Traditional banks could get revenue boost if they copy digital challengers

Traditional banks could add more than half a trillion dollars in annual sales if they adopted the business models of digital-only competitors, a global study has found.

By 2025, global banks could add $518bn in revenues, an additional 4%, if they changed their business models to partner with third parties to distribute and personalise their offerings, according to Accenture.

Its report, The future of banking: it’s time for a change of perspective, follows analysis of the business models of 100 traditional banks and 200 digital banks in 100 countries.

It found that most traditional banks offer their own products, distribute products and provide technology and business processes to others. These, it said, are missing out on additional revenues available through repackaging products to add value beyond distribution, and embedding their products into third-party services.

The huge revenues and profits being reported by big banks hide the gradual declines in market share, said Michael Abbott, senior managing director at Accenture.

“On the surface, the banking industry appears healthy, with big banks posting robust revenues and profits,” he said. “But a closer look reveals that the combination of low interest rates, fee compression from increased competition, and undifferentiated product offerings is slowly eroding banks’ share of gross domestic product.”

As revenues flow to challenger finance firms in the payments and banking sector, banks need to “unbundle their traditional products and partner with third parties to create and distribute new personalised customer offerings” to grow, said the report.

It revealed that between 2018 and 2020, digital-only banks performed significantly better than traditional banks. Even the best-performing traditional banks grew revenues by just 2%, while the best-performing digital banks increased revenues by 75%.

Accenture recommended that traditional banks adapt their business models to include ecosystems where they can distribute financial products from other companies, provide technology and business process services and bundle products and services into new offerings that can be distributed by others and create new propositions by building or bundling fragmented products and services, which can be distributed by the bank or third parties.

Dilnisin Bayel, a managing director in Accenture’s strategy & consulting group, said that to grow, traditional banks need to “go beyond becoming the best digital versions of themselves and become adept at operating multiple business models simultaneously”.

Bayel added: “This will require that they shift their perspective to consider adaptive models that put product innovation, embedded distribution, purpose and sustainability at the forefront. Banks can choose to continue to innovate at their current pace or take a fast-follower or leader approach to business model transformation – but they can’t afford to remain stagnant.”

Large traditional banks are changing business models and development techniques to get new products to market, often in partnership with the very companies that are challenging their dominance.

This week, Standard Chartered Bank announced it was using API technology from app-based bank Starling to develop a new investment product, which will also be distributed through Starling’s product marketplace.

According to the findings of a survey of UK finance firms by Lloyds Bank, about half of the UK’s financial services companies plan to increase investment in fintech through acquisitions and partnerships over the next 12 months.