Business models in retail banking - defining the future

New business models will replace the universal bank. There will be seven types of retail bank - and two paths to succeeding

Retail banking is under pressure from globalization, regulation, digitization and ageing societies. Without the critical size and the right skills, most retail banks will find it impossible to maintain Europe’s traditional universal bank approach. As they will also have to contend with new and focused competitors, they should choose one of seven more narrowly defined business models.

Banks will have to specialize more and define their identities. “What kind of bank am?” – this question must be answered conclusively and honestly. Each bank’s search for a solution will begin with choosing which core banking strength to focus on: A bank differentiates itself by focusing on customer wishes, or by focusing on its value chain with its resources and skills. 
 
Customer-oriented retail banks can differentiate themselves from rivals by ensuring effective customer access across online and offline purchasing processes and by satisfying customer needs. A bank can become a broad ecosystem of banking and non-banking services, a banking-only provider focused on digital-savvy customers, a trust-based advisor for service-oriented customers, or a supermarket that serves customers in many – albeit advice-lite –­ ways.
 
Value chain-oriented banks can establish themselves as their customers’ valuable partners by providing useful resources and expertise along the banking value chain. A bank can concentrate on product leadership in selected end-customer areas, becoming a product specialist. Or it can focus on providing specific bank-related processes and the ability to cover a broad range of B2B customer needs – positioning itself as either a utility bank or a banking-as-a-service provider.
 
An overview of future customer-oriented business models:
Ecosystems are mostly digital gateways that bundle providers and combine complementary services to meet a wide range of customer needs. For customers, an ecosystem is a convenient one-stop shop that offers tailored solutions that match the customer's profile. Network effects increase the attraction of the ecosystem by increasing the product range and reducing transaction costs. Ecosystems depend on partnerships to provide a wide range of services.
 
Trust-based advisors address customer who want bespoke service and advice. They serve discerning clients who want competent input on issues that defy standardized solutions. These banks are ideal for clients who are wary of the banking industry, who have little time or who are looking for other types of support. Trust-based advisors have highly qualified employees who ensure their clients get easy access to all financial services, including customized solutions. 

Supermarkets bundle products and services on a single platform, creating transparency and access to complex markets. Customers are financially savvy and price sensitive, and want to manage their personal finances themselves. They need an easy-to-use marketplace with high-quality products and services at competitive prices. Partnerships with asset managers, payment service providers, insurance companies and fintechs are essential for first-class propositions.
 
Focused digital players have a fairly new business model. They offer lean, digital banking solutions for customers who value convenience. In addition to a simple standard service in modern design, other banking services are available as optional extras. Many customers appreciate attractive basic prices and accept that additional services lead to added costs.
 
An overview of future backend-focused business models:
Product specialists focus on creating offerings using backend skills that ensure innovation, performance or cost leadership. They sell their products through B2B partners like financial supermarkets, trust-based advisors with open platforms, or direct B2C placement with retail customers who value price and performance leadership. Fintechs have established themselves as product specialists by creating seamless payment transactions (e.g. instant payments).
 
Utility banks offer plug-and-play solutions to non-banks that want to integrate financial services into customer journeys without having to set up their own banking operations. Utility banks offer ready-made financial products for resale to non-banks, or they provide backend expertise and banking licenses for non-banks to be able to offer their own financial products. For example, a utility bank can help e-commerce merchants sell credit products to customers.
 
Banking-as-a-service providers offer banking solutions to other financial institutions. They either have outstanding expertise in a particular business area or they use their economies of scale to offer cost-effective solutions to B2B customers. This enables them to provide customer-oriented financial institutions high quality back-end capabilities.  For example, they can provide financial-modeling tools to enable asset managers to map investment strategies for their clients.