REPORT: UNIVERSAL BANKING MODEL Retail banks must operate like tech firms to thrive

They must develop a platform that supports the full search-shop-manage value chain, McKinsey and Co. reports.

In late 2021, Thailand’s oldest bank Siam Commercial Bank made a bold step: it announced that it will be reorganising under a new parent company SCBx. The century-old bank aimed to position itself as a financial technology company, recognising the need for faster innovation in digitalisation. In an interview with Asian Banking & Finance at the time, the bank’s CEO and Chairman Arthid Nanthawithaya noted that the traditional banking structure was limiting its growth potential, leading the bank to reimagine the entire group structure.

Whilst the long-term success of SCBx and whether it will achieve its 2025 goals remain to be seen, the bank may have just made the right decision to adopt a more digital-focus, startup-like mindset. In a report, McKinsey & Company highlighted that the current model of universal retail banking is

To thrive, banks need to reinvent themselves unsustainable over the long term.

“To thrive, banks need to reinvent themselves, focusing on businesses where they can achieve and extend market leadership in the new digital world,” the management consulting company stated.

Operate like a tech company

To deliver a market-leading platform-based value proposition, banks will need to work like a tech firm with advanced data capabilities, a cutting-edge tech stack, and an agile operating model, McKinsey experts explained in the report Reshaping retail banks: Enhancing banking for the next digital age.

The report warned that lenders running the old playbook will not survive. “Leaders should act promptly to take advantage of strong financials and double down on three key capabilities essential to a platform-based business model: data analytics, a cutting-edge technology stack, and an agile operating model,” it added.

On the one hand, banks have real advantages against the Big Tech firms in regard to customer engagement and data. However, they have yet to extract the full value of these assets.

“To compete for data on an equal footing with technology companies, banks will need a comprehensive data infrastructure to support data collection, storage, and advanced analytics, as well as a digital marketing engine to translate analytical insights into personalised messages that anticipate individual customer needs and intentions,” the report said. Furthermore, their business models should have an IT infrastructure that is capable of handling significant variations in demand for streaming and processing capacity and delivering new solutions through fast innovation cycles.

The main challenge, the report said, in designing the new architecture is deciding which components should be developed in-house to strengthen competitive differentiation and which elements of the infrastructure can and should be outsourced to reduce the cost and the risk of service interruptions attendant to updates and upgrades.

“In addition, the cloud services available today have reached a level of maturity and accessibility that affords banks diverse options–including in-house development and various partnership models–for meeting the requirements of a maximally automated, digital-first business,” McKinsey’s report read.

The need for speed

Winning banks will develop speed as a core competitive advantage, McKinsey noted.

Banks have two avenues to achieve this: an agile operating model, and building the right mix of talent and skills.

Banks must push ahead with their transition to an agile culture, removing barriers to crossfunctional collaboration and creating semi-autonomous teams that can deliver solutions quickly in alignment with enterprise strategy, the McKinsey report said.

“Consistency in roles, communication, and work patterns across teams enables an organisation to reallocate funding and form new teams quickly as new opportunities arise and priorities change,” it noted.

Sustaining this more dynamic operating model whilst adapting to a new, more digital environment will require a dramatic shift in skill profiles, it added.

“For example, the primary role of branch professionals will shift from teller to universal banker, and with an agile tech organisation, a bank may see its ratio of developers to tech operations and infrastructure specialists flip from 1:2 to 1.5:1,” McKinsey said.

New ways of engaging

The McKinsey report also noted that each bank should prioritise a retail business—or, depending on capital resources and competitive strengths, multiple businesses— and develop a digital platform that supports the full searchshop-manage value chain of the priority businesses.

In particular, the management consulting firm named three models. The first is the daily banking platform, which would focus on simplifying daily shopping activities by embedding transactions seamlessly within customer journeys and giving customers fast, convenient access, to diverse retailers and service providers. Second is the home and life events (or complex lending) platform, which it said would