In a world where traditional revenues are shrinking, banks must adopt platforms to deliver services and products. Ecosystems and marketplaces provide the ideal space for banks to meet customers’ needs by onboarding partners and facilitating the end-to-end delivery of offerings.
Current State of Ecosystems in Banking
Banks are not turning into ecosystems because they enjoy it. Somewhat, serving as a one-stop shop for their customers has become an obligation. Financial institutions have long insisted on building their entire IT architecture in-house. Financial institutions are control freaks by nature and rightfully so - banking is built on risk management, security, and regulatory compliance. Banks feel more secure and in control when they build their own applications.
Mantvydas Stareika, CEO and Board Member at SME Bank, elaborates on the difficulties faced by the financial sector and the solutions to these challenges. The services available from a large-scale firm vary from those of SMEs. SMEs often provide tailor-made services faster and small business owners expect personalized service, which has resulted in numerous changes in small business banking trends. It is also interesting to highlight that during the COVID-19 pandemic, customers moved drastically toward online platforms, and the market catered for that. Nevertheless, the challenge is maintaining the quality and providing assistance for the customers' problems. The world of today forces the financial sector to provide instantaneous service along with the best quality and security.
Ecosystems are divided into 2 parts: the banks’ ecosystems and the partners’ ecosystems. A bank ecosystem is an ecosystem where the bank is connected to different providers and those providers are connected to the customers, while a partner's ecosystem is an ecosystem where the banks are connected to the partners, selling unique capabilities as a service.
Basically, an ecosystem is a one-stop-shop principal company that solves many problems for its customers in one place. Usually, an ecosystem company operates on a "win-win" principle - they work together with their partner and provide multiple different solutions for them. Ecosystem players are part of an open company where they work with different partners. They are flexible, and they need to identify their customers digitally and without them providing additional information such as a passport or registration number. They have to be trustworthy, and most importantly, they have to provide simple solutions that are acceptable and represent their customers.
Mantvydas also mentions that The Global Alternative Finance Market is increasing on a yearly basis. It has been noted that there is a growth of USD 183.80 billion during 2020–2024, progressing at a CAGR of 10% during the forecast period. Indeed, significant growth is in line with firms that adopted technology such as AI, machine learning, and others. The customer is the key element here; it is very important to mention that customers really appreciate what alternate lenders and players in ecosystems are doing.
According to Oracle’s Digital Demand in Retail Banking study, consumers from 13 countries think that 40 % of consumers surveyed think that non-banks can better assist them with personal money management and investment needs. One of the key elements here is that more than 70 % of loans are being approved by alternative financial institutions. It is important to mention that the Net Promoter Score (NPS) is used to measure customers' intention to recommend a brand in the future. The NPS is based on a simple question that asks customers how likely they would recommend a brand.
How Big Tech is Transforming the Banking Sector
Silvia Mazánová, the former Head of Payments, Cards, and Financial Markets at Česká spořitelna, elaborates on the innovations and future of cards and payment systems and how the banking sector should respond to them. During the past years, there have been many trends recorded related to the physical and virtual environment. The COVID-19 pandemic was not a positive factor for the card system. However, it has been noted that the banking sector was able to embrace this drastic change by pushing more for instant payment and tokenization, and customers also started to use more and more mobile wallets. The Czech Republic is known for being one of the front liners in digital payments. The e-commerce industry introduced instant account-to-account transfers, which are easily accessible and frequently used at e-shops.
Another noticeable trend is that market participant and the financial sector dictate the market's UX. The banks also had their first attempt at digitalization in servicing areas, which allowed reverting illegitimate card transactions directly via online channels, so the customer experience was digital at its fullest. A concept that is eco-friendly since there is a reduction in the use of physical materials which also prompted some banks to opt for cards that are created with recycled materials.
It can also be noted that recently there has been an increase in foreign payments by 30%, compared to card payments with only a 20% increase and domestic payments growth by 8%. It can be seen that there is a surge toward digital. On the other hand, as per Gartner (2020), it is estimated that cash will decrease, and by 2024, global cash in circulation will be reduced for the first time after decades of continuous increase.
Silvia shares the reasons why payments are becoming a significant aspect and are heavily attacked by non-banking competition:
The first reason for this impact is transactional data. Payments provide valuable information about customers' preferences. location, amongst others. This information has multiple uses in risk, advisory, and product offerings to targeted clients. The second reason is customer experience. Payments are the lifeblood of many ecosystems, also acting as a medium of exchange. Hence, the aim of those controlling the ecosystem is to reduce the fragmentation of payments to a minimum. The third reason is customer interaction. Payments represent by far the most frequent contact of clients with the banks. This contact can be used to offer additional services and to generate revenues. Digitalization and innovation have been becoming a trend in the market already for the past couple of years.
There are a significant number of new market players coming to the market. But the question is, what do the clients want, and why are new payment methods emerging on the market? Everybody is speaking about the customer experience. Customers simply demand a seamless payment without stressing how they are paying. They are expecting secure, fast, reliable, and UX-friendly payment initiation and processing. Payment is becoming invisible, for instance, in Uber. This leads to the question of how the bank maintains customer interaction. Banks and market players should offer more options, such as instant payment at POS and E-Commerce. The financial services industry should also innovate and introduce options for clients whereby they may decide if they want to pay with cash or instant payment.
To summarize some key elements, generation Z is living in a fast-paced digital world, and the financial sector needs to adapt and innovate outside its comfort zone. The audience is a niche market, and the best practice is to use a combination of cards and instant payment.
Davor Gašparac, Program Manager-Corporates & Markets at Erste Digital, shares a great overview of banks and fintech collaboration and how big tech is transforming the financial sector. Studies from Oliver Wyman show that PSD2, Platform, and Open Banking, in this new payment world in which the gateways to consumer bank accounts will be owned by Payments Initiation Service Providers (PISPs), which will potentially replace at least one role of today’s banks and cards.
Banks are obliged to offer their services through the physical branch. They were made aware of the threats that other players were going to start operating in the market and take a piece of the cake. Many consultants proposed various models for how banks should proceed. Here’s the usual ordering process: order—payment—delivery. In one particular step of the process - payment - there is currently almost a monopoly between banks for financial transactions. Merchants must contact their customers' banks to perform the service. What is happening with PSD2 is that the banks are obliged to open this process up. There is a threat. Payments Initiation Service Providers are going to stop in the middle, and somehow banks are going to lose attachment to the customers. This, however, is not the end of the ordering process. From the customer's perspective, it is more like a circle that does not start with the order and does not end with the delivery.
Adina Calin, Executive Director of the Products and Services Area at CEC Bank, lays more emphasis on the topic of social e-commerce. Social commerce entails a vast array of channels, including group buying and social shopping via mobile apps. It is about harnessing a brand across different social channels of sales, creating a seamless buying journey on platforms like Facebook, Instagram, or TikTok. Social commerce enables businesses to sell products and services directly through social networking platforms like Instagram, Facebook, Pinterest, Twitter, and many more. Retailers are adding social features, shopping integrated via social media, embedded finance like Buy Now Pay Later (BNPL), or integrating financial processes through existing social platforms.
Social commerce technology solutions make it easier for companies to set up products and sell on any social platform. The technology generates the checkout link, which is added to the product information so that payment for the product is securely processed directly on the platform. This creates a frictionless and easy shopping experience for the customers.
Online shopping is changing and becoming more and more social, and people's behavior is changing too. Retail brands can harvest real-time data on consumer behavior and turn it into practical insights. For instance, if a data consumer is influenced by a celebrity's opinion about a clothing brand, for example, Ralph Laurent, then the company can show a personalized Instagram ad to the consumer. Sprout's social shopping study found that in 2022, consumers shopped on social platforms where they felt most comfortable. When people shop via social platforms, they turn to friends for recommendations, especially those from 18 to 40. Gen Z social shoppers are most prevalent when it comes to visual social networks like TikTok or Instagram. Baby boomers are more inclined to use Facebook to make purchases, while women look forward to shopping on Pinterest and men will spend time shopping on Twitter.
During the lockdown, Gen Z, millennials, and Gen X started trusting influencers as much as they trust their friends. Live streams are the most popular feature on social media platforms. Live streaming commerce is essentially promoting products to influencers. About 71% of live stream watchers have bought something on social platforms, while 48% expect to buy more through platform features in 2022.
The best social media platform for social commerce and why
According to 87% of respondents, people researched products on Instagram and Facebook before purchasing, and Instagram and Pinterest offer the best social commerce experiences for brands. Facebook, Snapchat, and Tik Tok are all filling gaps with their offerings. Gen Z does 2-3 times more shopping on social media channels than the other shoppers and prefers Instagram and Snapchat for social shopping.
Insider Intelligence estimates that social commerce sales in the US alone will reach a staggering $36 billion in 2021. According to Grand View Research, the global social commerce market size is expected to reach USD 369.8 billion by 2028. From Tik Tok Commerce to Instagram Checkout, every social platform is trying to attract users and get them to start spending on their apps.
Moving forward to 2022 E-commerce predictions, from Facebook to TikTok, social media apps are getting into e-commerce brands with tools that allow easier digital marketing and nap shopping, especially on mobile devices.
Channels like TikTok will likely generate nearly 2 billion users in 2022, while Instagram and Pinterest are delivering relevant social commerce experiences. Many new e-commerce innovations will be driven by return on investment. COVID-19 accelerated this digital transformation and consumers now expect omnichannel personalization. B2B commerce will become B2Me Commerce and the experience will go far beyond the simple shopping cart. Another prediction for 2022 is that the blending of digital and physical experiences will become the expectation. As part of their go-to-market strategy, brands will engage with marketplaces or create their own. Sustainability will be prioritized, and recyclable sales will accelerate.
The composable architecture will drive innovation and allow brands to keep up. Brands will move towards the scalability, speed, and agility of cloud-native and headless platforms. As per the concept of CEC Bank, there’s a saying that goes, "Banking is necessary, but banks are not."
In a changing world, the 4th Industrial revolution is underway. This is a profound shift, and banks need to respond. In a world where traditional revenues are shrinking, banks must adopt platforms to deliver services and products. Ecosystems and marketplaces provide the ideal space for banks to meet customers’ needs by onboarding partners and facilitating the end-to-end delivery of offerings.
Platform and "Platform" - What is it really?, a presentation by Davor Gašparac, Program Manager-Corporates & Markets at Erste Digital at the Lending CEE Summit on 21-22 January 2022
How fintech ecosystems will change the world of banking?, a presentation by Mantvydas Stareika, CEO and Board Member at SME Bank at the Lending CEE Summit on 21-22 January 2022
Social eCommerce, a presentation by Adina Calin, Executive Director of the Products and Services Area at CEC Bank at the Payments CEE Summit on 10-11 March 2022
Innovation is not always liked but it can't be stopped, a presentation by Silvia Mazánová, the former Head of Payments, Cards, and Financial Markets at Česká spořitelna, at the Payment Cards Innovation Webinar on 30 November 2021