Banking models to address revenue fall: Technology Vs. Business focus

I had outlined in my previous post the fall in revenue that banks are witnessing across their service lines (you can read it here). The move towards overcoming this drop in revenue needs to go beyond the tried and tested models of cost reduction and margin improvement. Such a move cannot be restricted to the superficial layer of operations, but needs to go in depth to address multiple levels of the banking organization.

A quick look at the banking landscape shows that the organizational models adopted by banks to overcome the new reality can be categorized on two fronts – one that is focused on the technology aspect, and the other focusing on the business side. The technology focus brings together both traditional approaches driving operational efficiency as well as new age technologies including the likes of machine learning, artificial intelligence, analytics and data. The business side brings together extensive focus on revenue or cost or an optimum mix of both these factors.

Technology Focus

Majority of banks are trying to build the relevant technology capability to gain an edge over their counterparts as well as the Fintechs. Four major approaches categorize the technology transformation efforts of banks, as outlined below.

1. Internal technology arm: Here the existing technology unit of the bank is also entrusted with the responsibility of innovation and R&D to bring forth new ways of adopting emerging technologies. BBVA has created innovation centers within its technology unit that drives adoption and advances in technology across the bank. There are also examples of banks who are capitalizing on their storage infrastructure and extending it to provide cloud-based services for their customers.
2. External technology arm: In this case, the technology adoption is driven primarily by business units with ownership outside the technology divisions. The business units pursue their objectives either through acquisitions to build the relevant technology capability or creation of separate units that manage specific technology-based business structures. An example of the former could be BBVA acquiring Simple to accelerate digital banking capability, while latter is evident in Banco Santander establishing Openbank in Spain.
3. Partnership: Multiple banks are also entering into partnership with Fintechs that provide them access to the technology platform of the Fintechs. Citibank’s partnership with DemystData for credit scoring and lending is a step in this direction. Another fitting example would be Banco Santander partnering with Socure on biometrics-based customer identification for KYC and similar regulatory mandates.
4. Investment: Here we find banks either investing directly in Fintechs by acquiring them or through separate VC funds that are targeting Fintechs. Santander has established a separate Fintech fund – Santander Innoventures towards this. BBVA acquired Holvi to take advantage of online sales platform and use Holvi’s digital approach to small business banking. Many of these banks have also been organizing events targeted at identifying Fintechs, like Open Talent -a Fintech startup competition by BBVA and Fintech Venture day events by Santander.

Business focus

A straight forward categorization in terms of whether the bank is focusing extensively on revenue or cost may not be possible. A look at some of the initiatives and outlook provided by the banks indicate the probable focus the bank has. Barclays has been deploying digital technologies aimed at bringing down costs and also reducing headcount through investment in new technologies and automation. The bank at various instances has also been mentioning that its single focus was to reduce costs. On the other hand, Santander has highlighted in multiple avenues that its number 1 priority was market share growth and has invested in customer analytics to increase revenue from target offerings.

The above examples showcase a clear demarcation in focus between being cost-driven and revenue-driven. At the same time, we can also find banks that have an optimum focus between these objectives. Commonwealth Bank of Australia launches mobile apps and contactless terminals to reduce cost of operations on one hand, and on the other, drives innovation centers to outline ground breaking ideas with customers and enhance customer experience.

We find that banks have been adopting multiple business and technology models based on what works best for their stream of operations and customer base. A model that works for one may not be the right fit for the other. Ultimately, all models serve to achieve the common objective – scout for additional avenues for revenue growth and profitability against the backdrop of falling incomes levels and margins.