Digital Transformation: Business building for banks

Low-interest rates, the impacts of customer derisking, tougher banking regulation in many countries, and other headwinds are forcing banks to rethink their long-term trajectories. If business expansion is a priority, the main options are large-scale M&A, digital transformation of the core business, bolt-on deals, or new-business building. All have pros and cons. Large-scale M&A offers speedy access to new markets, products, and technology but often comes with a hefty price tag and the perennial challenge of integration. Bolt-on deals are easier to handle but rarely have as much potential to change the game.

Banks that prioritize business building tend to out-perform their peers. According to a McKinsey survey, 65% of financial-services businesses that made business building a top-five priority saw revenue growth above that of their competitors. Building a new digital business is increasingly seen as an effective way to grow, because of proof points in the market and the ability to launch digital businesses more easily than ever before.

Through a stand-alone vehicle, banks can extend their product offerings, engage new customers, attract deposits, and create opportunities for talent identification and development that might get overlooked in an established organization. These benefits should enable the new business to pursue growth opportunities faster than the incumbent. Indeed, the new business should benefit from the parent’s talent, funds, market insight, intellectual property, data, and other assets, all deployed in an environment designed to jump-start growth.

As customer demands and behaviors shift, five key benefits that some companies already recognize are adding motivation and urgency to bank business-building aspirations:

1. Combat fintech competition.

2. Tap into innovation.

3. Defend the franchise and grow faster.

4. Ramp up lending and payments.

5. Access a new source of funding.

The strategic target of a new build should be nothing less than radical disruption. Banks should aim not only to expand their core offerings but also to create a unique combination of products and functionality that will disrupt the market. Successful new launches come with a clear sense of mission and direction, as well as a road map to profitability. The strategic common denominator should be a laser-like focus on creating a differentiated proposition that solves problems. This will achieve the vital goal of making life easier for customers, so it is more likely to achieve a durable advantage in the marketplace.

Before embarking on the creation of a new business, executive teams must think carefully about their strategic positioning, their operational and market challenges, and the mechanics of building and then managing a new business while maintaining the core. Following are three key topics for consideration:

1. Do we have a clear business proposition? Is there a strategic rationale for launching the digital bank? What is our competitive advantage? Do we have strengths in áreas like innovation, customer segmentation, product and pricing strategy, or customer value proposition?

2. Is our distribution strategy robust? What are the options for distribution? Have we considered a partnership strategy in the telco or service industries? How strong are we by measures such as customer acquisition, servicing channels, and branding and marketing?

3. Can we scale our tech/digital capabilities and adopt a flexible operating model? What is our tech architecture and vendor or partnership strategy? What are our delivery resources and staffing plan? Have we specified our organizational structure,

governance, and hiring or reskilling approach?

The banking industry has been digitizing incrementally for some time now, but only a handful of banks have yet turned digitization into a strategic advantage. Building a new digital business from scratch is a way to accelerate this process. However, to do it right, banks must excel on multiple fronts, combining the strengths of an incumbent with the agility of a start-up. They also need a unique idea, a top-notch team, and a clear path to profitability.