Both banks and airline companies operate in a complex and highly regulated environment. They have high capital requirements and need to invest heavily in their infrastructure. The arrival of low-cost carriers changed the playing field in the airline industry. It did not however make traditional airline companies redundant. The rise of Fintech companies will definitely change the banking industry, but in parallel with the airline industry it will not oust traditional banks. Banks do need to adapt to this changing world by focusing on areas where they really add value and start to form commercial alliances to maximize the utilization of their infrastructural assets.
Similarities between the two industry
An airline’s core function is to bring passengers from A to B. It utilizes capital intensive assets while working in a highly regulated environment to ensure health and safety of all involved. Banks transform the surplus of A to meet the deficit of B (the asset-liability transformation). They apply systems and infrastructure in a highly regulated environment to ensure trust in the system is maintained.
That is not the only similarity. Traditional airlines with their hub and spoke model are confronted with a new and disruptive entrant to their business model: the arrival of low-cost point-to-point carriers. Even though barriers to entry are high, low-cost carriers have been successful in eating away market share of the traditional airlines. Low-costs carriers were able to start from scratch and were not limited by an older fleet or loss-making routes. They were much more focused on specific routes and bringing cheap solutions to meet the travelers’ needs. Also they created a new earnings model by selling ancillary services, like catering and preferred seating.
Not much different than what Fintechs try to achieve in today’s banking industry: improve customer experience in all aspects of the asset-liability transformation at a lower cost.
Responding to disruption
Traditional airlines react in different ways to deal with the new competitors.
- By entering and further extending their global alliances, they provide passengers with a more seamless flight network and a more beneficial loyalty program. These alliances allow a more efficient use of planes and systems. Banks can adopt a similar strategy by combining back-office processing, while maintaining brand recognition and customer loyalty.
- Airlines understand the new entrants’ business model and copy elements of it in their own strategy, such as flexible pricing structures, paid services and better customer service.
- Also by adjusting the routes offered and let certain routes be solely serviced by low-costs carriers, traditional airlines remodeled their strategy.
- Finally traditional airlines put new brands in the market to compete with low-costs carriers or take ownership stakes in them.
Four key takeaways
With this in mind, banks should consider to form cross-border banking alliances, especially in the highly fragmented European banking landscape, to consolidate back-office assets while maintaining the individual client bases. Combining these assets reduces the costs per transaction and improves the execution of some low value-adding back office tasks that that are operationally and regulatory required. This would result in cheaper services, faster execution and better customer experiences. A second consideration should be the development of better loyalty programs to strengthen customer bonding. Why not receiving loyalty points every time you transfer money or trade your shares via your bank account? Another option is to allow specialized providers to take over certain areas where costs are high and banks cannot make money, such as in compliance. Finally, setting-up or buying a challenger bank next to the existing organization will keep clients ‘in-the-house’. It presents a new, cheaper and faster customer experience in specific parts of banking. And at the same time it won’t suffer from the costly legacy infrastructure.
Learning and growing
Banks can learn from the parallels with the airline industry. Adapting the business model to constant change, accepting capital requirements and regulation as a given, and focusing at its core strength. New challengers will not make traditional banks redundant. To the contrary: banks should learn from them, develop with them and sometimes even let them take over parts of our business where they are better equipped.