2020: The banking business model changes faster

2019 closed on a somber note, with banks' growth slowing down across most markets, even going below the GDP growth rate in some countries. Margins are also under pressure; one research estimates that the returns of nearly 60 percent of banks are lower than their cost of equity. While Europe retains the dubious distinction of being the worst performing market, emerging banking markets, including China, Brazil and India, are also posting lukewarm results. There are signs that a slowdown is imminent, although industry observers are divided on its exact timing.

Heading into 2020, banks will have to consider receding from a me-too universal banking business model to start focusing on and ultimately excelling in a particular area. In a commoditized market, this is the only path to growth. Here, there are two decisions to make – selecting the area of focus, which would be influenced by context (customer base, asset size, capital structure, operational strengths etc.) and choosing a right balance between scaling the existing business model and evolving a new one. Here, "business model" refers to an umbrella term comprising the following aspects of banking: customer focus or segment, distribution channel, products and services, ecosystem approach, business technology landscape, operating model (including revenue model and cost structure), and workforce (people and competencies). All of these elements are reshaping the banking business model individually. And more so collectively.

For a bank continuing with the existing business model, the focus area could be scale, built through organic growth or acquisition from a growing pool of unsustainable banks; value, as the most cost efficient player in the market; customer experience that differentiates it from all others; or product/ service excellence in a niche, such as unsecured lending, mortgage, student financing etc.

If a bank decides to evolve its business model, it could choose to be any of the following: a manufacturing bank that produces the most efficient product(s) in the market and enable white labelling by third parties; an aggregator – such as India's Paytm– that curates products and services to fulfill more than just the banking needs of customers; a distributor that focuses on acquiring and servicing customers without taking on mid and back office burdens (many neo banks do this); a segment player that focuses on say, manufacturing companies or ecommerce retailers.

Regardless of the choice, most banks will spend 2020 transiting between its current and target state, and hence, juggling a combination of models. This is quite expected since banks are slow to adopt new business models: in the 2019 Innovation in Retail Banking study, presented by EFMA and Infosys, as many as 50 percent of respondents stated their intention to continue as full stack banks working in retail, business and corporate banking. However, we can expect some acceleration in the pursuit of scale or value leadership or alternative business model, as banks realize that in order to survive their commoditized markets they must seize ownership of a property such as size, cost efficiency, experience, distribution or customer segment. Here, they will get help from the environment in the form of opportunities to acquire or merge with weak banks – a recent report says 35 percent of banks globally are staring at merger or sell-out to survive – and to establish new models, such as specialized marketplaces or digital-only banks. It is worth mentioning DBS here, which, in addition to digibank, has set up four marketplaces for property, car, electricity and travel. In terms of business model evolution, the momentum will be greater in markets that have embraced Open Banking, where banks are under more pressure (but also have more opportunity) to differentiate their propositions.

In a digital world, where the winner usually takes all, sharp vision, flawless execution and early action make all the difference. 2020 is here; there's no time to waste.