Blog

Banks face fierce competition from challengers who are quick to adopt innovative technology and embed it at the heart of their business. Gonçalo Traquina, KPMG’s Management Consulting Lead for Lower Gulf Financial Services, explores the need for banks to follow in their footsteps or risk obsolescence.

Banks are increasingly competing with large, established technology companies such as the “Vier Reitern” or GAFA (Google, Amazon, Facebook, Apple) as well as a number of FinTechs that constantly come up with innovative and customer-oriented solutions. In order to survive and be successful in this time, banks have to adopt new models.

Most large banks today are vertically integrated and offer closed-loop offerings. Their products and services run through proprietary sales channels and a strictly controlled infrastructure. Driven by regulation, the emergence of open application programming interfaces (APIs), such as open banking, is turning the status quo on its head by allowing third parties to act as alternative sales partners and offer a new range of products.

Additionally, customers have embraced platform-based businesses for less friction, lower prices and better service, and the convenience of using mobile devices as their primary point of contact.

A development in consumer preferences is also driving the shift towards platform-based models. Indeed, our research and experience suggests that after nearly a decade of service fragmentation and unbundling, consumers are returning to “rebundling”. Instead of having multiple apps for ordering food, ridesharing, and payment options, they may want just one. Consumers may not specifically ask for “super apps,” but many want the convenience and simplicity that super apps can provide.

The concept of banking as a platform

Digital platforms are about to dramatically change business models, competitive structures, prices and customer behavior in banking, as we have seen in other industries such as retail. Given the rapid pace of change, established banks are forced to think about alternative models – one of these options is Banking as a Platform (BaaP).

By establishing a banking platform, banks can enable third-party FinTech developers to develop products and services on behalf of bank customers, create a broad network of FinTech applications for loans, payments, investments, asset management and other services, while also providing financial institutions enable a uniform banking experience to be offered.

Learn from FinTechs and use them

FinTech companies are realizing the market opportunity to serve mobile-first customers and are introducing disruptive business models that eliminate unnecessary costs and are more efficient in using customer data.

These business models support royalty-free or low-fee products and services that put banks’ fee and margin income at risk. Players like Alipay (China) and WeChat (China) offer their customers access to thousands of products from hundreds of financial service providers in a single digital ecosystem.

Two other super apps were created in Southeast Asia, from the leading ride sharing platforms Go-Jek and Grab. Both apps now offer a range of other services, from grocery delivery to medical advice, and both compete to help consumers choose and buy financial products.

FinTechs are leaders in innovation by using rapid development methods on the latest technology stacks and bringing products and services to market that are not yet offered by banks. Banks are well advised to be aware of these developments for a number of reasons.

They disintermediate banks from their customers. Super apps like WeChat and Alipay offer customers a range of basic banking, savings and investment products. While these products are initially being developed and subscribed by traditional financial institutions, it still means these institutions are moving a step further from their customers.

Similar to the insurance sector with platform games and aggregators, traditional financial institutions can quickly determine that they are performing the regulated activities while the super apps maintain the customer experience and relationship.

The rise of super apps

“Super apps” are increasingly using their enormous wealth of data to provide better services and improve operational processes – for example, by using social media and transaction data to evaluate loan applicants for risk and to target financial products more precisely to customers. Traditional banks, with their isolated data and mainframe technology assets, struggle to get a complete and representative view of their customers.

Apps are also building their brand reputation in the financial services sector. Offering payment services within the app may seem pretty harmless at first; a marketplace without a payment mechanism can be doomed to failure in the first place. Currently, the vast majority of these payments go through the traditional bank and card issuer infrastructure.

However, most of the bigger super apps now also have close ties with banks (e.g. WeChat has WePay for payments and WeBank for banking products; Alibaba has AliPay and Ant Financial), which use the app’s brand reputation and reach to make new ones Reaching out to customers and building trust in financial services.

With these approaches, FinTech companies can offer banking products and services without the traditional cost structures of traditional banks. The banking industry has so far avoided the level of disruption seen in other industries due to a combination of regulatory obstacles, industry structure, entrenched customer relationships, and customer concerns about privacy and reputation.

However, these are not insurmountable obstacles, especially when customers expect and demand a high level of service and convenience. With cellular networks and platform-based business models, FinTechs can bypass the strengths of today’s banking industry. Banks should react to these challenges and make their operational strategy future-proof.