In the last editions of Dialogue, reinvention or transformation of the business model for financial institutions was often an underlying theme. Indeed, because of increased regulations designed to make the financial services industry more robust or make the European markets more open and more transparent and because of disruptive innovation thanks to new technologies leading to tougher competition both from within the sector as from outside, financial institutions need to reassess their business models. A business model is a representation of a firm’s value proposition to its major stakeholders such as customers, shareholders and employees in a socially responsible way towards its communities.
Transforming towards a sustainable value proposition, does not necessarily mean a radical change of its business model, but it is at least critical to reassess if not to reinvent itself from time to time. Financial institutions had first to deal with the consequences of the crisis and had to reposition themselves, mostly leading to restructurings and even retracting to their domestic market. They now get increasingly more customer focused and look at how they will add value going forward and achieve the necessary returns they will need to have to a sustainable access to capital markets.
Business model transformation can come in very different shapes from changes which client segments to target and which services or products to offer, to becoming more efficient and effective the way services and products are delivered to existing client segments. Within a more complex and more competitive environment, financial institutions need to become more agile. Such transformation doesn’t come easy and requires a much better understanding of the changing customer behaviour, a much better understanding of how new and upcoming regulations can be an opportunity particularly for early adopters, a much better appreciation of how technology is changing customers and competition.
Given this complex and challenging environment, financial institutions may need to adopt different ways to better asses relevant opportunities and sustainable business models and therefore we are likely to see financial institutions at least initially engaging more than before in partnerships or collaboration for certain services or investing in several new technologies before being able to assess which ones are relevant for the targeted client segment. This shows that changes of business models of financial institutions will mostly not be radical but more a continuous evolvement towards a more optimal model.
The articles in this seventh edition of Dialogue give several witnesses of how a better understanding of the customer, markets and regulations are the corner stone of the transformation to a more value driven business model:
- The article “Insurers and Banks – An Important Distinction” talks about the bank-insurance model and the way the regulatory changes with Basle III and Solvency II have and are reinforcing the underlying dynamics of their respective business models with for example the insurers being the long term investors. As pointed out, such changes can lead to new business models with (rather than integrated bank-insurance businesses where the synergies are not always consistently present) more collaboration across industry segments to leverage each other’s strengths.
- Another example of leveraging regulatory changes is in the payments with for example the upcoming Payment Service Directive commented in “Adapting to Change in the Payments Industry”. The payment industry is fundamentally changing with new players coming into the market. The article makes the point through a number of examples that it is not only important to find innovative ways to enhance the customer experience. It is also important to look for opportunities to engage with customers beyond existing boundaries focusing on what customers want by leveraging not only internal data but also working closely with payment service partners such as merchants to better understand the needs of the customer.
- “Banks re-invent themselves to keep the Customer On Board” discusses the fact that clear technology changes such as increased digitization are not necessarily not yet widely adopted by the customer and therefore it may be worthwhile to see how old distribution channels such as the branch can be married with the digital distribution platforms to a flexible “banking store” for advice and service delivery.
- “Delivering Shareholder Value amid Complex Regulatory and Supervisory Landscapes” starts from the fact that it will be a major challenge for banks to accommodate the increasing complexity of regulation and supervision and at the same time create shareholder value. Bank business models can be at large categorized in retail, wholesale and capital markets and banks often have a mix of those with one dominant. These distinctive models have each their risk profile and return potential but in a mix model there are also cross-risks and enhanced return opportunities. The article makes the point that it will be important for banks to redesign their strategies taking into account these increasing cross-model complexities to assess which geographic and product segments are likely to be most effective in delivering shareholder value.
- In several articles published in this and previous editions, the importance of better understanding the customer behaviour has been more than highlighted. “Making Use of Big Data to Create Value for the Customer”, based on an interview with Philippe Baecke who is doing research on the use of big data in the financial sector, goes beyond the importance (and the challenges such as data privacy) of using big data to become more customer-centric by stating that banks as a result may start to be more collaborating with other business partners, initially to better understand their customer and at a later stage to possible provide services together.
- The business environment of financial institutions are also impacted by measures taken by the central bank to stimulate the economy and as such may influence how banks for example take advantage to the benefit of their customers of such measures and the liquidity it creates. The article “Quantitative Easing for the Eurozone: Origin, Impact and Unintended Consequences” not only discusses the impact such measures may have when rolled out but also highlights some scenarios of how it may impact the business environment at the time such measures would be phased out.
It is an understatement to say that financial institutions face tremendous challenges to cope with a radically changing customer, technology and regulatory environment. We hope that the articles in this seventh edition of Dialogue from both market practitioners and academics continue to provide you not only with insights but also give food for thought in the way you transform your business or make your business more efficient and effective to your customers. Better understanding your business environment has to be a continuous process and we hope we can contribute to your better understanding. Besides these insights, we see our role as well in re-channelling built-up knowledge (through research and interaction with the market) into our education programmes and in the context of this publication, allow us to highlight our Executive Master Class in Big Data, commented in the interview with Philippe Baecke.
We appreciate receiving feedback and views.
Ignace R. Combes
Chairman Centre for Financial Services (Vlerick Business School)