I had a really interesting discussion with a bank about the component based model that I’ve been expounding for some years.
In brief, the core of this model suggests that every piece of banking is being attacked by specialist digital firms and that banks will become assemblers of these specialist pieces, rather than providers of all of them.
Banks have historically built and deployed end-to-end banking. In a digital world they don’t need to do that anymore and, in fact, it will be unsustainable to do so. To build every piece of banking functionality internally will be too high a cost. Even if the bank does do this, the resulting outputs will be good in some parts, average in others and downright awful in a few. It is these last ones where banks need to partner and integrate, rather than build and deploy.
It is very similar to what large technology firms do, and banks are large technology firms.
SAP does not try to do everything in the technology world they live in. They couldn’t. Instead they acquire strategic parts of the business that need completion, partner with systems integrators where appropriate, along with other specialist software, hardware and infrastructure firms to deliver a complete solution. That’s what banks need to do.
Big banks will be just big technology firms that process finance (some already are). In doing this, they will partner with systems integrators, specialist software firms and other hardware and infrastructure firms that provide the best capability to process finance for their clients.
It’s the only way banks will survive in this digital age.
The issue that most banks have in thinking this way is that it is at opposites with today’s way of doing things. Today’s way of doing things works on the premise that the customer is locked in to the bank. The bank therefore focuses upon keeping the customer locked in by being opaque, hiding fees and charges by wrapping them into services.
As banking is componentised, these opaque areas will become transparent. The digital specialists will make it clear that transactions can be processed for peanuts; that a deposit account does not have to sit within one institution; that a wallet can be used for free; and that payments is easy.
These things are already coming into play thanks to specialists like PayPal and new forms of exchange such as bitcoin.
All of this therefore demands a new business model for banks as financial integrators, in the same way as technology is delivered by systems integrators.
Banks need a new mentality to deal with componentisation and transparency, as well as a new business model however, and most banks have not got the guts to think this way yet. The few who do will be the ones that will dominate the industry ten years from now.