In a number of countries, the market share of retail banks is under constant threat from the emergence of competitors such as Curve, Venmo, Revolut or WeChat. These new players are trying to diversify their sources of income by creating an integrated ecosystem of products and services available through a single interface (SuperApp) that is more attractive to consumers than a bank’s value proposition. The traditional model, where the consumer must visit a physical branch to access banking services, is becoming less attractive to most people who value speed and convenience.
Pressure on the current banking system
Commercial banks are currently facing a wave of technological change, especially with the advent of Web 3.0, blockchain technology and artificial intelligence. These changes require the hiring of new specialists, as well as the introduction of new rules.
As these new technologies lower barriers to entry for non-traditional financial players, the sector is developing a new model for accessing finance called “embedded finance”. These conditions have led to the evolution of user preferences and behavior that can already be observed today: the use of digital applications and digital wallets, transactions carried out using cryptocurrencies and tokens, etc. ESG (environmental, social and governance) is about to become important decision-making factor both at the level of consumers and at the level of organizations, putting additional pressure on banks.
Moreover, the pandemic has also exacerbated the structural difficulties that banks face. Lower interest rates impacted their income, with returns below the equity threshold. Banks seek to achieve economies of scale throughout the value chain while optimizing technology and their operations.
5 scenarios for rethinking the traditional banking model
Faced with the above factors, PwC analysts have developed five most likely scenarios that retail banks will face. Perhaps the future banking landscape will be driven by a combination of these five scenarios, in addition to regional, macroeconomic and political considerations.
- Scenario 1: transformation at the front office level
The first scenario is based on an extension of the integrated financing model already mentioned above, in which front-office banking products and services are offered by non-financial institutions. This is leading to a growing shift away from intermediaries at the value chain level: on the one hand, large technology and fintech companies are taking charge of customer relationships and incorporating financial services into their platforms, and on the other hand, banks are focusing on middle-chain operations. and back office. risk management and activities in the capital markets.
- Scenario 2: Bank Consolidation
In this second scenario, a wave of consolidation could see banking institutions join forces to scale up and compete with fintech and non-traditional financial services.
- Scenario 3: fragmented landscape
This third scenario could unfold after a deterioration in trust in social institutions, leading users to turn to smaller micro-niche players. In this scenario, the winners will identify specific segments and goals and develop a holistic service offering to meet their needs.
- Scenario 4: Resurgence of Regulators
Under this fourth scenario, regulators may take a proactive approach to tech giants and new entrants in the financial sector to ensure a stable and healthy system, leading to higher compliance and reporting costs.
- Scenario 5: CBDC growth
The fifth scenario focuses on the rise of Central Bank Digital Currencies (CBDCs). In the event of a decline in cash, digital currencies will be adopted, with inevitable implications for the value chain and the development of decentralized finance (DeFi).
PwC’s message is clear: to remain relevant, commercial banks must refocus their strategy around three pillars. The first element is the introduction of technological innovation through the reconfiguration of the internal structure and technology to accelerate operational change and scale to improve efficiency. Second, developing a customer-centric strategy: to this end, banks will have to rely on their data management and analytics capabilities to cover a wider range of customer needs. Third, building trust with all stakeholders, in particular by strengthening their obligations to regulators and by taking the necessary steps to protect their users’ data. Banks can also develop necessary tools such as digital identity protection services or digital safes to store holdings of cryptocurrencies and other digital assets.
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