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Fight-or-flight: How European banks can stay ahead in the disrupted financial market

By Adrian von Aesch, DXC Technology

With digital technology, tech giants, startups and FinTechs entering and disrupting the financial services market, banks are faced with the dilemma how to stay in the game and remain competitive. Banks used to be the designated institutions for safekeeping, transactions, financing, investing. Today, almost anyone who understands the services, technology and is properly regulated can provide financial services.

What is keeping banks ahead in the game, for now, is the high level of trust. Customers still trust banks more than other organisations. However, if banks don’t adapt to the ongoing changes, they stand to lose this advantage. So, what do banks need to do to endure in the future? One aspect that must change is the traditional inside-out approach regarding products and services. Financial organisations need to become customer-centric and take an outside-in approach. Find out what customers really want and need, asses their capabilities and the available technologies, reorient their strategy and change their business model according to that.

A joint research paper by DXC Technology, UBS and the Business Engineering Institute of St. Gallen, published by the Banking Industry Architecture Network BIAN – a collaborative ecosystem of leading banks, tech providers, consultants and academics – proposes following a CONCENTRIC business model. The model suggests that financial organizations should develop CONCENTRIC-based strategies, essentially following changing customer needs, using relevant and differentiated offerings to counter the blurring of traditional financial sector boundaries, as well as assessing the disruptive potential of innovative technologies on their core capabilities and designing new capabilities. In other words, thinking ahead and positioning themselves strategically for the future. The future strategies can range from further specialization to become valuable contributors in an existing ecosystem to establishing new orchestration paradigms and ecosystems that may span into multiple industry sectors.

The CONCENTRIC model comes in handy to ‘peel the financial services onion’. By using it organisations can assess their capabilities, explore the available technologies, understand the level of disruption FinTechs and start-ups bring. Utilising the insights gained via this model, they can then define their adaptive strategy, including whether they want to partner with a start-up/FinTech, become part of an emerging ecosystem or position themselves deliberately as a capability-based orchestrator themselves.

When thinking about their strategy, financial organisations should take one key lesson from non-traditional financial service players, like Amazon or Alibaba: diversification of capabilities from the customer perspective. Amazon and Alibaba are very good at using an ecosystem of capabilities that answer to the needs and wants of customers, offering goods and services by various sources, not just the offerings of their own company. By including the relevant financial services capabilities these platforms are threatening the future of the banking sector.

As our research has shown, these platform companies stand to be disrupted as well. Amazon’s Alexa may be arranging your daily life now, but this platform-based assistant will be disrupted as AI keeps advancing further. In the future, digital personal assistants will be based on open source algorithms deployed on your smartphone and personal devices. These AI-based assistants will not be platform-based and will be dedicated to the personal user. Using an independent assistant the “Augmented me” becomes possible, further strengthening the power of the consumer. The “Augmented me” will be at the centre of everything, assisting you directly and independently, collecting data and helping you conduct your business the way you want it.

This is yet another opportunity for financial organisations to position themselves successfully for the future. Looking at the “Augmented me” from the customer’s point of view, banks can assess their capabilities and decide what they are good at and how these capabilities should be enhanced, combined and offered via platforms or ecosystems, or directly to customers. By taking that path, they can reinforce the brand and stay close to the customers. An alternative strategy is to decide to serve the mass market behind the scenes by offering fast and secure banking services for other organisations.

Accepting these new tech and business trends and creating a strategy around them is highly important for the European banking sector. Drastic banking consolidations will be happening on a national and international level. In Germany, according to estimates, only 100-200 banks out of 2000 will survive the upcoming consolidations. If the European financial organisations don’t think ahead, they may lose the game and the financial sector could end up dominated by the big US and Chinese digital companies.

If you would like to learn about the CONCENTRIC business model and position yourself to thrive in the future, take a look at BIAN’s white paper: “Skin the financial services onion: a capability-based model to explain the (r)evolution of the banking industry”

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