The banking industry operating model is broken and needs dramatic reinvention for banks to survive in the longer term.
The clear parallels
As we look at the banking industry operating model today, it looks similar to that of the airline industry in the late 1980s. The entire business value chain proprietary owned and operated by the airlines themselves, including non-core functions, such as ticketing, luggage handling, ground services and catering etc. This model resulted in little to no recurring investment in the non-core functions that were considered low value, cost centres. In reality, these functions were instead subject to continuous cost challenge without investment. This approach did little for client experience, operational efficiency and risk management. Morale of the staff who had the thankless task of managing and maintaining service continuity in these functions was extremely low (sound familiar?). Further, this model distracted investment and management focus from delivering differentiation in the airline’s core proposition. The outcome – poor quality services, customer dissatisfaction and consistent failure to deliver on a strategic return on equity; and in some cases business failure.
Thankfully with the benefit of hindsight, we can also look to the airline industry for the solution – adoption of a supply chain model. Integration into an eco-system of specialist providers/strategic business partners providing non-core services and functions. By developing standardised services on multi-tenanted platforms to multiple airlines, these specialist providers were able to achieve utility scale and the platform investment not possible for a single airline operator. In turn, this allowed the airlines to focus on differentiation of proposition. The outcome – improved cost income ratios, better quality support services and enhanced customer experiences, resulting in improved returns on equity.
However, despite these clear lessons, and banking industry executives agreement on the topic, industry body research and advice from leading strategic advisory firms over the years – the industry still remains lethargic and little action has been taken.