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Is There a Digital Crack in Banking's Business Model?

By  Erik Raper Erik Raper  on 2016-05-16 09:30:00  |  Featured in  Financial Services
Erik Raper
Posted By Erik Raper
in Financial Services
on 2016-05-16 09:30:00

Digital.Banking.2016.jpgThe rise of digital innovators in financial services presents a significant threat to the traditional business models of retail banks.

Historically, they have generated value by combining different businesses, such as financing, investing, and transactions, which serve their customers’ broad financial needs over the long haul. Banks offer basic services, such as low-cost checking, and so-called sticky customer relationships allow them to earn attractive margins in other areas, including investment management, credit-card fees, or foreign-exchange transactions.

According to McKinsey, digital start-ups (fintechs) — as well as big nonbank technology companies in e-retailing, media, and other sectors — could exploit this mismatch in banking’s business model.

How? In McKinsey's perspective, A digital crack in banking’s business model, technological advances and shifts in consumer behavior offer attackers a chance to weaken the heavy gravitational pull that banks exert on their customers. Many of the challengers hope to disintermediate these relationships, slicing off the higher-ROE segments of banking’s value chain in origination and sales, leaving banks with the basics of asset and liability management.

It’s important that most fintech players don’t want to be banks and are not asking customers to transfer all their financial business at once.

Instead, as McKinsey's perspective points out clearly, they are offering targeted and more convenient services. The new digital platforms often allow customers to open accounts effortlessly, for example. In many cases, once they have an account, they can switch among providers with a single click. Convenient, right?

Read Also: Digital Banking: 6 Digital Imperatives for Emerging Financial ServicesDigital.Banking.Trends.2016.jpgAcross the emerging fintech landscape, the customers most susceptible to cherry-picking are millennials, small businesses, and the underbanked — three segments particularly sensitive to costs and to the enhanced consumer experience that digital delivery and distribution afford. 

The days of banking being dominated by physical distribution are rapidly coming to an end.

The proliferation of mobile devices and shifting preferences among demographic groups mean that customers expect more real-time, cross-channel capabilities than ever before. Physical distribution will still be relevant but far less important, and banks must learn to deliver services with a compelling design and a seamless unconventional customer experience.

Banks must recognize that customer expectations are increasingly being set ... by nonbanks. 

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Erik Raper

Erik Raper

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Erik Raper heads Paragon’s Marketing and Advisory Services teams across focused industries. In this role, Mr. Raper leads his team to bring deep industry experience, rigorous analytical capabilities and a pragmatic mindset to clients’ most complex business problems. Mr. Raper’s team of marketing and strategy professionals work with Paragon’s Industry Leaders in the development of key go-to-market solutions which align to Paragon strengths and are essential to achieving clients’ business imperatives.

Before being appointed to his current position, Mr. Raper has served several key roles at Paragon including Director of Strategic Solutions Sales, Vice President of Strategy, and leader of Advisory Services. Mr. Raper guided the development of a suite of straight-through-processing (STP) solutions that focused on delivering business value–expanding Paragon’s Fortune 500 clientele and establishing the foundation for the firm’s brand platform: "Improving the Way Work Gets Done."

Prior to his appointment at Paragon in 2004, Mr. Raper spent seven years with Prudential Financial. As a vice president, he was instrumental in leading Prudential through a major operations and technology re-engineering in support of the company’s initial public offering. Preceding his employment with Prudential, he spent seven years with AT&T in various Marketing and Strategic Planning positions.

Mr. Raper holds a B.A. in Marketing from Columbus University, Metairie, Louisiana.

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