Traditional banks could boost revenues by nearly 4% annually by rethinking their business models and embracing the innovative strategies of digital-only banking and financial services new entrants, according to a new report from Accenture. This will result in more than half a trillion dollars in additional revenues by 2025
The report, “The Future of Banking: It’s time for a change of perspective,” analyzes the business models of nearly 100 leading traditional banks and over 200 digital-only players in 11 countries across North America, Europe, Asia-Pacific, and Latin America and the role they play in the banking value chain. It identified two common business models:
● Vertically integrated — traditional, linear business models, i.e., those that sell only their own products, those that distribute products from other providers, and those that deliver technology or business processes to others; and
● Non-linear — adaptive business models, i.e., “packagers” that assemble new propositions, adding value beyond just distribution; and firms that embed their propositions into third-party services, such as “buy now, pay later” services embedded into the merchant point-of-sale.
“On the surface, the banking industry appears healthy, with big banks posting robust revenues and profits,” said Michael Abbott, a senior managing director at Accenture who leads its Banking industry group globally. “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. And in many markets, banking and payments revenues are flowing from incumbents to new entrants. To re-ignite growth, traditional banks need to reimagine how they create and deliver compelling products that focus on customers’ intentions. That will require rethinking their vertically integrated business models.”
The report further reveals that between 2018 and 2020, digital-only players performed significantly better than traditional banks. But those that adopted non-linear business models achieved 76% compound annual growth rate (CAGR) in revenue, while those digital players simply emulating traditional, vertically integrated models achieved only 44% CAGR.
“Being digital is no longer a differentiator,” said Dilnisin Bayel, a managing director in Accenture’s Strategy & Consulting group in the U.K. “To capture growth, traditional banks need to go beyond becoming the best digital versions of themselves and become adept at operating multiple business models simultaneously. 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.”