In December 2017 we visited the Fintech Live event in London and, as expected, Brexit was one of the key topics people most talked about. There was much interest from British fintech start-ups to explore opportunities at the other side of the English Channel and heavily market their companies. Meanwhile, representatives from mainland Europe did their best to promote their region.
The other key topic was the arrival of PSD2 and open-banking in Europe. What approach would the market take? How would banks and others position themselves? What will be the market impact? What new propositions will arise? And what can we learn from reference cases around the world?
But one presentation by Ben Robinson, Chief Strategy Officer of Temenos, piqued our attention. His presentation focused on the future of banks in the emerging new habitat post-PSD2. Primarily, he described his vision of an end-state where only two roles for banks remain:
1. Infrastructure based custodian services: providing the infrastructure that enables secure, reliable and fast transactions. The role builds on economies of scale, leveraging the large investments in existing systems. Furthermore, to maintain a competitive position and substantial market share, large investments are required in infrastructure and underlying capabilities. This will drive consolidation within the European market until only a few large players exist. The envisioned future market landscape is comparable to the Telecom sector of today.
2. Aggregators of financial services: acting as a market place between customers who are looking for the right solutions and products providers looking to distribute their products. The size and quality of the network, as well as reputation, are key drivers to attract the most clients and to negotiate the best offers for customers. Additional advisory services are important to help customers to choose the best solutions for them. Succeeding this strategy, a strong customer relationship is critical, which requires continuous improvements in customer experience and proposition. In the envisioned end-state there are only a few large aggregators, comparable with the e-commerce world with players such as Amazon.
To complete this vision, we believe a third role that is yet missing should also be added:
3. Financial solution provider: providing the financial solutions to customers such as payments, savings, mortgages, personal loans and investments. The value of products is based on factors such as customer rates, service (e.g. processing times and flexibility) and terms & conditions. Scale and expertise are key drivers to be able to offer the best solutions. In the envisioned end-state, as distribution will be unbundled from the production, financial products are even more like commodities, with smaller differences between products and lower margins. This limits the role of financial solution providers to mere product factories where operational efficiency is ever more important.
Within this vision, combinations of the three roles above or niches within them are also possible, providing more options, for example to be a full-service provider that offers an integrated solution covering all three roles.
Assuming this vision of a few very specific roles will materialize, it raises many questions with vast implications for financial institutions. For example, what are the critical factors to make this vision a reality? How much time will it take for the market to take its new shape? Which players will position themselves where? Which players will earn the place of winners in these categories, and who will come out losers? What should the many mid-sized and regional banks do? And what are the implications for fintech start-ups?
Financial institutions have various options at hand to best position themselves for this envisioned future. As a first step, companies need to thoroughly look at their own competitive advantage. What are their unique qualities and therefore which role would fit them best? Once the future direction has been determined, companies need to work towards that end-state role. This could entail engaging in mergers & acquisitions activity to increase scale and /or complement the current activity suite. Or, alternatively, one could divest certain activities to fully focus on a specific activity, such as the front-end customer relationship.
Still, the future is uncertain and dependent on many factors. This means companies also need to remain flexible; one cannot fully bet on a specific scenario, but should maintain optionality. For example, maintain certain capabilities that can be applied to multiple roles. Or adapt an agile way of working with a new organizational structural, that allows to respond much quicker to a changing environment.
At the same time, companies need to remain competitive throughout the whole journey. You cannot be a winner in the end-state if you do not survive until the end-state is reached.
While there are many possible future scenarios, the future is uncertain and may take quite some time to take its new form.