Navigating a changing business model: How banks can compete with fintechs

Banking is changing, and not just by going digital.  Established value chains are being divided, updated into new products, and brought to market by emerging new players.

In today’s fintech market, it’s not enough for traditional banks to be the best digital versions of themselves. To keep pace, they must embrace new roles in the value chain, Accenture suggests in its latest Future of Banking report.

The path towards new growth opportunities lies in breaking down the old vertical stack of services and rebundling them, from distribution or customer experience to managing the balance sheet. 

“In this world, to grow and be profitable, it’s no longer necessary for banks to always own the value chain end-to-end or to manufacture all of their own products. What matters more is how they can architect value for the end customer or for the next player in the value chain,” Accenture wrote. 

Incumbent banks can draw inspiration from digital players that challenge the traditional business model. Financial companies that create new products by pairing their own services with others’ are better positioned to stay ahead of the curve. 

“The more comprehensive a bank’s commitment and approach to delayering its capabilities and atomizing its products, and to repackaging internal and external components, the more new revenue streams it can develop,” the report argued. 

The non-linear model 

After the first wave of neobanks entered the market offering digital-only experiences and more personalized products, incumbent players followed by increasing their own digital presence. But the market remained fundamentally unchanged as neobanks just mirrored the traditional linear business model: selling their own products or distributing products from other providers.

The real disruption, Accenture argues, comes from the digital players with non-linear business models that are creating a whole new value proposition by segmenting the value chain and coupling their own products with others through selected partnerships. In the US, more than 60% of digital-only fintech players opted for a non-linear model.

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Higher revenue growth rates reflect the public’s fast adoption of this new model. Specialist providers that leverage value chain fragmentation showed compound annual revenue growth of 76% between 2018 and 2020, above the 44% growth rate posted by digital-only players with vertically integrated business models.

Meet the new competition 

New fintechs are targeting different parts of the value chain, taking advantage of banks’ margins. These companies chose to play in micro-product niches, and were able to create innovative products quickly at low cost.

“They have the flexibility to rapidly create differentiated products for a digital customer who searches online for financial products and creates a custom bundle that meets their specific needs,” Accenture wrote. 

• Chime: with an estimated 12 million customers, the company offers fee-free overdrafts and payroll acceleration without a banking licence or a regulated balance sheet
• BNPL: Afterpay reached over 16 million customers while Klarna has 90 million customers by expanding buy now, pay later services
• Stripe: Offers APIs that other platforms can embed into their services; among its total client base, 50+ are each processing over $1 billion annually in payments
• Wise: Started as a forex disruptor, the company debuted with a market value of $11 billion in 2021
• Robinhood: the retail trading and investment platform attracted more than 21 million customers

Where do these companies derive their competitive advantage from?

• They focused on customer intent, embedding their services in the right place along the customer journey
• Business models allows for scale with lower customer acquisition costs
• Some added an emphasis on climate and sustainability to further differentiate themselves

How to move forward?

Facing this new fintech wave, banks can identify their key differentiators and how to monetize them: 

“Their balance sheet power, ability to manage risk, and familiarity with regulations are difficult for new entrants to replicate -- a key strength and one that doesn’t need to be constrained through a model of monolithic vertical integration,” the report said. 

Overall, banks currently have three moves at hand: 

• Continue on the status quo: going for the traditional vertical model as the safest bet while becoming the best digital version of itself, but risking stagnating growth
• Fast follower: monitoring market trends and integrating new capabilities through acquisitions
• Go on the offensive: Scaling up through non-linear business models in markets where they hold competitive advantage, including product bundling or indirect distribution partnerships

For larger banks, a lack of a clear strategy to tackle the new digital competition in the embedded payments and credit market would result in lower customer attrition and fee compression. But in between the large incumbents and neobanks lie regional and community banks that actually ‘face an existential threat’, according to the report.

Whichever strategy they choose, banks will need to adapt to a market where their role is changing, as well as their relationship with the end customer. It’s not easy for legacy institutions to change their course, but by evolving to serve different roles in the value chain, banks can move from defending market share to once again targeting real growth.