The Next Financial Services Business Model

by Kaihan Krippendorff

My wife knows credit cards. She has a couple, of course, but she is also the general counsel of one the world’s leading credit card companies. So, it’s enigmatic that were she old enough in the early 1970s to apply for a credit card herself, her bank would have refused to issue her one. Before 1974, most banks deemed women too high a risk unless they were married and their husbands co-signed for the card.

The pattern of corporate evolution is predictable: a change makes something new possible, corporations take a long time to adapt, a few pioneering firms embrace the new reality, and others fall behind until eventually the entire industry evolves.

We are today experiencing such a leap in evolution across most sectors, including financial services. Advances in areas of finance-related technology, such as blockchain, mobile payments and next generation security, are opening up new possibilities for how financial service firms operate their business models.

The reaction of successful out thinkers to what technology makes possible is evolving the eight elements of the business model: positioning, placement/distribution, processes, product, physical experience, promotion/sales/marketing, pricing and people.

Positioning
Strong business models begin with a unique, clear positioning. Traditionally, financial service firms have differentiated their brands by functional attributes such as interest rates, fees, and customer service. But increasingly we see winners positioning themselves around deeper emotional attributes.

Consider Simple Bank, founded in 2009 to deliver basic banking products like checking accounts through mobile and web. By focusing on attributes such as simplicity, dreams, ease, and beauty, the bank grew rapidly. The team launched their beta in 2012 and by the end of 2013 the bank was processing around 13 debit transactions per minute on average with an overall customer balance of $64 million.

In February of 2014, BBVA acquired Simple Bank for $117 million. The bank continues to grow and operate with reasonable freedom.

Placement
Placement describes how you get your value proposition to your stakeholder. Financial businesses are fundamentally different than other industries in that they must engage not only front-end customers but back-end. Banks, for example, cannot only attract customers; they must also attract borrowers so they can put deposits to use.

Consider CommonBond, a financial services company which was founded in 2012 to connect college students in need of a school loan with alumni willing to invest. The company quickly attracted the attention of intuitional investors. Today they have over $1 billion in loans outstanding.

Process
Process refers to the internal processes you follow to create and deliver value. The most significant process advancement in financial services is arguably the distributed ledger (also referred to as blockchain), which helps identify and reduce fraud by maintaining a distributed network of records rather than keeping them all under one central authority.

Countless out thinkers are applying this approach to the recording of events, tracking of medical records, and transaction processing.

In the financial services world, Alibaba is using this approach to reinvent small business lending in China. Their platform, a sort of eBay-meets-Amazon, offers nearly a billion products and is one of the 20 most visited websites in the world. The merchants who sell on the platform sometimes need funding to grow and fulfill orders. Since Alibaba has transaction data about merchants who sell on their platform, they can use that data to make loan decisions quickly and efficiently.

Product
When we think about product, we tend to think about features such as a computer’s speed and hard-drive capacity or a desk’s color and design. But taking a more user-centered approach often reveals unseen opportunities.

Consider TransferWise, a financial services company founded by two friends who put a lot of thought into what attributes people cared about that they could deliver. In doing so, they came up with a process that allows people in different countries to transfer money directly into each other’s accounts rather than having to deal with banks’ complicated processes and ever-changing fees. Launched in 2011, the company now has over one million customers sending more than $1 billion per month.

Physical Experience
Your customers only know you and your offer through their senses. They must, at a fundamental level, see, smell, hear, taste, or touch it. Companies that understand this often create innovations their competitors overlook.

In the financial services sector, Biocatch uses a portfolio of patents to help financial institutions reduce fraud by not only authenticating customers but continually monitoring them as they interact. Their platform collects and analyzes more than 500 behaviors during a customer’s digital sessions, sensing for malware, bot activity, and other suspicious behavior.

Promotion
Promotion points to how you communicate your value proposition to prospects and customers. Forward-looking financial services companies are using “customer-centric design thinking” to deepen and lengthen their customer relationships.

For instance, through its acquisition of fintech start-up eMoney, Fidelity is using a top financial-planning software that significantly enhances communication between financial planners and their clients. Instead of sitting down with pens and forms, planners can share interactive charts, updated with the latest stock and fund performance data. This offers the ability to narrowly target customers, deliver customized messages, do deep personalization and shift the capabilities that will define success.

Pricing
Pricing here is less about the absolute price you charge but rather about the basis of your pricing. Software has long evolved from selling licenses to selling access. Retailers are exploring a shift from selling per unit to selling per month. As financial institutions begin positioning themselves along more innovative dimensions and become more akin to lifestyle brands, there exists an opportunity to rethink pricing.

Consider Stockpile, a company that, via gift cards you can find at your local grocery store, enables you to buy incremental shares of stock in companies like Facebook, Activision, Apple, Amazon.com, and Berkshire Hathaway. They have disaggregated the price of stock.

People
People has to do with how you attract, retain, organize and incentivize workers. Here again, we see a shift in thinking. The small-team, agile structures that tech firms like Google and Zappos have embraced are making their way through the IT departments of major financial institutions into the business.

ING, the Dutch banking group, is perhaps the leader of this movement in the financial services world. In 2015 the company broke its standard hierarchical groups into about 350 nine-person “squads,” and then grouped these into 13 “tribes.” Such “agile” approaches to organization have enabled ING to accelerate time to market, increase employee engagement, and improve productivity.

Rethink your financial services business model.

Now is the time to stop and rethink your business model:
Positioning: What unique core customer can you attract through a positioning that competitors would avoid copying?
Placement: What new paths to customers and investors are newly available?
Process: When was the last time you thought through your core processes? What can you reimagine?
Product: If you stopped thinking in terms of product categories and instead in terms of attributes your core customer needs, how would you design from scratch a compelling “product”?
Physical experience: How is the physical experience of your brand and company unique? How can you rethink the experience?
Promotion: By taking a customer-centric perspective, what new possibilities are available to differentiate how you interact with customers and prospects?
Pricing: On what basis is your competition charging? How can you change the basis of pricing?
People: Are your people policies aligned with the future of financial services? How can you change who you hire, how you organize them, how you incentivize them, and your culture?