RESEARCH REPORT

In brief

In brief

  • Banking is changing as a new wave of digital-only players fragment the market, componentize products and challenge age-old business models.
  • New research examines the business models of traditional and digital-only players to identify how value chain fragmentation is reshaping the industry.
  • Our analysis shows that the digital-only players using adaptive models enjoyed higher revenue growth compared to players with traditional models.
  • Incumbent banks can catalyze growth by operating a range of new models in parallel with the current core of the business.


An age-old model gets turned on its head

The digital revolution has finally come for one of banking’s long-standing foundations.

For years, business models in the industry were as fixed as panes of stained-glass cathedral windows. A bank typically owned each layer of the value chain and would create, package, and distribute its products, whether the bank was a century-old global titan or a neobank offering a digital alternative to traditional offerings. Its models were monolithic, linear and vertically integrated.

But new waves of digital-only players have unshackled themselves from vertical integration and are fragmenting the banking value chain by choosing which layers they want to play in. They are also unbundling traditional products into micro-products or services and re-bundling their own offerings together with components from other providers to offer better customer propositions.

Many digital-only players are using this non-linear and adaptive business model to attack incumbent banks where they are most exposed. The strategy of each challenger varies, but they are unified in their ability to configure innovative products and propositions quickly and at scale, with lower customer acquisition costs.

The result in most markets? A steady outflow of banking and payments revenues from incumbents to new entrants.

There’s value in going non-linear, our report shows

Our Future of Banking report analyzes the business models of leading incumbent banks and digital-only players to identify how value chain fragmentation and product componentization are reshaping the banking market of the future.

We found that digital-only players with non-linear business models are outperforming those that simply emulate vertically integrated models in the digital world. They can also adapt more easily to product componentization and further value chain fragmentation to respond quickly to future disruption in the market.

The average compound annual revenue growth of banks and competing players in our study that utilize different business models (between 2018 and 2020):

76%

digital-only players with non-linear models.

44%

digital-only players emulating traditional vertically integrated models.

<2%

traditional banks with vertically integrated models.

The performance of these digital-only, non-linear challengers offers inspiration for incumbent banks looking for breakout growth and higher market valuations. The billion dollar question is: where to begin?

Crafting a kaleidoscope of business models

Large banks are understandably reluctant to discard the vertically integrated business models that still drive their profitability. The good news is that taking on non-linear business models is not an all-or-nothing proposition.

The key to success in this flexible, fluid environment is not just to shift from yesterday’s business model to a new one. Rather, it is to evolve from reliance on a single, vertically integrated business model to multiple non-linear models and roles in the value chain.

Owning the value chain end-to-end and selling only your own products are no longer requirements for success. Architecting and creating value for the end-customer or for the next player in the value chain offer new paths to differentiation and growth. This requires having the vision and flexibility to reimagine and “package” compelling propositions that truly focus on customers’ needs and intentions.

To become a value architect, banks should consider playing a range of roles in the value chain. Depending on the size, market and strength of the bank, an incumbent can embrace any mix of these approaches to increase business model flexibility and differentiate itself from the competition.

Sell the bank’s own products

Control all layers of the value chain, from manufacturing to distribution, in a traditional model of vertical integration

Build a distribution-driven ecosystem

Distribute financial products of all kinds from other companies, or even non-banking products.

Sell banking capability as a service

Reach scale by manufacturing technology or business processes that are invisible to end-clients.

Create new propositions through bundling

Build or package fragmented micro-products or products for distribution through other companies and digital experiences.

View All

In the leading banks of tomorrow, the traditional model of vertical integration will co-exist with an endlessly configurable kaleidoscope of non-linear models. This will allow these banks to both defend their existing business and seize new opportunities. By unshackling themselves from the traditional value chain, they can grow and scale in new markets while lowering the cost of growth.

You can find more detail on the future of banking business models in our report.

By rethinking their business models and embracing the innovative strategies of digital-only banking and financial services new entrants, banks could boost revenues by nearly 4% annually.

Mike Abbott

Senior Managing Director – Global Banking Lead


Alan McIntyre

Senior Industry Director – Banking


Dilnisin Bayel

Managing Director – Strategy & Consulting, Credit Lead, Europe

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Purpose: Driving powerful transformation for banks
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