The post pandemic world is proving to be a challenging one to navigate for the banking sector. Escalating geopolitical tensions, increasing interest rates, unchecked inflation, rapidly evolving regulations, and reduced money supply are putting banking revenue under pressure. At the same time, banks are contending with changing customer expectations and increased competition from fintechs and technology giants. Age-old revenue models are increasingly proving to be ineffective, making it crucial for banks to consider and explore new monetization strategies and revenue streams.
Despite the pandemic, the last three years saw an uptick in mergers and acquisitions across the banking sector. But this momentum is slowing down, and banks are preparing for much lower growth in the coming years. 56 percent of banks are expecting only 1-5 percent growth this year and five percent of banks expect to retract.1 Liquidity, net interest margin compression, and core deposit growth are the three key factors that banks say are impacting their growth projections this year. Changing customer expectations and the easy availability of fintechs is another reason for impacting banking revenues. Today’s customers are used to a high degree of personalization and value-driven experiences from almost all their service providers, and they expect the same from their banks too. Unfortunately, legacy infrastructure and outdated business models are holding banks back from delivering the superlative personalized experience that is in demand. And fintechs and tech giants with their cloud-native offerings and agile solutions are quickly filling the void left by banks. Digital native customers are not hesitant to switch loyalties to these newer entrants and banks must revamp their business strategies and revenue models to not just win, but retain, and grow customer share of wallet.
Banks have now realized that exploring new revenue streams is no longer a choice, but a strategic priority. There are a few strategies that banks can consider for accelerating revenue growth.
- Everyday Everywhere Banking: The modern customer wants to be able to access financial services anywhere and anytime, in as seamless a manner as possible. And modern banking must be invisible, intuitive, and intelligent. It must be deeply integrated with the customer’s life, offering hyper-personalized and value-driven products and services. Life stage-based offers, need-based solutions, engagement and relationship-based pricing, personalized offers, discounts, and loyalty programs are crucial for building long lasting customer relationships. Banks must be able to understand the customer’s needs and requirements and seamlessly offer solutions to them when, where, and how they need it.
- Wealth Advisory: According to the World Wealth Report 2023, in 2022, high net worth individuals (HNWI) wealth and population saw the highest declines in a decade, compared to 2021, dropping by 3.6% and 3.3%, respectively.2 To unlock revenue growth opportunities in this segment, banks must empower their workforce and leverage technology-powered solutions. Further, with the global middle-class segment progressing both in size and financial power, there is significant opportunity for banks to provide them advisory and guidance on wealth management, financial planning, retirement planning, insurance, investments, and more. Banks must intensify their focus on this segment to diversify revenue streams.
- Banking-as-a-Service (BaaS): Success in this new era of banking will increasingly depend on the effective use of APIs. BaaS will emerge to be a key driver of banking revenues soon. In this model, banks can open their APIs to third parties to use for their business. This way they can embed financial services into a plethora of unrelated businesses. They can monetize their APIs by charging partners who access them, thus creating a new revenue stream as well.
- Banking Ecosystems: Banks must consider becoming orchestrators of a comprehensive customer-centric ecosystem that brings together a wide range of third-party partners. Such an ecosystem can deliver a value-driven experience and ensure that customer requirements are met. Such a model not only monetizes APIs but also helps deepen customer share of wallet with personalized offerings.
The shift to newer revenue strategies is crucial for the banking sector. But banks cannot make this transition on the backs of legacy technology systems. New revenue strategies for the digital world require banks to be able to collate and use data intelligently as well as effectively leverage APIs. To enable this, they need a technology infrastructure that is cloud native, microservices based, agile and powerful. The good news is that they don’t need to overhaul their legacy cores. They can simply partner with specialized technology partners who can deploy their robust technology platforms over their existing cores.
The banking sector has been experiencing significant disruption over the last few years. And it is now evident that age-old ways of working will simply not work in such a dynamic market context. Banks must prioritize their shift to newer revenue models that are designed with the customer at the heart of the business of banking.
