During an incredibly turbulent period in the banking sector, it might seem odd to be thinking about how financial institutions need to evolve their thinking when it comes to building ecosystems. After all, the problems we have seen at Silicon Valley Bank, Signature Bank, Credit Suisse and others have prompted the media and most commentators to focus on proprietary business models, individual risk posture and internal management, not a critical examination of which partners they work with.
But, as I reflect on what’s happened (and what may yet happen), it occurs to me that there may not be a more opportune moment to consider the role of third-party organizations and next-generation ecosystems in mitigating what some are calling “business model risk.”
To illustrate the point, let’s look at the results of a survey ISG conducted in November 2022 through the lens of the current market turmoil. The survey asked more than 200 banking leaders from around the world if and how they are increasing shareholder value by improving three elements of the “Transformation Triangle,” i.e., employee experience, customer experience and third-party ecosystem.
In relation to ecosystems, 92% of respondents believed that building the right ecosystem is essential to creating value and the best experience for their customers. Not a surprise perhaps, but the results also revealed that the number one issue with existing third-party ecosystems was “a lack of empathy with our challenges.” In other words, banks did not believe that their partners understood their issues (and hence struggled to help address them).
How to Solve Banks’ Business Challenges
Moreover, the survey found that, in the face of this apparent lack of empathy, most banks chose to focus on other pressing matters such as customer acquisition, sustainability goals and cybersecurity. This highlighted a growing gap between what ecosystem partners have traditionally been used for (technology outsourcing, enterprise license agreements, specific consulting engagements, etc.) and what banks now need them to deliver (FinTech partnerships, Banking as a Service, business transformation, etc). Of the banking leaders we talked to, 62% said they expect third parties to help them improve business agility, 71% wanted support in building new products/services and an eyebrow-raising 68% expected partners to help them identify (as well as solve) business challenges.
Hence my hypothesis starts to take shape. Could a new approach to ecosystems have prevented some of the banking failures we have seen these past couple of weeks? Maybe not – but imagine if individual banks genuinely sought fresh thinking from third parties in relation to their strategic vision and business operating model. Our survey found that “business know-how” and “industry innovation” are now in the top eight drivers for organizations seeking partnerships, suggesting banks understand the value these third-party domain experts can theoretically bring.
The issue is that saying these things are important and actually leveraging them in reality are two different things. Perhaps this is partly because almost two-thirds of the ecosystem relationships in banks are managed by Procurement/Vendor Management function, which have traditionally treated third parties as “vendors” (the clue is in the name) as opposed to “partners” with insight and strategic value to contribute. It was however encouraging to see that the survey found that 26% of such relationships are now handled directly by lines of business (a figure which has more than doubled in the past two years), where that all important “outside in” perspective can be more easily delivered, and perhaps more readily heard.
How to Ensure Your Provider Ecosystem Reduces Business Model Risk and Drives Value
As the delivery of financial services and products proliferates via open banking, APIs and embedded banking (Banking as a Service, or BaaS), banks will find a greater degree of diversification with greater ability to activate new channels, offer new products and reach new customers. In turn, this should reduce business model risk for most banks. However, once again our survey provides a note of caution – less than half (45%) of respondents said their bank currently has a BaaS initiative, suggesting a lack of urgency to grasp the advantages such a strategy can bestow.
Similarly, although new customer acquisition was seen as the number one challenge for respondents, just 26% are currently exploring the metaverse / Web 3.0 as a way to use immersive, virtual experiences to attract and engage new customers.
In other words, we see a theme emerging clearly through the mass of numbers. Most banks understand the challenges they face. They even know what should be done to address them, including leveraging the expertise of third parties. The trouble is they are not acting quickly enough to take advantage of the opportunities presented by such new ecosystems. To mitigate the specter of business model risk and drive true business value, banks need to wake themselves from their slumber and think very differently about their ecosystem, whether that means engaging hyperscalers offering greater business agility, API providers / integrators offering new channels to market, platform providers giving new functionality or FinTechs offering digital innovation.
ISG helps financial institutions build next-generation ecosystems through a combination of industry expertise, domain knowledge and an unrivaled view of third-party service and technology providers. Contact us to find out how we can help you think through your third-party ecosystem.