Future of Finance: Personalization at Scale and Banking as a Service
With ever declining software production costs and the ongoing digitization of all economic sectors, previous advantages of scale for legacy institutions and businesses have eroded. For legacy service providers in financial services, such as banking and insurance, consumers face more options than ever before in history. Indeed, the cloud has led to the rise of newcomer challenger banks, and the ever-increasing offering of financial services by traditional non-financially oriented industries (Apple), incumbent banks face greater competition than ever before.
Congruently, 66% of consumers expect financial service firms to always understand their unique needs & expectations. And they are more willing than ever (at 57%) to exchange data for hyper-personalized experiences. Notably, 66% of Gen Z, a generation that has experienced the Great Recession of 2008 and the COVID-19, places greater emphasis on financial stability than previous generations.
But like most traditional industries, incumbent financial services firms are held back by fragmented databases and have historically been unable to offer strong cross-channel offerings, or even collaborate cross-enterprise. In fact, banks’ fragmented databases make it difficult to organize information on demand and create 360-degree customer profiles. As a result, customers with different needs and propensities are sometimes offered the same products.
Congruently, BCG estimates that for every $100 billion in assets that a bank has, it can achieve as much as $300 million in revenue growth by personalizing its customer interactions. As such, the savings potential that personalization brings has made it imperative for banks to offer personalized services. However, this requires investment in database overhaul and investment through software acquisition.
Indeed, Accenture estimates that incumbent banks have globally spent upwards of $1 Trillion between 2015–2019. Such expenditure on software acquisition is only the beginning as it is estimated that half of the incumbent banks continue to remain digital laggards.
The emergence of technologies in the areas of Core Banking, AI, ChatBots, and low-code/no-code platforms are beginning to emerge. Therefore, this thesis believes that software companies offering services to banks to help enable the personalization of their services represent venture scale returns.