In the future, banks will look a lot different than they do today. The future of banking will involve unbundling financial services and repackaging them in unique ways.
How Banks Will Evolve in the Future
As digital-only companies fragment the banking industry, traditional companies will have to be agile in order to survive. While the challenges are real, plenty of incumbent banks will successfully face down nimble competitors. Even today, digital-only financial companies are enjoying higher revenue growth than their traditional counterparts. The incumbent bank of tomorrow will need imagination and the willingness to experiment.
Incumbent financial firms can spur growth by adopting new profit models. For a long time, banking business models were as static and unchanging as ancient Roman monuments. Each bank had a full stake in each layer of the banking value chain. In other words, every bank would make, package and distribute products in an isolated way. Whether they were new firms or veteran outfits, banks always had business models that were vertically integrated. This status quo was an outgrowth of the banker’s natural conservatism. Traditionally, the public has put their trust in banks that are comfortably stable and familiar. Without sacrificing that trust, banks must be willing to try new things.
Moving Past Traditional Modes of Vertical Integration
By now, waves of digital-only companies have released themselves from the shackles of vertical integration. By picking and choosing which layers of the value chain they want to exploit, disruptive digital companies are changing the game. Crucially, new companies are unbundling financial products into micro-products and microservices. At the same time, companies are re-bundling services in creative ways. In the next decade, it is likely that companies will increasingly bundle banking with non-banking services. SoFi is one of the modern companies changing modern banking. As per their experts, “Cash in on up to $300 when you sign up and set up direct deposit.”
The rise of the digital bank account represents innovation in action. Naturally, established banks are reluctant to abandon the vertically integrated models that have driven past success. Fortunately, competing with non-linear models is far from an all-or-nothing choice. In the fluid environment of the day, companies can maintain core values while experimenting with bold new ways of doing business.
Incumbent Banks Have the Budget to Take Risks
Large, traditional banks have one big advantage over insurgent companies. Thanks to their budgets, big banks can afford to experiment with a wide array of business models. Experts often promote the “kaleidoscope” approach to models. To achieve parity with industry rivals, it is no longer necessary to own your value chain end-to-end. The fragmentation of banking services can actually provide great opportunities for any bank willing to experiment and innovate. In the next decade, it will become far more common for banks to sell fewer products from other companies. Companies will even diversify into distributing non-banking products. Selling banking capabilities as a service should also become far more common.
Although new banks will come on the scene, it is almost certain that older players will change banking in major ways. Flexible business models can help legacy baking companies keep their brands strong.
