Incumbent banks know they soon risk losing more of their business to fintech-enabled challengers, such as neobanks and Big Tech, as traditional revenues decline. The net interest margins of banks have been falling steadily for two decades, and growth has flagged compared with other industries.

It’s clear that banks need to do something radical, quickly. But some will find new ways to create value in the fast-approaching next phase of banking. Others will only make cursory attempts at transformation and ultimately get bought out by their current rivals. They know why they need to change, and in many cases they know what their company’s vision is. The question is how.

Banks need to appreciate the significance of several emerging technologies and concepts that are reshaping their industry. By understanding these developments, banks can actively shape the next chapter of financial services, rather than be shaped by it.

Not to be confused with a piece of technology, the platform business model facilitates exchanges and transactions between others, usually service providers and consumers. Airbnb, Seamless and Uber, for example, provide the platform through which property owners, restaurants and drivers can connect with new customers.

These companies enable the provision of the service, but usually do not provide the service themselves. Amazon is an example of a model that simultaneously benefits from connecting buyers and sellers and selling its own products with the same platform.

This model contrasts with traditional linear businesses that control the development and distribution of their products or services.

It’s important to recognize the distinction between a business model platform and a technology platform. These are different things that support each other. Of course, every bank has a core banking platform (i.e., technology) that enables it to operate. But banks can also adopt or become platforms (i.e., business models) to facilitate additional ventures through partners in their ecosystem. This is an attractive option for banks where revenues are squeezed because of low interest rates, poor return on equity and typically high cost-to-income ratios.

Siam Commercial Bank launched a food-delivery app called Robinhood to help the people of Thailand deal with the economic hardships of the COVID-19 pandemic. They own the platform that connects restaurants and customers and provide a seamless experience. This is all part of the bank’s shift toward becoming a regional financial technology group that can usher in the next era of financial services with SCB Tech X, a new platform-as-a-service business.

Banks once had exclusive control over financial services and products, such as payments, lending and insurance. After all, they alone had the necessary tech stacks and protected relationships with customers. Regulatory agencies watched them closely. Traditionally, it wouldn’t have made sense for a taxicab company to help you with personal finance, but why not a ride-sharing app?

Now that nonbanks want to incorporate financial services into their products, banks have new avenues for distribution. This is a fresh way for financial institutions to find additional customers and revenue streams.

But in this embedded finance model, who owns the data? For instance, if a coffee chain embedded a major bank’s payment solution into its phone application, who would own the collected data? Well, that’s a point of contention.

BaaS enables embedded finance, but this doesn’t only help the banking customer—it helps the business partner launch a new offering in the market. Banks have already established a brand of trust and security.

By connecting with non-finance companies via their application program interfaces, banks can handle the regulatory burden and grunt work so their new partner company can focus on the market proposition and customer-facing responsibilities.

Done correctly, digitally enabled banks will take their place in a new ecosystem alongside tech companies and other nonbanks to create holistic customer experiences.

Standard Chartered launched a BaaS solution called nexus that allows digital platforms and ecosystems to offer loans, credit cards and savings accounts under their own brand name. Standard Chartered is piloting nexus with a major e-commerce platform in Indonesia where e-commerce adoptions rates—at 88 percent—are the highest in the world.

Whether a business can grow alongside available opportunities will determine its success. Without scalable infrastructure, a bank’s success will be limited by rigid technology. Would your website, mobile app or internal systems be able to handle a sudden spike in popularity?

Bhattacharya said if a bank wants to become a solution provider, it can build a stack of solutions (i.e., banking, payments, wealth management) in the cloud that can be embedded in a company’s ecosystem. So moving to cloud is not only about building a platform but also about expanding the capabilities for those companies.  

Today there are fintechs offering modern, flexible, cloud native options to tackle the toughest challenges across the entire banking stack from core banking, onboarding, identity management and data management.  The impact is that what may be considered as groundbreaking approaches today will likely become commonplace, and anyone still operating legacy banking platforms will be far behind their competition.