As open banking trends become more pervasive within a tight macroeconomic climate, incumbent banks are beginning to focus on new revenue strategies. Stirring the competitive pot are the latest results from Bank of England stress tests – hypothetical scenarios devised to ensure that major banks can withstand an adverse economic turn – that suggest that incumbent UK banks may be grossly underestimating the impact of FinTech competition on their profitability.
Possibly the result of too-big-to-fail thinking, some banks may not take the threat of new entrants seriously and, instead, assume a wait-and-see attitude as they partner with emergent players. However, with a pragmatic eye on future revenue potential, commercially savvy financial services providers are beginning to scrutinize their existing business models.
Historically, banking business models drove revenue based on interest income, transaction fees, and trading. The result is today’s heavy reliance on interest income as well as transaction processing, which can represent up to 80% of top-line revenue for a retail bank, and up to 30% for corporate and investment banking.
Now, these revenue streams are under pressure.
Revenue model options
Revenue is contingent upon a bank’s business model and value proposition to end customers or institutions. So, what can banks do to expand revenue potential?
Consider these three options.
- Optimize the base with a low-cost scale play featuring digital products that holistically help customers manage their cash flow or working capital position. This can be accomplished merely by re-stylizing customer accounts with new, digital-only features.
- Drive consumer mindshare through improved customer experience. Tap into the open banking ecosystem evolution by partnering with established and emerging players to breathe new life into customer experience and products and services. More and more experience-based partnerships are cropping up globally to spur differentiation and new revenue streams. For example:
- Digital-only Starling Bank enables customers to make transfers from the UK across 35 currencies via an app from London FinTech startup TransferWise.
- Uber offers a rewards-enriched Barclay’s Visa card in the United States through the ride-service company’s mobile phone app.
- Spotify offered a limited-time, half-off reduction of its music subscription service fees to customers who paid with a Capital One Quicksilver or QuicksilverOne card.
- Value play through horizontal and vertical integration to help reduce reliance on interest income, transaction fees, and trading. This option enables value proposition extensions through ecosystem partnerships or by leveraging emerging technology such as artificial intelligence (AI). Cross-sector collaboration (with retail, healthcare, etc.) has also become increasingly popular in recent months. (Figure 1).
These models mirror the levers of existing aggregators through which revenue is diversified across several affinity partners.
Figure 1: Early 2018 Market Activity
All three options rely on robust application programming interface (API) monetization features based on aggregator model dynamics. API calls – in and out of the environment – generate income as well as commission schemes for lead generation and conversion.
An excellent example of aggregator model implementation at scale is India’s private-sector YES Bank, a full-service commercial bank that, since its 2004 debut, has built a corporate, retail, and small- and medium-sized enterprise banking franchise across India.
|YES Bank 2017 revenue drivers
|Number of API calls||36 million|
|Number of transactions||10,800,000|
Three models to inspire innovative thinking
Option 1 in action: ING/Yolt
Dutch bank ING re-entered the UK retail banking market in late 2016 with a free mobile app to help consumers manage their finances on the move. ING’s app, Yolt, offers customers a cross-dimensional view of all their bank and credit card accounts. Building on the EU’s Revised Payment Service Directive (PSD2) and an Amazon-like platform, Yolt is a digital-only personal financial management app that allows customers to link their existing accounts in one place. Through a single visual dashboard, for both everyday banking accounts and credit cards, customers can easily monitor their transactions and spending. Yolt also features an online finance coach that reminds customers of the time left until pay day as well as available balance predictions based on regular outgoing direct debits.
“We built the aggregator in the way that people think about money; how long is it before their pay date; how much are they spending; and what is the risk of them going overdrawn?” said Ignacio Vilar, ING chief innovation officer. “We believe we have to reinvent the way we are providing customer service; this is where becoming a platform and the place to go is core to our strategy.”
Option 2 in action: Starling Bank Marketplace
UK-based, mobile-only Starling Bank was one of the first app-based challengers. With no physical branch network, Starling aims to take advantage of PSD2 and start its go-to-market process in the UK and, then, expand to other geographies. As an extension of its existing current-account-only model, Starling plans multi-currency accounts to bolster international expansion.
Leveraging an ecosystem strategy to offer new, innovative services through an alliance of partners, Starling launched Marketplace, a model that allows third-parties to add products to the platform that can be accessed through the mobile app. Following regulatory approval, Starling Marketplace is adding financial services integrations this year that span pensions, savings, travel insurance, and mortgage brokerage. The bank says it plans to add 25 partnerships in 2018.
Option 3 in action: American Express and Mezi
Early this year, American Express acquired AI travel assistant startup Mezi. The two companies had previously collaborated on a pilot project AskAmex, to support card members and travel providers. Sunnyvale, California-based Mezi was one of the first players to successfully launch a personal travel assistant designed to learn patterns and preferences over time. Outside of the process of booking travel, the partnership allows customers to manage flights, specify dietary requirements for inflight meals, and arrange all travel-related reservations.
“Mezi’s AI-powered experience opens up exciting new ways for us to connect with and serve our card members and creates opportunities for us to build more meaningful relationships with them,” said Phil Norman, VP of American Express Digital Labs. “With messaging emerging as the channel of choice for many, and the demand for unique experiences increasing, we believe the combination of Mezi’s capabilities with our global network of expert travel counselors creates a differentiated, high-touch service experience.”
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Coming up …
Leading up to the September 18 launch of the World Retail Banking Report 2018, Capgemini will publish a variety of blogs that examine three central banking topics: customer experience and business models, technology and operations, and product management. Stay tuned for insights and practical advice about digital transformation and the new normal for retail banking. Or, learn more about Capgemini banking solutions by visiting: www.capgemini.com/service/retail-banking
 Wired, “TransferWise partners with digital-only Starling Bank,” Lee Bell, March 15, 2017, http://www.wired.co.uk/article/transferwise
 Reuters, “Uber and Barclays team up to compete in U.S. card rewards war,” October 23, 2017, https://www.reuters.com/article/us-uber-barclays-cards/uber-and-barclays-team-up-to-compete-in-u-s-card-rewards-war-idUSKBN1CU2NI
 TechCrunch, “Spotify partners with Capital One to offer half-price premium subscriptions,” Sarah Perez, May 10, 2017, https://techcrunch.com/2017/05/10/spotify-partners-with-capital-one-to-offer-half-price-premium-subscriptions/
 Financial Times, “ING returns to UK market with free mobile app,” Martin Arnold, October 18, 2016, https://www.ft.com/content/e2f7f7b6-9463-11e6-a1dc-bdf38d484582
 Tech Crunch, “Starling’s marketplace banking rollout adds pensions, savings, travel insurance and mortgages,” Steve O’Hear, Feb 13, 2018, https://techcrunch.com/2018/02/13/starling-financial-marketplace/