The banking sector is at a turning point. Key measures for banks are at a historical low point. The sector’s price-to-book value has fallen to less than one-third the value of other industries. That gap is less the result of current profitability and more about uncertain profit growth in the future. While banks have pushed for great improvements recently, margins are shrinkingdown and expected to fall decrease, in the next decade.Banking is deeply transmuting. Many banks can thrive by necessarily changing the way that financial services are entrenched into daily life.
Regulations, intersectional competition and worries:Regulation and increasing intersectional competition are still worries, but the bigger threat is a global trend: new challenges often from different industries and often benefiting from the kind of cross-industry platforms behind the recent success of companies with a vastly superior economic model. The market believes that banks are headed in the wrong direction, without a future-proof strategy.It might be a certain of the skeptics are right about todayand may be wrong about tomorrow. Banking is facing a future marked by fundamental restructuring. It may accept as true that banks that successfully manage this transition will become bigger and more profitable and grow faster while leading to a value creation opportunity. In the following period, banks may realign to compete in new arenas, organized around distinct customer needs. These arenas will expand far beyond the current characterization of financial services, and they will also be fiercelychallenged by a wide range of tech giants, tech start-ups, and other nonbanks. But this intimidating reorganization, or breakup, could also provide banks with a huge opportunity i.e. higher margins, new revenue streams, and loftier valuations. Ambitious banks can break free from stagnant valuations, thrive, and grow if they are willing to embrace the platforms of the future and make a few strategic, informed big bets.
Unquestionably, it cannot know exactly what banks will look like in the future. Regulation, technology, geopolitical shifts, and unforeseen innovations could radically alter the way that the industry develops. It can expect that the banks that successfully manage the coming transition will use tech and data to embed themselves deeper into customers’ lives with real-time services that were unthinkable just a few short years ago. The opportunity is great for those who move fast into this new yet to come. Banks sending off traditional advantages: The Banking is bringing up the furthest back its traditional advantages. Recently, big banks drove profits and growth by applying synergies, economies of scale, and access to huge pools of capital. This massive industry already manages big volume in worldwide assets, and its growth is accelerating.
It is project that global assets will grow in the next decade.While traditional banks have been convenient one-stop shops for businesses and consumers, many haven’t evolved their products in a way that matches the tech-driven pace of change in other industries. Products such as checking accounts, loans, and even corporate advisory can seem undifferentiated. And people increasingly feel frustrated by the financial fragmentation that banks have imposed on many consumer processes. For example, buying a home once required navigating a confusing world of disconnected real-estate brokers, mortgage lenders, insurance companies, lawyers, renovation contractors, and so on. Today, we are awash in new ways to reach and connect with consumers. Banks need to identify and engage these customers as their newer competitors are doing.
To compete, most banks will have to embrace cross-industrial platforms. These new platforms dismantle the barriers between traditional industries, reshaping customer behavior and turning formerly linear value chains into ecosystems that fulfill customer needs in new ways. For cross-industrial platform, banks must now compete with any organization that has the capacity and desire to offer any kind of financial services. The new competitors have raised the bar on customer expectations. Both individual and organizational customers now seek a long list of attributes from their financial-service providers.The markets believe that the newcomers can meet their customers’ demands. Many traditional banks, on the other hand, face stagnant or decreased revenue and profits. The average global banking ROE was around 9.5 percent in 2021a significant recovery from 6 percent in 2020, but a sharp decline from 15 percent prior to the 2008 crisis.
By 2030, it is projected that it will fall below 7.2 percent.These falling margins are contributing in turn to weaker stock market valuations. Banking stocks trade at an accelerating discount to other industries—from a 15 percent discount in 2000 to a 70 percent discount in 2022. This means that global investors are voting with trillions of dollars against the future profitability and sustainability of the existing business model of universal banks.
Business models are emerging in banking towards the competition:The era when all financial services were dominated by monolithic banking entities is over. What, then, will arise to take its place- it ismay accept as true that the future of banking will be contested by banks and nonbanks in five cross-industry competitive arenas: everyday banking, investment advisory, complex financing, mass wholesale intermediation, and banking as a service. Day to Day Banking: Everyday banking encompasses day-to-day financial services, such as checking and savings accounts, credit cards, personal loans, payment processing, and lines of credit on the traditional-banking side, for individuals and for small and medium-size enterprises (SMEs). This arena will also include e-commerce ecosystems, loyalty programs, discounts, advertising, and peer-to-peer marketplaces making banking not a chore or obligation but something easy and even enjoyable. For SMEs, it will include tools to help organizations manage their finances.
E-commerce banking appis expanding its offering into neighbouring as a mix between Alibaba’s ecommerce offering, Ant Financial’s payments platforms, and WeChat’s social peer-to-peer (P2P) payments platform, managing director David Ferguson tells FinTech Futures that the fintech has been able to build scale “in a region which has gone under the radar”. It can take this mobile ecosystem and be one of the first, itcan create a very valuable business whilst everyone else chases India and Brazil. Eventually, the fintech will expand into other markets. The initial hook is payments, allowing users to pay P2P to both friends and small businesses, pay bills, and send gift payments.
But overtime, the app has fleshed out its offering, morphing into the ‘super app’ term many fintechs across the world aspire to be.It lets users log onto their tax accounts through the app, plug in meter readings for bills, and purchase items be that household appliances or loans through its marketplace, with the option of paying in instalments without the interest.Whilst payments have not made the company the most money, they are to help user base growth. These users are tapping its more lucrative services, like its buy now, pay later financing which it offers alongside its marketplace. Logistically, it should be a very hard for any country to do ecommerce well in. It is a matter of land mass square kilometres consideration to the population size. So getting scale should be hard, but sincelaunching ecommerce offering hopefully will acquiring more than expected level of the overall population as users.
The common thread of all these services is that customers want them to be hassle free, reliable, highly automated, and inexpensive in their day-to-day life. The ultimate goal for everyday banking is invisibilityoffering services that are cheap and easy and accessible through all channels via business models such as the Commerce marketplace specialist (CMS). Specializing as a commerce marketplace offers everyday banking for individuals and many nonbanking services via a marketplace platform (see sidebar “Commerce marketplace specialist: From WeChat to WeBank”). It can be a single access point for anything from consumer goods and electronics to home-cleaning services and movie tickets, all connected to bank accounts, or niche solutions embedded into selected specialized journeys.
A CMS uses automation and personalization to make everything simple online, offline, and eventually in the metaverse. It will have to compete with the generalist and specialist e-commerce platforms of tomorrow, Business gateway provider-sServing as a gateway provider offers everyday banking for SMEs via an integrated online portal, aggregating services that facilitate payments, cash flow financing, accounting, taxes, and so on. It allows organizations to focus on their core activities by automating many of the basic activities of running a business.A business gateway provider will compete with online accounting platforms, software companies, and even telcos for the small-business service ecosystem.
Arena of complex financing:Complex financing is the arena for individual and business services that require more sophistication than everyday banking. Examples include mortgages, home equity loans, car loans, and start-up loans. Such services are complex because many kinds of players are part of each ecosystem.While familiar, these products and services are used less frequently than others, but they have a big impact on the customer. For instance, getting a mortgage is just one aspect of buying a home, which requires navigating a maze of real-estate brokers, lenders, insurers, attorneys, and other professionals. Consumers crave a trusted expert to help them get through that maze and simplify it, weaving it into a single touchpoint. The end goal for complex financing is journey integration—making these processes convenient, efficient, fast, and low cost yet also as personalized as possible from start to finish via business models.
Intermediation to the corporate-focused arena: Mass wholesale intermediation is the corporate-focused arena. It’s a combination of expertise and new, efficient systems. It includes corporate finance, cash management, portfolio management, M&A advisory, equity and debt financing, and other traditional investment banking offerings. The ultimate goal for mass wholesale intermediation is extreme efficiency—and know-how—which banks can pursue through business models such as Automated trading and funding marketplace. Serving as an automated marketplace means offering mass wholesale products and services for corporate customers. This model automates large marketplaces of liquid capital via superefficient, frictionless, low-cost platforms, including “tokenization” through smart contracts.
And Integrated enterprise services platform to serve as an integrated platform means offering corporate customers deep integration with enterprise systems such. The platform can personalize and coordinate services such as accounting, commodity trading, and enterprise resource planning. The new arenas will require banks or nonbanks to ramp up their presence on new platforms, create touchpoints with customers, and mine and capture data in new ways. To understand how these concepts will play out and visitand examine the biggest arena of everyday banking.
Concluding thoughts and remarks: Keeping in mind that the impact of data and money regulation around the world is uncertain. Excelling at this transition will require banks to look beyond their traditional metrics of success, such as margins and risk costs. They will need to focus more on performance indicators used by leading e-commerce players, such as the number of customer touchpoints and time of engagement. This business model has enormous economic upside. Any bank that successfully transitions into a CMS can multiply revenues by many times , with higher profit margins for higher-value services.The successful bank of the future will be defined as a network of platforms. Few banks will capture all of the ten platform opportunities described in this article in their regions, but many will participate in multiple platforms.
Given the platforms’ enormous value creation scale, getting even one right can unlock tremendous value for shareholders and broader stakeholders alike. But success will come to only those banks willing to move beyond their traditional operating models. Banks should be prepared to evolve through multiple stages on their way to becoming a platform network.This vision of the coming shakeout may seem daunting. But the challenges are manageable taken one step at a time. The first and most important step is to commit to adapting as soon as possible.
