Digital Ecosystem and Banking Sector

India’s presidency of the G20 in 2023 placed digital public infrastructure (DPI) on the global map. Until November 2022, DPI as a term did not exist for most people around the world. In a period of nine months, between December 2022 and August 2023, not only was the grammar and syntax of DPI created, but a suggested framework for DPI was also accepted by the G20 member states.

The use of technology for inclusion is a concept that has existed for a long time. What is new is that, for the first time, a framework—marrying technology, governance, and the role of communities—has been agreed upon multilaterally.

The year 2024 promises to be a pivotal moment in the ongoing evolution of the digital landscape. The developments of 2023, marked by technological advancements, changing customer behaviours due to economic uncertainty, tweaks to regulatory requirements, and competitive pressures, have served as a stepping stone for organizations in crafting their digital transformation strategies for 2024.

To secure a competitive edge, organizations must prioritize agility and innovation. Furthermore, data-driven decision-making, AI integration, cybersecurity enhancements, and sustainable practices will be pivotal in shaping successful digital transformation strategies for the year ahead and beyond.

A digital ecosystem is a network of inter-connected companies or products. Today businesses are recognizing the benefits of partnerships and connectivity. All top companies in the world have a digital ecosystem in place. They build networks of connected products and partner with other companies, sharing resources and expertise throughout their ecosystem. Even partnering with one other company will help increase your customer base, brand reach, access to resources, like software infrastructure, and more.

The pandemic has magnified a previous trend in which many traditional corporations tried to create or participate in digital ecosystems, only to fall short. These ecosystems consist of interconnected sets of services through which users fulfil a variety of cross-sectoral needs in one integrated experience.

Today’s dominant ecosystems were launched by growing tech companies, which have used hyperscale platforms to compete with, disintermediate, and often substitute for the offerings of traditional competitors by controlling customer interfaces and control points such as search, advertising, and messaging.

An ecosystem approach involves bundling services beyond banking to offer customers a friction-free and far-reaching service. These service bundles could focus on different aspects of individuals’ lives, such as housing, retail, mobility, retail and wellbeing, as well as financial health.

In an ecosystem offering, a multitude of actors provide their products and services, and are integrated on a single digital platform destined for the customer. Adopting an ecosystem play allows banks to address a bigger share of total wallet by expanding the points of access to their financial products. They can also strengthen their strategic positioning by providing non-financial services that customers would be willing to buy.

In a housing-focused ecosystem, for example, a customer could use a single platform to fulfil their journey from searching for a new property to its ultimate sale. Interim actions supported by the digital platform could include financing the property purchase, obtaining insurance, completing renovation works, moving in and property management. Services provided could include a mix of banking services, such as mortgage pre-approval, mortgage loans, house insurance, credit cards, investment advice and renovation loans, as well as numerous non-banking services, including estate agency, legal advice, architecture and design services, utilities, contractors, moving services and furniture retail.

Many different customer needs can be addressed through ecosystems. For example, we have supported a client in developing a platform to create and support an ecosystem of players focused on business customers in the agriculture and food sector. The platform allows bank customers to access numerous services for the development of their business and take part in a supportive network.

Services may be offered through a differentiated services model, reflecting different customer preferences and differing service provision costs. Some services might be provided for free, others through paid subscription packages and some made available on-demand on a pay-per-use basis, or along the lines of current banking services.

Three core approaches are open to Indian banks when launching an ecosystem offering. As a builder, the bank owns the platform as well as all the products on the platform – an approach that requires heavy investment in order to provide all the products and services across an end-to-end customer journey for a specific need. Alternatively, a bank could strategically position itself as an integrator, owning the ecosystem platform and orchestrating a mix of in-house and third-party products – an approach requiring strong partnership capabilities and organizational agility. Thirdly, a bank could opt to be a provider, offering its products and services to digital platforms owned by third parties – requiring less investment but still based upon digitized banking products and a compelling go-to-market proposition.

Types of Digital Ecosystems

Businesses typically either focus on in-house ecosystems or partnership-based ecosystems. Both approaches have their advantages, but they require different strategies and resource allocation.

1. In-House Ecosystem

One type of digital ecosystem is when a single company offers a suite of interconnected products. Together, these products address a variety of consumer needs. Often the pieces of the suite work together so that a customer can access extra features or improved functionality if they use more than one.

Example is Microsoft, which offers a range of business products, including a cloud platform, productivity tools, and devices to host all that software.

2. Multi-Company Partnership

This type of digital ecosystem is when two or more companies partner to offer collaborative products or services. This is not a merger or acquisition—all participating companies contribute to and benefit from the network. These ecosystems come in many sizes. They might be made up of just two companies or a huge number.

Example: Amazon has a core network of 67 partners.

Benefits of Building a Digital Ecosystem

A good digital ecosystem can make your company more agile, help lower costs, and open new revenue sources.

1. Prepared for economic change or global issues

A set of partnerships or products can help company adapt to rapid economic changes. If demand drops for one product, you can change your strategy to focus on another without having to start from scratch. Or you can lean on your partner companies. With combined resources, you might be able to pivot more quickly to meet changes in demand.

2. Build customer loyalty with a ‘family’ of products

Encourage people to buy from you by offering a suite of interconnected products. It’s more convenient for customers if they can get everything, they need in one place. Incentivize them even further by providing package discounts if they buy multiple products at once.

Apple has one of the most complete product families of any company. It sells a full range of products that work together in a user-friendly manner but aren’t easy to pair with non-Apple devices. Apple laptops, tablets, and smartphones all come equipped with Safari (Apple’s browser), iCloud (Apple’s cloud platform), and the Apple App Store.

3. Create new revenue streams

Partnering with companies that already have the infrastructure in place allows you to roll out new products or services in a shorter time. In some cases, it can shorten your time-to-product by months.

4. Lower customer acquisition costs

One other way a digital ecosystem can benefit your company is by making it less expensive to acquire new customers. Multi-company ecosystems give you access to an expanded customer base without spending additional money on advertising or other customer acquisition costs (CAC). According to a McKinsey study, banks with robust ecosystems see 10-20% savings on CAC.

 Banking and Digital Ecosystems

Now coming to the banking sector, the next few years could be a make-or-break period for some banks. They will join the digital financial ecosystem movement—or be consumed by it.

These platform-based ecosystems offer products and services that are created and distributed in partnership with others. And they confer powerful advantages, allowing organizations to enter new markets, create new services, and acquire new customers faster and more affordably than with traditional product development and go-to-market models.

Traditional companies are investing occasionally but companies from outside the traditional banking arena are investing heavily. Big-techs, such as Google and Amazon, are using their deep technical prowess to integrate payments and financial services capabilities into a variety of ecosystem offerings. And financial technology companies are chipping away at value chains that banks once dominated, attracting customers with niche services tailored to their specific segment needs.

Banks are holding back because of uncertainty. Given the risks of moving away from existing business models, the fear of cannibalization, and the intricacies of partner-based initiatives, not even the largest and best-resourced institutions are certain which approaches can deliver the greatest risk-adjusted returns.

Ecosystems are the unavoidable next step in digital disruption for the financial services sector. The hyperconnectivity that digital tools and channels enable has blurred traditional boundaries between brick-and-mortar and web environments and between the four walls of an enterprise and the wider value chain.

Tech leaders have popularized the ecosystem concept, delighting consumers and business customers with “one-stop shopping” experiences and integrated journeys that fold partner-developed financial solutions into their online platforms, apps, and services. Today, with a swipe on a phone or the click of a few buttons, customers can complete many financial activities without any direct engagement with a bank.

This ecosystem innovation is giving bigtech and fintech creators more market power. In China, for instance, Alipay has largely replaced traditional short-term deposit, payment, and credit card services. And in Singapore, DBS’s PayLah ecosystem allows customers to make cashless payments at thousands of locations, interact with vendors to get exclusive promotions, and integrate with other digital wallets such as Google Pay.

Ecosystems are the next step in digital disruption for the financial services sector.

Recognizing the threat these challenges pose, several established banks and financial institutions are beginning to mobilize. However, only a few of the world’s largest and best-resourced banks are backing ecosystem development in a concerted fashion—a discovery that should set off alarm bells for the industry at large.

Over the last six months, BCG analysed the activities of the largest 100 financial institutions as defined by market capitalization at the end of 2021. Using public information on business activities and partnerships, they assessed the extent to which banks were engaged with business ecosystems, whether by creating and orchestrating their own or by contributing to those created by others. From this analysis, BCG has examined the correlation between a bank’s ecosystem engagement and its financial performance and capital market valuation—and extracted a set of strategic plays.

Here are some key findings from our research.

• Most banks are still in test-drive mode. This failure to leap into the ecosystem movement in a targeted way is leaving massive value creation at stake—and giving a significant leg up to peers that have embraced this shift.
• Winners could achieve superior market performance. This stronger capital market performance is not just driven by expectations of future earnings but also by stronger fundamentals. Ecosystem investments and business model shifts can go hand in hand with strong value for institutions.
• Competition for value is likely to intensify. Over the next decade, expect ecosystems to drive a massive shift in value. However, bigtechs and fintechs are likely to pursue that value for themselves. Horizontal players, vertical specialists, and niche solution providers from within and outside the traditional financial services sector are attacking the banking value chain from all angles. Many are well-funded. And bigtechs that today focus mainly on the point of sale could use their resources and sizeable market share to acquire dominance in other parts of the financial services industry.

Strategic Plays Best Suited to Existing Banks

Existing banks and financial services institutions have different needs, ambitions, and starting points and are different from than the typical fintech or bigtech. They face a tougher problem to compete in business ecosystems without reducing their core business and capabilities that have been built for decades.

There are four ecosystems that an organization can give strong marketplace advantage.  Three are creator strategies and one contributor’s strategy.

1. Build an ecosystem around the core and play as a creator.

Under this model, organizations serve as the primary creator, building an ecosystem that is closely tied to their traditional core business. They partner with businesses in different domains to build the ecosystem, then bundle their financial products with complementary offerings. This archetype is suitable for banks that command strong share in a specific market, or that wish to transform into an ecosystem player outright.

Example: HSBC, for instance, launched an ecosystem called Business Go to extend its core banking services and deepen relationships in the SME market in Hong Kong.

2. Go deep into specific verticals and markets.

With this strategy, financial institutions build ecosystems in specific industry sectors where they have strong existing penetration and growth prospects, offering their core products and services to these segments and tailoring or introducing others to provide additional value. In this model a bank would partner with one or more large players in each industry to help reach scale quickly, enabling all participants to benefit.

Example: DBS has pursued vertical ecosystem plays. They established the DBS Marketplace, consisting of seven ecosystems each focused on a specific sector such as real estate, travel, and health.

3. Use ecosystems to learn and experiment.

With this strategy, banks and financial services institutions use digital ecosystems as a learning lab to enable experimentation, diversification, and piloting to deal with external opportunities and threats. Institutions can use these incubators to explore new products and business models, access new technologies, and gauge which concepts have the potential for substantial commercial upside. This archetype can be a safe and effective way for banks to experiment before committing the core business.

Example, ANZ, BNP Paribas, Citi, Deutsche Bank, HSBC, and Standard Chartered founded Trade Information Network in 2018 as a data registry to support the digitization of global trade through enabling the exchange of original trade information between the buyers, suppliers, and financiers around the world.

4. Play as a contributor.

There are several ways in which banks can capture value on platforms managed by others. One is to be a generic contributor and embed white-labelled products and services such as payments or loans in non-proprietary ecosystems as additional avenues to drive growth.

Example, Goldman Sachs provides embedded financing through its ecosystem relationships with Apple (such as Apple Card) and Amazon (Small Business Loans) as part of its newly formed Platform Solutions division.

The most successful banks build, test, and refine two or three ecosystem archetypes in parallel.

Execution of Digital Ecosystem

A successful ecosystem strategy is not just about good ideas, but good ideas delivered well. There are several steps to help banks do this. The major step is to be deliberative and take the time upfront to determine what strategy archetypes best align with the bank’s capabilities and market ambition. Failure to think through the details and business case can result in sub-scale investments and diminished returns.

The most successful large banks have studied and develop two or three ecosystem archetypes and build, test, and refine them in parallel. Some ideas will not work out but understand that the knowledge gained from these efforts will help refine overall ecosystem strategy.

Banks need to determine the most effective way to execute an ecosystem. Don’t immediately assume the answer is to build own ecosystem. Banks may find that contributing to an existing ecosystem can be a much faster route to scale and a smart way to gain needed learning before investing in a new ecosystem. Banks that serve as an ecosystem contributor need to define clear competitive and financial objectives to avoid margin erosion and cannibalization.

To be commercially viable, the ecosystems must offer digitally native products that can be sold on platforms and marketplaces. Bank offerings must have easy onboarding features that enable them to acquire customers at scale, as well as automated credit decisioning capabilities that allow them to make loan offers in real time. In support of this, banks must invest not only in product development but also in the underlying ecosystem “engine”—and build integration layers, authentication layers, APIs, standardized data models, and AI algorithms that can support multiple ecosystems plays. Top-performing institutions will also create asset libraries stocked with reusable components and features.

Banks that win the ecosystem game from a cost and market leadership perspective make a point of reusing core capabilities to launch multiple bets sequentially and iteratively. This approach helps them gain speed and efficiency advantages and stay ahead of the market.

Business ecosystems can be a game-changer for banks, giving them the means to grow into new markets, acquire new customers, and enrich their portfolio of offerings. But it requires that financial institutions devise a ecosystem strategy that is aligned to the business’s customer and commercial ambitions, while crafting a roadmap that considers the required capabilities and investments. Those that approach the ecosystem opportunity in an assertive and purposeful way can de-risk complexity and returns—and gain a jump on slower and less disciplined competitors.

Achieving change depends on multiple factors. It’s vital that banks become truly digital, embracing technology to improve customer experience. They can use data analytics to understand their customers fully and design personalized, real-time products accessible through multiple channels. Customer service operations themselves are evolving, with the potential to transform from reactive cost centre to proactive value generator.

Across the wider organization, banking operations are ripe for radical and holistic change. Legacy system issues need no longer hold back new operating models, which can now take advantage of developments in cloud services and open banking. Indian banks can also explore new ways to capture market value by developing an ecosystem offering – bundling services beyond banking to serve customers better.