Competition to traditional banking businesses is a common theme these days. From fintech competitors and BigTechs to super apps, seemingly everyone is vying for a piece of the banking pie. Worryingly, these challenges come at a time when banks are facing increasingly hostile regulation and unprofitable business models. McKinsey and Company’s 2020 Global Banking Annual Review highlighted an alarming decrease in banking returns on equity (ROE) worldwide.1 Tighter regulation has contributed to this bleak picture, with banks forced to carry more capital reserves to mitigate risk. Most banking service and product offerings fail to address the modern customer’s needs, whether in customer or corporate banking. With customers growing accustomed to having their needs met proactively by BigTechs, a bank’s traditional approach to product design feels outdated. Here are three critical issues that currently afflict bank business models and why product innovation isn’t enough to solve them.
Despite this rosy picture, there are improvements to be made. For starters, customers are extremely sensitive to annual fees. Banks should consider dropping fees for cards at low dollar values, and instead look to recover lost revenues through greater market share. Communication of rewards and benefits also lags other industries as most customers cannot relate to the number of points they earn.
Pushing customers to use mobile wallets is another step banks can take to deal with the threat from super apps. It allows banks to own their customers and speeds up approval processes thanks to digitized workflows. These product-led innovations still have some holes due to a lack of pricing innovation.
As productive as the credit card business is, the mortgage business has seen some shocks over the past two decades. Regulatory and compliance requirements have changed the economics of the business for traditional banks. Online lenders have further taken a chunk of the market with faster approval times and sophisticated credit models.
While a lack of customer knowledge and rigid product offerings are a stumbling blocks, perhaps the biggest issue banks face is the focus of their current pricing strategies. Most bank pricing models run on a cost-plus basis, where the bank’s primary focus is to cover costs and earn a profit.
When looking at corporate and credit-driven businesses, the focus is risk-based, an even more pessimistic model.5 The bank’s primary focus is on avoiding a loss at all costs and this leads to stringent requirements placed on customers. While bundled offers reduce the negative impact, these models lie in stark contrast to those adopted by technology-driven industries.
This flexibility is missing in traditional banking currently. For instance, credit cards are a shining example in retail banking, but the thought of a flexible annual fee or customizable rewards structure is unthinkable right now. Customers cannot scale or customize their spending to tailor their rewards experience.