The Banking Industry and Digital Innovation: in Search of New Business Models and Channels

Abstract

The financial sector plays an essential role in the development of the contemporary economy, which is not likely to ever change due to its systemic nature. However, conventional banking is becoming a thing of the past as significant changes in demographic, societal, technological, economic, regulatory and legitimacy-related aspects of banking reality change the feasibility of present business models, pressuring for radical adjustments. Banks are also finding themselves under pressure from shadow banks, FinTech firms and lower-cost challenger banks as entries to the sector have risen. Non-bank financial institutions have different advantages over traditional banks due to different competencies and while they pose a threat of disruption, they also covet some of the resources that banks have access to. This article is an attempt to review and categorise the main trends affecting the environment of the financial industry basing on various empirical and non-empirical works of other authors, followed by a synthetic overview on how incumbents and entrants are innovating in a race to design a new valid business model. We aggregate those insights to assess the potential of disruption versus equilibrated cooperation using Disruptive Innovation Theory and Core Competencies theory and conclude that convergence between the two types of financial entities is likely, bringing an end to banking as we know it. We project that the business models will be evolving towards an opti-channel approach, whereby continued innovation enables the emerging alliances of banks and FinTech companies to reach the customer via their most preferred channel and offer a highly individualised service.