consumers slow their spending. “The share of wallet spend of the consumer is less due to inflation, and hence banks will have a squeeze in margins,” Partha added. 

The net result is that the traditional banking model is being eroded and disrupted by non-traditional players. It is high time for banks to rethink.

Rethinking the connected economy

The IBV study highlighted 10 new imperatives for the banking industry. All of these point to a quick realization that the connected economy is here to stay. “We are living in a connected world, and COVID-19 and the Ukraine crisis has also hastened the realization of the ‘Connected economy’,” said Partha.

Banks are not sitting still. Parthasarathy points to corporate bank digitization, a key trend in APAC, as an area of interest. The creation of digital wholesale banks and the development of digital wealth management are others. 

For many FSI players, these imperatives are pushing them to embrace the platform economy. Partha believed that platform business models would capture 30% of global industry revenue pools by 2025, creating new models for the consumption of financial and non-financial services.

However, the platform economy poses its challenges. “In a platform economy, ‘Time to Market’ is the key. How do we reduce friction across value streams and drive the network effect? Hyper personalization of our products to address consumer needs and backed by re-imagined customer experience both in acquisitions and service is the key to success,” she explained. 

She also noted that simplification, speed, continuous deployment, and governance for IT change would determine who wins in the extreme agility games of connected ecosystems. “For a bank, data which is in silos must be simplified from data lakes to data mesh and moved to cloud to enable AI and machine learning insights and ‘next best action’. This will ensure that there is hyper-personalization,” she observed. 

The IBV study offers three ways today’s banks can drive all the ten imperatives: extreme digitization, unlocking the value of data and AI, and flexible technology architecture. 

“Using AI and machine learning is key to breaking down the data silos in the data lake and bringing the data into a data mesh in the cloud. We need to migrate legacy infrastructure to cloud and offer ‘Banking Software-as-a-Service’ to banks,” said Partha. 

A robust data foundation that blends data and AI with APIs and microservices, intelligent workflows and automation, hybrid cloud infrastructure and services, DevSecOps, etc., and deployment of AI factories and transformed data environments also accelerates transformation. But, more importantly, it helps banks to use data to drive their business strategies and not merely support them.

The new digital Hobson’s choice

While the imperatives are clear, addressing them means that banks must face some tough questions. They also cannot do it alone.

It is why many are partnering with experts like IBM. They can drive real-industry reinvention using an outside-in-view on business models, product variants, functional and technical capabilities, and transformation themes. 

IBM can also use its value-assessment framework to define and measure initiative outcomes. This allows banks to focus on those initiatives that add the most value and improve their overall project management. Meanwhile, IBM’s expanding technology capabilities can accelerate delivery and value realization.

Ultimately, the choice is left to the banks. With macroeconomic challenges, closer regulatory scrutiny, and shifting consumer attitudes, banks need to rethink their banking model. But because digital can also widen the gap between the leaders and laggards, sitting on the fence is no longer an option. 

Banks need to realize that digital is reshaping the world around them and embrace it in their DNA. And they need to begin by accepting the game has changed.