The world is facing a long road to recovery from the Covid-19 pandemic. At the same time, financial institutions are facing increasing competitive pressure from fintechs and must weather the impact of near zero interest rates, writes Eli Rosner

McKinsey estimates in its Global Banking Annual Review of 2020 that 17% of banks have a moderate risk of falling below regulatory buffers and 7% are at high risk. This could wipe nearly 3% of all banking capital from existence.

McKinsey also estimates that up to $3.7trn could be lost in revenues in a long, muted recovery between 2020 and 2024. Either way, revenues are not expected to recover for two to four years.

But pockets of hope emerge. Many organisations across the world, including banks were surprised at how fast they were able to adapt and move to remote working. It took an average of just 10.5 days to migrate assets to the cloud. This was around 24 times faster than anticipated according to McKinsey data.

Banks showed there were agile enough to react at speed and scale, adjusting their strategic priorities in the wake of the pandemic. IDC mapped out the trends that will make or break banking transformation in the next five years.

These include an initial focus on business continuity, followed by a focus on ROI and operational efficiency, especially in the face of a recession in which many business loans may need to be written off. Returning to growth will see all financial institutions having navigated vast amount of change to get back to a pre-pandemic position.

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The ‘new normal’

As we enter the ‘new normal’, technology will play a critical role in mitigating risk and the impact of economic shocks. Technology has the power to act as a buffer against the harshest economic conditions.

Those banks that have been investing in digital, cloud and platform will be in the best position as we come out of the crisis. An open ecosystem platform-based approach is essential to future success.

Such an approach allows financial institutions to bridge the digital divide: enabling them to deliver improved customer satisfaction and retention, faster time to market for new products and services, and to do so at a lower price point. Crucially it also enables them to transform their business model and find new revenue opportunities by turning cost centres into profit centres.

A fast-changing landscape

2020 was the year when the market capitalisation of the top three payment companies eclipsed the market cap of the world’s top three banks for the first time ever. In the last ten years the total market value of banking and payments provided by traditional banks has dropped by 24%.

A few strategic questions are in play here. How will banking capabilities be delivered going forward? In branch? Online? Embedded in a non-financial customer journey, like booking a trip on a travel site? Who will deliver the banking services and who will own the customers?

Are we seeing the bifurcation of the manufacturing of banking services and the distribution of those services? It’s a fact that innovation can come from anywhere, and should no longer be restricted just to banks’ in-house teams. Collaboration through open technology is the only option: exploiting APIs and connecting to fintechs through an open, platform-based approach.

Banking as a Service and embedded finance

Amazon says one third of its revenue comes from product recommendations. The same can apply in financial services. There are new opportunities for personalised and contextual services that are embedded into the customer journey.

A new dawn of opportunity is being created by fintechs, non-banks and other brands, based on their understanding of customer needs. There’s the opportunity to hyper-personalise the experience, for example to finance a trip through a travel site. Imagine this on an industrial scale – integrating the full scope of banking services at the right time and the right place.

This gives rise to Banking as a Service (BaaS) and embedded finance. While holders of a banking licence must focus on compliance and delivering the best and most efficient banking services, they can now also provide those banking services direct to other third parties and embed their capabilities into other brand offerings. For example, Tesla insurance and Shopify loans.

Going forward it will be about embedding finance seamlessly into customer journeys – and delivering banking ‘as a service’ through a platform-based approach. We’re embarking on a new multi-distribution model in banking that’s enabled by technology, creating a new world of embedded finance.

11:FS claims that today BaaS or digital financial services are really only 1% finished. There is so much potential. In fact, embedded finance is expected to increase 10 times in just five years. This represents a $7trn market capitalisation opportunity by 2030.

Ten years after Andreessen Horrowitz spoke about software eating the world, it’s fair to say that banking-enabled software has a voracious appetite! So, what are you waiting for? It’s time to get involved.