Banks need new revenue models

The traditional banking business model is no longer sustainable. Just as the ‘GAFA’ technology firms (Google, Amazon, Facebook, Apple) have set the standard for the sharing economy, so too banks need to adapt their models to compete in a new world of customer expectations. 

Although moves by large tech firms into financial services have been limited so far – with Amazon exploring the potential of creating checking accounts– banks should not rest on their laurels. With huge customer bases, wide-reaching tech platforms and large-scale brand loyalty, the influence of these tech firms poses a real threat to banks and financial services institutions. There’s a danger they could lose the relationship with the customer and become a pure commodity service. 

So what lessons can banks learn about these platform-based business models to help them remain competitive and front of mind with consumers?

New opportunities

Chinese Fintech firm AliPay, part of Alibaba, is a prime example of how banks can use a platform approach to generate new revenue streams. Last year, the firm introduced a ‘smile to pay’ service which uses facial recognition technology to allow customers to pay simply by flashing a smile. The innovation doesn’t just lie in the technology, but the business model behind it. 

The technology isn’t provided by Alipay itself, but a third-party start up integrated into Alipay’s platform. Alipay simply charges a small incremental percentage on each transaction. Given the potentially large volume and frequency of transactions on a platform of this scale, this – alongside other similar new services – could generate significant revenue over the long term. This is the model banks are up against and what they should seek to emulate.

Bank as a platform

By sharing access to their own APIs and those of innovative Fintechs and third parties, banks can open up entirely new avenues to generate revenue, accelerate innovation and deliver the types of new services customers crave. A ‘bank as a platform’ approach will be a key competitive differentiator in the future of financial services – particularly at a time when banks are faced with diminishing returns from their existing portfolio. 

Historically low interest rates and a squeeze on margins across the board is impacting profitability. Failure to explore new partnerships and revenue streams will make it more difficult to compete against the tech giants who could potentially cross-subsidise banking services should they decide to offer them. It’s this same approach that banks need to take – for example, spotting opportunities to cross sell holiday insurance when customers are booking travel through online partners, or a loan when customers are looking to buy a new car. The use of APIs to make these interactions as frictionless as possible for the customer will be key to their success.

Collaborate to innovate

It’s not news that banks have struggled to innovate. In a recent report from Celent, Gareth Lodge, Senior Analyst highlights that despite “significant strides” being made by banks over the past 10 years, relative to other industries over the same timeframe, they are still lagging.

Working with Fintechs, not against them, is crucial to addressing this challenge and platforms are the perfect environments to facilitate this collaboration. By providing an ecosystem for Fintechs to share ideas and work together on concepts, banks can innovate their offerings and continually create new opportunities to generate revenue and improve their business proposition.

There is a growing recognition that a ‘bank-as-a-platform’ approach will play a major role in the industry. Those banks with the vision to capitalize on this new era of platform to innovate their business model and uncover new sustainable revenue streams will be best placed to compete, collaborate and thrive in the future, alongside the digital giants.