Do banks need to be ready for 'unbundling'?

By : Andrew Short

December 14, 2017 01:00 PM

In light of technological innovation, evolution in customer expectations and regulatory reform, one concept modern-day banks need to be comfortable with is change.


Among the many trends that could have an impact on the retail banking sector in the coming years is unbundling, whereby established institutions relinquish full control over the end-to-end banking process. This could see banks spinning off dedicated business units to focus on delivering key services, or teaming up with specialist providers.


PSD2 - which aims to level the playing field for competitors and give consumers a broader range of financial service providers to choose from - could be a key driver of this trend.


Giving consumers more power

One of the arguments in favor of unbundling is that it will encourage competition and shift control away from established financial institutions and towards consumers.


These are ideas that are already gaining traction in the industry, particularly in markets such as the UK, with its new generation of 'challenger banks' that are questioning established business models. These emerging businesses are prioritizing simplicity, with some starting out by offering only one type of product. Their aim is to deliver a service that is personalized, relevant and beneficial to the customer, as opposed to serving the needs of the bank.


One of the biggest names on this scene is Starling Bank, which was the first challenger bank to launch a mobile-only current account. At the moment, the company is focused purely on providing current accounts, but plans to offer a platform within its app where customers can view other products from various providers.


Starling CEO Anne Boden was among the speakers at the recent Money 2020 conference in Copenhagen, where she pointed out that the banking industry has spent years locked in business models whereby established institutions have end-to-end control of consumer financial services. Ms Boden argued that this has prevented bank customers from experiencing the sort of tech innovation they have seen in other parts of their lives, Vocalink reported in its account of the event.


'Blurring the boundaries'

It's not just in the UK and EU nations - where PSD2 will come into effect in January 2018 - that entrenched banking systems, strategies and business models are being questioned.


In an article for Lexology, McCarthy Tetrault, a Canadian law firm that counts financial institutions among its clients, discussed how the growth of the fintech sector is contributing to a "shifting and blurring of organizational boundaries". It noted that unbundling could become more common if large banks find that their size is making it hard for them to keep up with innovation.


"Banks and other established players may also choose to partner with and acquire fintechs," the firm added. "The major consequence will be that the line between bank and non-bank entities will become less defined."


What seems clear is that the recent trend of escalating competition and diversity in the financial services industry is set to continue, and an openness to collaboration could prove equally beneficial for legacy institutions and emerging fintechs.


This positive, cooperative attitude is already evident in markets such as Norway and India, where exciting partnerships could help to pave the way to a new era in banking.

Andrew Short

Mobile and Payments Solutions Manager – NCR Financial

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Andrew has 20+ yrs experience in the software industry covering banking, healthcare and the telecommunications verticals. With past positions in finance, accounting, sales, and prod. mngt, he brings significant mobile and payment expertise to his current role.