Digitising to diversify: How digital platforms can fuel bank’s top line growth

While other industries have blazed a trail, transforming how they acquire, serve and monetise customers over the last decade, UK banks have barely changed their business models. Now, the industry has a growth challenge. Over the past five years, UK retail banks’ total revenue has been falling at -1.3% CAGR - despite total lending growing at +3.2% CAGR during the same period. These banks offer a full suite of products and are sitting on a goldmine of customer data, and yet they have done very little to improve cross-selling. Last year, less than 10% of UK customers with mortgages, personal loans or insurance held them with their main banking provider.

By failing to innovate, banks now have very little influence over customer acquisition. Even for some of their most critical products, such as mortgages, banks don’t own the customer relationship and instead rely on intermediaries to drum up interest. Meanwhile, for products distributed directly-to-customer, such as current accounts, acquisition efforts are limited to expensive, broad-brush marketing campaigns with limited success. In 2019, for example, UK retail banks spent £233m on conventional, above-the-line advertising, which convinced only 1-2% of customers to switch current accounts.

Banks are also struggling to differentiate themselves with traditional products. In the past, they could major on pricing structures to appear competitive, but low interest rates and the resulting margin compression, makes this a tricky option today. Four of the UK’s biggest banks have resorted to offering £100-200 cash incentives for new current account customers, further increasing already heavy margin pressures.

Customers expect more from their banking experience. Thanks to the likes of Netflix, Spotify and Instagram, customers expect businesses to know them inside-out and deliver personalised products and services. Furthermore, companies like Shopify and Klarna serve up financial solutions to the customer at the precise moment they need it, so they no longer need to dedicate time to find the right finance product. Today’s banks have a way to go to meet these expectations.

Putting technology first to unlock new revenue streams

The good news is that banks recognise these challenges and, by committing the right level of investment and leadership attention to real digital transformation - rather than digitising existing products and journeys - it is possible to develop the tools and technology they need to address these issues and unlock new value propositions.

Hyper-personalisation
Embedded finance
Other non-interest income

Hyper-personalisation

Hyper-personalisation applies artificial intelligence (AI) to real-time data to specifically curate content and products for individual needs, and then deliver it through the most relevant channels at the most relevant time. Amazon’s product recommendation system is a famously successful example of hyper-personalisation, which now contributes 35% to total income.

Banks are extremely data rich organisations, but the data is often trapped in legacy systems. Sophisticated data analytics and management technology will enable banks to unlock the true value of the data, and use Open Finance APIs to pull data from the wider Financial Services network. With these digital data capabilities in place, banks can use hyper-personalisation to:

Increase acquisition and cross-selling rates by targeting customers with the right product at the right time: Most banks rely on traditional, manual methods to identify and execute cross-sell opportunities. By contrast AI continuously analyses each customer’s data to present relevant recommendations at the relevant times, achieving a significantly greater conversion rate. Outside banking, digital personal shopper StitchFix analyses customers’ clothing data (style, size, price range) against a database of clothing patterns for similar customers to generate a personalised wardrobe; the AI robot continuously refines the customer’s personal style as they use the service.
Increase customer conversion rates by offering unique pricing for each customer: A leading example here is Chinese online-only insurance company Zhong-An which uses big data and machine learning to assess the risk of short-term-maturity products and price them dynamically - for example, for insurance against flight delays, the machine maps the weather forecast two hours before the flight and prices the product accordingly.
Reduce the risk profile of the organisation: Greater levels of personalisation also offer benefits from a conduct risk perspective, for example by making it easier to ensure the affordability and suitability of a product over time, rather than just at the point of acquisition.

To successfully sustain this level of personalisation, without it creating significant cost and complexity in the organisation, banks will need to move towards constructing products from a more standard set of reusable, modular components which can be configured and reconfigured via APIs into bespoke customer propositions. This should be underpinned by next generation technology that enables highly flexible parametrisation of key proposition features, such as pricing and rewards.

Embedded finance

Traditionally, financial products have to be actively sought out by customers. We are now seeing an increasing shift towards financial products that appear at a customer’s point of need, such as during an online purchase.

With embedded finance, banks partner with non-financial service companies to incorporate their products into the partner's customer journey - meeting a customer’s need at the moment it arises. A bank could embed point-of-sale flexible finance in the checkout journey of a luxury retailer, or build on-demand car insurance into an online car hire journey.
While embedded finance can represent a significant opportunity for banks, it can also prove to be a critical risk for those who fail to build the required Banking-as-a-Service propositions. Underlying technology, such as cloud computing and APIs, will be key to enabling banks to:

Unlock a new revenue stream: For those who adopt it, embedded finance is expected to be a major source of revenue, estimated to drive $7.2tn of market value by 2030.
Diversify their distribution model to access a wider customer base: When Green Dot partnered with Uber to build a debit card with instant pay for Uber drivers, it unlocked a new customer base of gig economy workers who benefit from daily paydays.
Gain brand exposure at zero marketing cost: By now, Swedish FinTech Klarna will be familiar to most. The company reaches over 90m customers by embedding its "buy now pay later" offering, and distinctive logo, onto the websites of more than 250k major online retailers, gaining free brand exposure every time someone checks out online.

Other non-interest income

In a world where interest margins are constantly squeezed and FinTech-fuelled pricing transparency is exerting significant pricing pressure on incumbents, it is vital that banks start diversifying their income streams. Investment in digital platforms is a key enabler of this.

In addition to the two opportunities above, digital platform investment can enable banks to turn technology into a financial asset such as:

Sell software-as-a-service (SaaS): Partner with other financial services companies to provide the technology to distribute products which sit on the partner’s balance sheet. For example, SaaS provider Mambu’s technology powers over 7,000 loan and deposit products for a range of financial institutions.
Provide customer insights to third parties: For example, using anonymised customer data to inform market spend performance analysis.
Develop digital customer identity solutions to improve third party onboarding: For example, by using customers’ credit assessments to create 'credit passports', enabling them to quickly secure financing from other providers with no additional assessment.

Getting started

To mobilise and grow new digital platform-led revenue opportunities we believe there are three primary steps organisations can take:

Create the value case: Secure the buy in and investment to develop new revenue streams based on new digital opportunities.
Prove the concept: Demonstrate a steel thread of the working solution in the bank’s operating environment to illicit initial customer feedback, validate the opportunity, and demonstrate the potential value to the wider organisation.
Deliver and scale: Refine the proposition and roadmap, and productionise the solution.

With the right approach to identifying and productionising new growth opportunities underpinned by the flexibility and speed new platforms offer, banks will be able to unlock a world of new opportunities, including - and well beyond - those discussed in this article.