Buy now, pay later (BNPL) has emerged as the latest battleground between incumbent banks and challenger brands. However, from an incumbent’s point of view, the battle is less about competition for the BNPL segment itself as it represents a relatively tiny market compared to the overall consumer finance revenue pool, both today and in the foreseeable future.
For incumbents, competing in this market presents an opportunity to identify, justify and scale up their best strategies to quickly and successfully transform themselves into future-proof businesses.
The BNPL market is a novel segment built around new customer and merchant value propositions with an innovative business and revenue model. It provides incumbent banks a relatively low risk, ringfenced test market to experiment with new technologies, fintech partnerships, platform services, and to demonstrate to customers their overall value chain strategy and customer lifecycle approach.
The Australian major banks have approached the BNPL challenge multifariously. It ranges from ignorance of the segment’s importance, to mimicking the leading BNPL proposition in the market with a technology-centric approach of building and leveraging a state-of-the-art front-to-back technology stack. Some apply a more traditional internal product development response with launching an innovative card product to compete with BNPL offerings, while another involves the bank partnering with leading BNPL providers and offering a white-label product manufacturing and tech platform capability with some distribution and commercial agreements in the background.
The Australian banks’ widely different responses to the BNPL phenomenon illustrate that we are reaching a point of divergence in the local banking market’s evolution. This comes at a time when customers are demanding more from banks, both locally and globally. They expect digital experiences that match those offered in other sectors and internationally. The COVID pandemic has only accelerated consumer adoption of digital channels.
Newcomer digital attackers in the banking market use sleeker, smarter back-stage technology and can harness data to offer innovative services that fit neatly into consumers’ lives. While incumbent banks, tied to legacy systems, are confined to product silos with limited ability to use the massive volumes of data available to improve customer insights, make business decisions in, or near, real-time or support changes required by Open Banking and Consumer Data Right.
Australia’s major banks are working hard to develop new data management capabilities supported by artificial intelligence that bring cost-to-income benefits while improving customer and banker experiences. They have begun business, product and process simplification, and are driving digitalisation and automation initiatives.
Successful digital transformation requires five components:
• The first is to migrate core infrastructure to the cloud. Cloud-core banking enables new capabilities, using best-of-breed components to differentiate value propositions and improve operations, and unlock the power of data;
• Next, banks should build their own challenger tech stack that is cloud-native, modular, microservices-based using open Application Programming Interface architecture, leveraging next-gen core banking platforms with an integrated data infrastructure. Building a system where every component from front to back uses new and best-of-breed technology offers a rapid pathway to the future that is ultimately economical than an incremental approach;
• In parallel, banks must streamline operations by simplifying products, reducing process complexity and automating. End-to-end straight-through digital processing should be applied to high-business-value and high-cost areas, such as onboarding and credit origination for retail credit applications and customer servicing. The aim is to cut costs, achieve a single universal customer view and prepare to migrate to the new stack seamlessly;
• With smoother operations, banks should scale up the future stack by developing and launching new offerings through their challenger. Rapid scaling is critical to improving returns on investment and building momentum for the broader bank. It also means cultivating new ways of working and technology capabilities;
• The final stage is to migrate the existing customer portfolio and business operations to the new tech stack. There will always be a period in which legacy core and next-gen cloud-native core coexist. Certain elements of the business may benefit from staying on legacy components for longer than others. Successfully navigating this stage requires an agile and iterative design approach driven by customer value and business risk considerations.
Australian banks’ varying responses to the BNPL opportunity anticipate rather heterogenous transformation trajectories in the years to come. To keep pace with the global front runners, we believe they need to take bolder, more deliberate steps with their transformation strategies.
Drawing on the direct experiences of leading global players with regards to transformation strategies and execution approaches can be a game-changer.
Adam Flesch PhD is Senior Director, FS Strategy and Management Consulting Lead at Publicis Sapient.