Stack, Hub, Long-tail and Utility: four emerging models in retail banking
Banks around the world are feeling the effects of multiple rising pressures, forcing banking as we historically know it to be reshaped before it gets disrupted. Banks are facing the need to reinvent themselves or run the risk of sliding into irrelevance.
Gartner predicts that by 2030, 80% of heritage financial firms (AKA incumbent retail banks) will go out of business, become commoditised or exist only formally. Why? Because new offerings based on 21st century business models from new digital players will hold more relevance with the consumers of tomorrow.
“Established financial services providers face a growing risk of failure if they continue to maintain 20th century business and operating models.”
Gartner, 2018. Digitalization will make most heritage financial firms irrelevant.
This rising threat of disruption from big tech, fintech and neobanks comes on top of existing global economic pressures, increasing cost of compliance, a growing consumer trust deficit, short termism and the pressure to turn a fast profit, increased pace of technological innovation and ever-improving quality of experiences consumers are encountering elsewhere in their lives.
“What was once a very stable industry has become a fragmented, highly competitive and open landscape. For incumbents, simply being a digitally better version of themselves is unlikely to be a winning strategy.”
Accenture, 2018. Beyond North Star Gazing.
So, what on earth can incumbent banks do about all this? Amid the bold claims of multimillion-dollar investments into digital transformation and innovation programmes, what exactly are banks digitally transforming into?
Introducing Stack, Hub, Long-tail and Utility
Inspired by Glyn Britton’s 2016 vision of retail banking’s future, I’ve built on this and developed four emerging models; possible futures for what the banks of today could become, or what new players may start to offer tomorrow.
Whilst these four models are grounded in research, guided by trends and signals in the market, I’ve applied creative license in equal measure. Forthcoming articles will deep dive into these models and showcase emerging global examples.
Stack, the Disneyland of banking
The stack model is a customer-oriented approach enabled by technology with the aim of differentiation through a premium user experience where all financial interactions are seamless and interconnected. The bank carefully controls all the key touchpoints — human, hardware, software and integrations. A stack is like Disneyland. Everything inside Disneyland is Disney, in the same way that everything inside the stack, from top to bottom is owned and controlled by the stack bank, including a wealth of customer data — which is critical to the success of the stack.
- Full ubiquitous ownership of the products, services, platforms, distribution
- Premium, harmonious experience with data working hard across all touchpoints to create seamless, interconnected, and highly personalised user experiences
- Operates on the principal of loyalty by design, where customers that bank more and for longer are rewarded for their loyalty, where value increases exponentially with increased brand engagement
Emerging players: WeChat, Grab, Virgin Money, Discovery Bank
Revenue streams: tiered subscriptions, interest margins, interchange fees
Hub, the Westfield of banking
Like the stack, the hub model also owns the central customer relationship, plus all of the customer’s purchasing and financial behavioural data. But unlike the stack, the hub model relies on a partnership ecosystem to deliver a broad range of services and solutions that extend beyond banking. The hub values ownership of the customer relationship over everything else and so offers products and services of competitors alongside their own offerings. The customer doesn’t need to go anywhere else.
- Everything in one place, the one stop shop with the perfect offerings from multiple providers, like a dynamic department store that adapts to your needs
- Most dominant hubs will extend beyond financial services into lifestyle services
- A future of navigational financial advice, bringing together bankers, data, and behavioural insights to point customers towards the choice in the face of more choice
Emerging players: Starling Bank, Raisen
Revenue streams: tiered subscriptions, interest margins, interchange fees, partner referral opportunities, data monetisation opportunities
Long-tail, the small batch craft beer of banking
The long-tail model enables the provision of highly targeted, niche financial products and services. Long-tail firms will have very distinct, modular offerings, that they serve at low volume, but high margin. Long-tail banking may be served direct to customer but it is likely to be supported by a strong and targeted distribution network. By its very nature, the long-tail category includes an incredibly broad and varied range of services, to meet an ever-growing assortment of niche customer needs.
- Small batch banking with low volume, high margin, specialised point solutions
- New highly targeted distribution models to access the right customers, potentially through other providers hubs
- Purpose-driven banking that speaks to not just a distinct customer need but distinct customer values
Emerging players: Brex, Tully, Rabobank, Blast
Revenue streams: will depend on the specific value proposition, however for many long-tail services, subscription fees will be a common revenue stream. Long-tail businesses that build clusters of customer groups with declared interests, attitudes, or are at common life stages may be able to monetise those audiences through partnerships or data commercialisation opportunities.
Utility, the Wordpress of banking
The utility model is designed to support a future of embedded finance, enabling new financial services propositions from non-traditional banking players. In the days before Wordpress, Wix and Squarespace, if you wanted to launch your own website, chances are you’d need to know the basics of coding, be able to navigate hosting and domain registry, and have a modicum of web design knowhow. But now, anyone can launch their own website without having to write a line of code and even the least design savvy can create a professional, slick site using pre-made templates and plugins.
In the same vein, utility models provide banking as a service to businesses with no banking license, no regulatory experience, no balance sheet management or no core banking technology. These services can then be deployed to that business’s end consumer, to deepen relationships and expand on the range of experiences on offer. A full-service utility player combines next gen digital banking technology with the back-office banking capability that gives partners the confidence they are operating in a compliant manner and their customers are protected.
- New breed of cloud native, modular, plug and play API-powered banking technology, coupled with back office banking services from a regulated entity
- To support a future where banking functions become embedded within other customer experiences offered by retailers, tech companies, hospitality and other non-banking sectors
- Democratising banking so that non-banks can offer banking services to deepen engagement with their own customers
Emerging players: solarisBank, Green Dot, Cambr, Griffin, 11:FS Foundry
Revenue streams: platform licensing fees, servicing or project fees, revenue share on loans or other financial products, data monetisation
Today’s incumbent banks are situated somewhere in the middle of all four models. Efforts have been made to explore some aspects of each model, but it’s hard to find an incumbent bank that truly excels in any one area. Any effort to move into each of these four models seem accidental and siloed in their approach, rather than deliberate, strategic moves.
The stack model is most closely aligned to where incumbent banks have traditionally aspired to be. But most are a long way from this goal today, with loose bundles of first party or white labelled products that aren’t designed to work in harmony with each other. The stack’s promise of the premium, harmonious customer experience is battling against legacy products, processes and infrastructure.
Finally, I don’t believe that to remain successful in the future, incumbent banks need to pick just one model. It is highly feasible that a deliberate, strategic move to position one division of the business as a utility, alongside a direct-to-consumer stack or hub approach, could be a winning formula. There are neobanks heading down this route today (hello, Starling).
With thanks to Tim O’Sullivan for the rad illustrations.
