Before the coronavirus crisis the industry was at an inflection point, but the systemic shift in customer behaviour has catapulted its transformation.
The rate of progress in banking over the past decade was incredible, but the acceleration over the past 18 months has been almost unimaginable. Before the coronavirus crisis the industry was at an inflection point, but the systemic shift in customer behavior has catapulted its transformation. Mounting cost pressures, growing competition—from challengers, Big Tech and fintechs— and increased regulatory pressures are continuing to build. Really, when you look at all that, it’s a perfect storm for change.
When I started in this business 20 years ago, retail banking was all about how bright and welcoming your lobby was. When it came to corporate banking, people wanted to know which big companies were your customers and the number of deals you were involved in, and that was pretty much it.
Money was flowing back then, but today banks really have been forced well outside their comfort zone by the pressures on their bottom line. To cope, it helps to go back to basics. First and foremost, banks serve their customers, which must be at the heart of every strategy and decision.
Covid-19 triggered an explosion in consumer demand for digital banking and the 21-90 rule came into play—that is, in 21 days something becomes a habit, and in 90 days it’s your way of life. Many who had previously been resistant to digital banking grew accustomed to it through the sheer force of the lockdowns. Today, individuals and businesses are less likely to visit branches or use cash. We’ve recently looked at 5,000 of our retail banking customers and only 42 percent visited a branch in the last 12 months, and most (3 in 5) were because they needed to, not because they wanted to1. These are lasting changes and will fundamentally shift how banks run their businesses and serve their customers. And financial institutions need to innovate and make their products and services more intuitive to meet consumer demand. Luckily, this experimentation and greater resilience is made possible by cloud computing.
Moving To The Cloud: Agility And Resilience
While digital transformations have been accelerated out of necessity, especially over the last two years, the tangled legacy IT systems of many banks have made it incredibly difficult — and costly — to unwind and evolve at speed and solve the challenges mentioned above. Temenos research shows that, worryingly, almost three-quarters (70 percent) of banks can’t cover their estimated cost of capital.
Those who double down on technology, specifically cloud computing and artificial intelligence (AI), will overtake rivals. They’ll be better placed to serve customers in the digital age with technology that enables greater automation, scalability and innovation.
And a commitment to technology today will build the agility and resilience essential to thrive tomorrow. For example, the Temenos Value Benchmark2 — a strategic survey-based program to lift business performance shows that those running our digital banking platform achieve 85 percent better cross-sell rates.
Varo Bank doubles accounts and triples revenues on the path to profitability with The Temenos Banking Cloud
In August 20203 , Varo Bank—a purpose-driven fintech with an ambition to improve the financial health of millions of Americans—made history by becoming the first and only consumer fintech in the U.S. to gain a national bank charter license. The pioneer uses The Temenos Banking Cloud to create a hyper-efficient cost model, operating at 75 percent lower cost than traditional banks, offering digital services at scale, securing future profitability, and bringing financial inclusion to millions of Americans. These benefits are passed straight to its customers by delivering lower-cost, tech-driven banking services. With the open cloud platform, the bank is able to automate its back office, reduce costs and benefit from lower cost/income ratio. Utilizing modern technology enables Varo to elastically scale based on customer demands in digital banking, deploy new products quickly, and drive down operational costs substantially.
Since obtaining its bank charter and going live with Temenos, Varo reached four million accounts in 13 months; doubling accounts and tripling revenues on the path to profitability. In September 2020, the bank raised $510 million in a series E funding round and reached a $2.5 billion valuation.
These are benefits and opportunities that no bank can ignore. When I speak to bank CEOs, they talk about their urgency to transform. They really understand how critical it is to utilize disruptive technologies such as cloud and AI.
Moving to banking-as-a-service and embracing open ecosystems
Another major trend emerging from the disintermediation of the banking value chain and new players in the ecosystem, and driven by modern technology, is the opportunity for new business models, such as banking-as-a-service (BaaS) or embedded finance.
To match the rising demand for personalized, seamless and convenient digital experiences, organizations (both inside and outside the banking industry) have taken an ecosystem approach to partner and extend their offering to include financial services at the point of sale.
For businesses, BaaS offers the potential of bringing products to market faster and extending their reach to new markets, while for banks it allows them to attract new customers and offer a greater range of services to existing clients.
Innovations in this space include the concept of consumer credit and instalment loans, which have been revolutionized in the BaaS era by the digital enablement of Buy Now, Pay Later (BNPL). The new capability, which seamlessly integrates into e-commerce merchants’ systems, appeals to younger consumers who feel unfairly charged by credit card companies. It also helps merchants attract new customers faster and generate all-important loyalty. BNPL purchases are expected to grow 400% from $24 billion in 2020 to $100 billion in 2021.
How PayPal’s new Buy-Now-Pay-Later capability is disrupting the banking sector
Using The Temenos Banking Cloud, PayPal introduced a new Buy Now, Pay Later (BNPL) service across the U.S., France, U.K. and Australia. This capability is disrupting the banking industry by making payments better, easier, and completely effortless. Simultaneously, it provides value to consumers and merchants at a time when incomes may be unstable and SMEs need the business more than ever. PayPal was able to launch the BNPL service so quickly that its CEO Dan Schulman called it “the fastest start to any product we have ever launched.” After six months, 50 percent of its customers reused the product, showing what can be achieved using advanced SaaS technology as a differentiator.
BaaS—enabling embedded finance and taken off since the start of the pandemic—is encouraging new business models and ways of working in the financial services sector. Adding to this, banking trends have precipitated a mindset evolution where a more collaborative approach is embraced. Leaders have realized the value of an ecosystem that works and drives innovation.
Ultimately, by investing in AI and cloud technology, and selecting the right strategic partners now, banks can overcome their current challenges and keep pace with change while focusing on customer experience. Temenos makes it possible to undertake and overcome this necessary journey toward a stronger future.