Is your business model ready for the digital future?

European banks face the tenth year of ECB's policy of low interest rates that was set up to save member states plagued by huge financial debts. This controversial policy has put enormous pressure on bank profits. Furthermore, when and how Britain will leave the European Union is still at anybody's guess. Because London, the most significant financial centre within the EU, will find itself outside the borders of the common market, many employees of large banks are ready to move. However, both of these problems are of minor importance compared to the real challenge banks have to cope with: the digitalisation and the radical change of business models that comes with it. While being conservative, careful and slow have been traditional virtues of banks in yesteryears, these attributes could be harmful in the very near future.

As I am in regular contact and exchange with managers in the financial service sector, I know their problems at first hand. While banks have only few problems with the automation of processes and the digitalisation of existing business models – to open a new bank account, to apply for a credit or to finalise the terms for a building loan is a matter of minutes these days – they are rather slow when it comes to profound innovations and developing new business models. They are well aware of the growing importance of IT platforms for their markets: Apple Pay, Google Pay or Amazon Cash are already taking their share of the market with their own solutions. Small but nimble Fintechs are also gaining clients with new services such as independent information about the best loans and interest rates. Thus, they are forcing the banks to question their future strategy.

Let me therefore explain my thoughts about the two things banks need to do:

1. Digital Focus
   The main task of every bank is to shape its digital future. The most important questions are: which products and solutions do our customers need and how can we develop new services by using the valuable data we have exclusively at hand, i.e. the account movements of our clients? These data could be combined with additional external information to offer personalised services according to the known preferences of each customer. New services can be developed in cooperation with insurance companies, mobile phone providers, travel agents and all other sorts of service providers. All of these options make use of one of the key assets of each bank: the direct and trustful relationship with its clients and the information that can be gained with it. While branch banking is decreasing, loyalty of customers is achieved by offering good digital services. It is no coincidence that direct banks have the most loyal customers according to a loyalty survey using the Net Promoter Score® (NPS®). Maintaining a good customer relationship will be one of the keys to your success in the future according to surveys such as "In Search of Customers Who Love Their Bank" (Bain & Company, February 2018), which indicates that the enormous trust of banking clients in well established tech companies as the new rivals on the block.
2. Collaboration & Alliances
   The cooperation with other big banks on shared platforms should be considered as a powerful tool to prevent tech companies from gaining ground. While PayPal is the second most common form of payment in Germany today, several Swedish banks introduced the Swish-App for Peer-to-Peer-transactions in 2012, and they hold their ground for digital payment.
   
   The cooperation with Fintechs as drivers of digitalised solutions in the financial services market could also help to close gaps in products and services. However, this cooperation comes at a price, because it either means to give up the interface between bank and customer in favour of the Fintech or to open up your portfolio to services of other banks and to become a more neutral financial service provider. The platform "Zinsmarkt" (interest rates market) of Deutsche Bank in cooperation with the Fintech Deposit Solutions is a good example for this development. Even if the customers chose products of other banks, Deutsche Bank is at least keeping its contact with them.

Courage to Change

In times of change a clear strategy and good leadership to execute it, is more important than ever. Once the management has made its decision about the new business model, and a new strategy is set up, the next crucial question should be; Is our employees the right ones to make our new strategy come to life?

Collaborating with a professional Executive Search and Talent Advisory company offers a process that not only evaluates your employee's strengths and weaknesses, but also their potential for future development connected to your company. On one hand, you might end up in a situation where a reduction in staff is inevitable, as certain branches will shut down. On the other hand, you are required to motivate and develop employees to meet new tasks or search for new employees to fill the gaps if needed.

To be successful as a leader when implementing a new business model and going through a change process, you have to possess a broad palette of leadership behaviours and be able to swiftly switch between the different approaches depending on the situation. In the article How to successfully drive change in your organisation my colleagues expand on this topic and provide practical tools.

Do you want to discuss the topic further? Please reach out to Gregor Ghirmay, Partner, in Mercuri Urval´s office in Wiesbaden