Why digital, ecosystem-enabled banking transformation is the way forward

Traditional European banks are still struggling to solve long-standing challenges related to costs and return on equity – despite numerous cost-reduction programs. Meanwhile, banks’ revenues and operating margins are under pressure due to sluggish interest rates, a slowdown in lending and competition from new market entrants.

EY’s global banking outlook for 2021 estimates that non-financial services firms already generate more than $200b of global financial services revenues. FinTechs and BigTechs are making inroads into the banking space and capturing market share – applying their technological agility and digital capability to propose more valuable customer experiences at a cheaper price. Businesses from other sectors such as consumer goods and automotive are also now providing different types of financial products and services, encroaching into territory previously dominated by the banks.

From a demand perspective, European customers are increasingly open to buying banking products and services from companies outside financial services, such as retail, telecommunications, technology and social media, power and utilities, among others. Customer behaviors are also changing, with increased interaction on digital channels. More customers are taking up internet banking, using applications and relying on digital channels even for more complex transactions, such as taking out a loan. COVID-19 has only served to accelerate the digital shift, with social distancing measures and lockdowns pushing consumers to interact more in the digital space. In addition, customers increasingly expect their consumer banks to offer services beyond traditional banking, such as providing financial advice. Commercial customers, including SMEs, are also demanding more value-adding services and richer experiences from their bank – knowledge, networks and additional services to help them grow, as well as finance and more traditional banking support.

Banks across Europe have a clear need to act in order to improve revenues and profitability, serve customers better and secure a bold strategic positioning in the market. “Banks have a once-in-a-generation opportunity to transform their business. Creating the necessary investment capacity and securing the ability to execute at pace are going to be critical to future success,” says Nigel Moden, EY EMEIA Financial Services Banking and Capital Markets Leader.

Banks need to consider new ways of operating – models based on banking as a service or as a platform within wider ecosystems, perhaps a “plug and play” approach to develop products that can be promoted in the wider market.

Our global banking outlook research has found that people most associate transformation in their organization with exploiting new technologies – reflecting that developments in technology are often the drivers of change – providing opportunities or triggering the need to respond to what others are doing – as well as often being part of the solution. However, truly effective banking transformation also requires other factors alongside technology, such the development of new capabilities in the workforce and a clear vision for the customer relationship.

Although immediate market pressures and shocks such as the COVID-19 pandemic can create a sense of increased urgency to transform, this does not necessarily mean that European banks need to adopt a “big bang” approach. EY research into how transformation is perceived by organizations across all sectors suggests this could be detrimental.

Transformation should happen on a continuous basis. Adopting a culture where transformation is seen as incremental and continuous has a more positive association – a mode of ongoing fine-tuning and adjusting in light of market, customer and technological developments.

An ecosystem approach involves bundling services beyond banking to offer customers a friction-free and far-reaching service. These service bundles could focus on different aspects of individuals’ lives, such as housing, retail, mobility, retail and wellbeing, as well as financial health.

In an ecosystem offering, a multitude of actors provide their products and services, and are integrated on a single digital platform destined for the customer. Adopting an ecosystem play allows banks to address a bigger share of total wallet by expanding the points of access to their financial products. They can also strengthen their strategic positioning by providing non-financial services that customers would be willing to buy.

In a housing-focused ecosystem, for example, a customer could use a single platform to fulfil their journey from searching for a new property to its ultimate sale. Interim actions supported by the digital platform could include financing the property purchase, obtaining insurance, completing renovation works, moving in and property management. Services provided could include a mix of banking services, such as mortgage pre-approval, mortgage loans, house insurance, credit cards, investment advice and renovation loans, as well as numerous non-banking services, including estate agency, legal advice, architecture and design services, utilities, contractors, moving services and furniture retail.

Many different customer needs can be addressed through ecosystems. For example, we have supported a client in developing a platform to create and support an ecosystem of players focused on business customers in the agriculture and food sector. The platform allows bank customers to access numerous services for the development of their business and take part in a supportive network.

Services may be offered through a differentiated services model, reflecting different customer preferences and differing service provision costs. Some services might be provided for free, others through paid subscription packages and some made available on-demand on a pay-per-use basis, or along the lines of current banking services.

Three core approaches are open to European banks when launching an ecosystem offering. As a builder, the bank owns the platform as well as all the products on the platform – an approach that requires heavy investment in order to provide all the products and services across an end-to-end customer journey for a specific need. Alternatively, a bank could strategically position itself as an integrator, owning the ecosystem platform and orchestrating a mix of in-house and third-party products – an approach requiring strong partnership capabilities and organizational agility. Thirdly, a bank could opt to be a provider, offering its products and services to digital platforms owned by third parties – requiring less investment but still based upon digitized banking products and a compelling go-to-market proposition.