After years spent optimizing costs to offset the squeeze on interest margins caused by ultra-low rates, it is time for banks to widen their focus. Normalizing rates and a more favorable pricing environment have already lifted their profitability significantly. However, this tailwind could prove short-lived. This is the moment, therefore, for banks to turn their attention to revenue enhancement and seize the growth opportunity.
To aid this process, PwC Strategy& has identified four high-potential areas for closer examination:
Not everything outlined below should be regarded as a pure revenue enhancement opportunity. Some may make more sense as value-add opportunities for the customer – opportunities that banks treat as revenue protection strategies.
There are multiple options under each of these headings: the most promising among them will differ according to each bank’s existing strengths, partnerships and market opportunities. However, within the four areas they will find routes to new and sustainable sources of growth and profitability, building on the transformation work they have done on costs, technology and sustainability over recent years.
Customized offerings
This category brings together opportunities related to the customer experience and ways to develop deeper customer relationships. Data is naturally key to this category, and banks should focus on the expanding opportunity to use AI to tailor propositions more closely to individual customers.
To capitalize on opportunities in this area, they must enhance their data resources by collaborating with partners and seeking access to data from non-traditional sources. Data organization, structuring and governance are critical, and financial services companies will require a robust data platform to pursue analytics-led projects. They must also develop ways to prioritize AI use cases and estimate their impact, and then to measure their effectiveness post-deployment. Staff upskilling is required to enable innovation and organizations will be expected to adopt robust responsible AI frameworks that reflect the developing regulatory environment.
With the right foundations in place, there are many opportunities for data analytics to unlock new revenue opportunities by enabling more granular understanding of customer needs and behavior. This can lead to margin enhancements through individual loan and deposit pricing, faster and more intuitive customer journeys, tailored, channel-specific marketing messages and customized product offerings. For example, Deutsche Bank’s Next Best Offer provides an example of the potential for customization. Its algorithm monitors the portfolios of wealth management clients for risks and recommends alternative products to the adviser – the recommendations are based on the portfolios of comparable clients and are provided only when the expected returns from switching exceed the costs.
Product and service innovation
Fintech entrants have led the way on much of the product innovation in financial services in recent years – buy-now-pay-later (BNPL) being the best-known example. However, the technology renewal cycle in banking is opening many opportunities for established banks to develop BaaS propositions that will underpin new business models such as embedded finance.
Banks can, for example, enhance their product offerings by developing their own BNPL offer or other credit products that can be embedded in the consumer’s purchase journey on third-party e-commerce websites. This can offer banks an additional avenue for personal loan origination, together with the opportunity to extend their relationship by marketing additional financial products to new borrowers acquired through these third-party channels. Similarly, adoption of modern tech architecture can enable new digital insurance solutions that strengthen the position of bancassurance players.
Examplary, the joint project between Helaba (Landesbank Hessen-Thüringen) and vc trade, which has fully digitized the issuance, distribution and servicing of the Schuldschein corporate lending market offers a key example of how banks can use digital technology to innovate in product and service delivery.
The digitization of banking is also allowing new players to enter the market. In the UK, the digital bank Starling is providing its in-house banking technology platform, Engine, as a service for third parties that want to launch their own digital bank. Digitization is also enabling non-financial players to enter the market. For instance, the Turkish discount supermarket chain A101 has launched T.O.M. Katilim, a digital-only bank, licensed under Turkey’s recent digital banking regulations.
Enhancing cross-selling efforts more generally offers clear growth potential, provided these initiatives are subject to sufficiently rigorous oversight to pre-empt regulatory risks. Banks have strong, entrenched positions in the payments space, for example, and can therefore consider opportunities to develop merchant acquirer platforms alongside retailers, opening a potentially large-scale revenue opportunity. In new product areas such as access to crypto assets, developing regulation is helping to solidify opportunities, while a more rigorous certification regime will also enhance the potential of green investments.
Vertical and horizontal integration
Partnerships offer an important potential area of growth for banks. Partnering can unlock both revenue opportunities through product co-development in areas such as bancassurance or merchant acquiring, as well as the chance to create new distribution models such as marketplaces or digital wallets. These tie-ups can also allow banks to enhance their proposition in different verticals by integrating value-added services such as payroll software for business customers or real estate services to support mortgage sales.
Partnering is a key way for banks to expand their addressable market as well as to increase their potential touchpoints with existing customers, and so can have value both as a means of revenue enhancement and protection. Larger banks with significant customer bases represent high-value distribution opportunities for potential partners, and there is scope to offer their customers value-added service enhancements, provided by their partner brands on advantageous terms. For example, the UK digital bank Starling offers customers a range of third-party mortgage, insurance and pensions products via is marketplace while Revolut has added non-financial products, including a marketplace allowing users to book tours, activities and tickets for visitor attractions.
The key to a bank’s partnership opportunities will be the strength of its ecosystem, both with fintech players that can bring enabling technology to the table and with non-financial services players. Partnerships can allow the bank to reach target customer groups, provide access to complementary, value-enhancing products for existing customers or to data that will enable more customized offers.
Within the constraints of customer acceptance and data governance rules, there may also be opportunities to sell anonymized client data to third parties or to turn proprietary AI models into services offered to other organizations. Banks collect a wide range of information throughout the customer journey, which can help non-financial services players such as retailers or e-commerce firms to customize their product offerings.
Advisory businesses
Initiatives to supplement spread-based businesses with increased fee income should be a priority for banks looking to increase revenues. They may choose to target capital investment on acquisitions of fee-generating businesses such as corporate finance and M&A advice, retail asset management or wealth management services.
There is also potential for banks to develop new fee streams organically, for example by launching propositions to advise clients on their ESG transformation. This could involve advising on carving out specific operations in order to reduce the business’s carbon footprint, or on investments in technology to reduce emissions. Examplary, Société Générale has launched a service for wholesale banking clients that reviews ESG risks, disclosures and ratings and advises on strengthen disclosures and integrate ESG into their business strategy.
Conclusion
There is a wide range of opportunities across the four areas identified above for banks to accelerate their top-line growth. These areas offer ways to sharpen and personalize customer propositions, strengthen product and service innovation, expand the addressable market through technology-led initiatives such as BaaS as well as other types of distribution tie-up, and monetize the bank’s expertise more effectively through stronger fee-based business offerings.
Clearly, banks must carefully consider the fit between their product range and capabilities and the choice of approaches available to them, as well as the geographical and economic factors at play. Revenue transformation will also be most effective as part of the overall transformation journey that European banks have been on in recent years, in vital areas including cost and technology. The more favorable environment for revenue growth initiatives is one that banks should seek to capitalize on as far as possible.
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