In our previous blog post we considered the evolution of digital banking and the types of services available. In this edition our focus shifts to the development of a viable plan.
The creation of a digital bank starts with a single idea - to create something new and better. The question is how this idea can best be brought to life. We recommend taking a structured approach for the creation of the new venture:
- First, from problem statement to value proposition, to ensure you create a unique value proposition tailored to customer needs
- Second, from value proposition to business plan, to ensure there is a suitable business case
Then, following an iterative process the idea is gradually firmed up, tested and built into a complete proposition and business plan.
Where’s the value?
A value proposition is a description of the value a company plans to deliver to customers when they use its product or service. A strong proposition tailored to customer needs is vital to be able to create a viable business.
The development of a value proposition starts with the definition of the problem statement. A problem statement is a concise description of an issue to be addressed and aims to identify the gap between the current (problem) state and the desired (goal) state of a process or product, in a specific region and to a specific customer segment.
The definition of the problem statement requires a full strategic view of the market, customer needs and pain points. This allows you to identify specific market opportunities and figure out why better solutions are not yet available.
After the initial problem statement definition, it is important to validate it. This will help you better understand the selected market and assess the financial viability early on. In parallel, the goal is to develop detailed customer profiles with key characteristics, needs, pain points and behaviour. Finally, a competitive analysis helps further identify the key players, their strengths and weaknesses, and how to potentially differentiate.
Design thinking methodology and tools are used to create a value proposition in a creative yet structured and effective manner. Potential solutions are then screened and curated based on a defined set of selection criteria, such as the problem-solution fit, user friendliness, technical feasibility, and revenue potential.
One of the key aspects of a client-centric and user friendly proposition is to offer convenience by combining multiple solutions for customers. Through economies of scale, these multi-product/multi-service propositions tend to be more financially viable.
Once the optimum proposition or propositions have been selected, a mock-up version or (if possible) a minimum viable product or MVP of the value proposition is to be created.
The goal of this process is twofold. Firstly, for the project team to get a common and unified understanding of the value proposition, since at this stage of the process it is not unusual for widely varying interpretations to exist, and secondly to test and refine the value proposition as quickly as possible following the agile adage: fail early, learn fast.
In order to test and refine the value proposition, it is crucial to identify the most risky assumptions on which the success of the value proposition depends.
In any business development process, but especially in the digital banking arena, it is vital to address the potential monetisation of the product or service at this stage. Digital banks tend to focus on creating the customer experience but struggle to generate revenues - a focus at an early stage on the business model will help improve the chances of developing a viable business.
It is recommended to test and refine the value proposition as often as needed to arrive at a satisfactory value proposition. During the testing phase, it is important to formulate specific, measurable, attainable, realistic and timely (SMART) performance metrics.
In addition, it is important to predefine what a successful test should look like, as testing is only really effective when also considering the option that the envisioned solution does not work (yet).
In parallel with the ongoing testing and refinement of the value proposition, the business model must also be developed. This describes your propositions including the target clients and distribution, key activities, and financial overview of revenue and cost.
The business model canvas (BMC) has become a leading tool for this design, providing a well-structured way to embed your value proposition into three key business development areas:
Commercial - The customer relationship describes the type of relationship to establish and through which channels. These can range from personal to automated, transactional to long-term, and can aim to acquire customers, retain customers, cross-sell and/or upsell. The type of customer relationship influences the overall customer experience.
The customer segments include a detailed description of customer demographics, financial behaviour, values, etc.
Operational - The key activities provide a high level description of the core processes required to deliver the services. The key resources provide an overview of the financial, human, intellectual and physical resources required to operate. Typically, digital banks have a relatively low amount of physical resources (employees) and high levels of intellectual resources leveraging proprietary technology.
The key partnerships describe the level of engagement with third parties, ranging from strategic alliances (with both competitors and non-competitors) to buyer-suppliers. In recent years, the dominant partnership models have been largely shifting to platform and ecosystem approaches. Many digital banks adopt a business model heavily reliant on partners throughout all areas of the business, from commercial front- to operational mid- and back-office activities.
Financial - The financials include both the cost and revenue for the value proposition, and form the first step into a business case. It is important to understand whether you are operating a cost-driven or value-driven business as the former is based around low-priced value propositions, lean operations and economies of scale while value-driven models are based around premium priced value propositions, with better service.
While digital banks typically aim to offer a premium customer experience, at the same time they operate a cost-driven model attracting customers with competitive pricing (such as free current accounts or market leading interest rates).
While it is seemingly a simple exercise to complete a BMC and create your business model, it is important to conduct a proper exercise. The goal is to create the comprehensive business model needed to assess technical and operational feasibility, as well as the financial viability of the endeavour prior to making a sizeable investment decision.
A detailed business model, backed by additional research, provides the foundation for the business case. The business plan allows for refinement of your business model and enables you to communicate your plans with investors, regulators and partners.
It is critical to build a detailed and realistic business plan, as many digital banks fail to create a financially viable business. And this is not only an exercise for the end of the process - it is a question that must be considered early to be gradually detailed with each step of the process.
The business plan is best created by a financial expert with a critical and independent view. At the same it is crucial that the business case is built upon the same foundation as the business model - which often goes wrong.
Therefore, the financial expert should be part of the process of creation from problem statement to business model development and on to the business. Similarly, the other team members should also be involved in developing the business case.
The revenue side is derived from the identified market potential and the validated value proposition in combination with the commercial inputs from your business model.
The cost side is derived from the key activities, resources and partnerships in your business model and should consider both one-off investments and operational costs. The cost structure significantly depends on the value proposition and operational set-up.
In addition to the income statement, the balance sheet with the assets, liabilities and capital structure needs to be detailed. The capital structure is especially important for financial institutions as a banking licence requires certain levels of capital.
After completion of the full financial plan, it is important to critically assess the outcome and challenge the fundamental assumptions once more. This assessment allows you to refine your business model and enhance your business case.
It is recommended to reassess the complete business model. There is almost always room for business model optimisation before changing the value proposition.
It is very likely that adjustments will be necessary in order to enhance the business case. However, it is important to note that changes to the business case also require changes to the business model.
The business should also provide a clear picture of the product roadmap, including the MVP and additional product launches until completion of the full proposition. The timing of product launches will have a large impact on the financial plan.
The MVP is often too narrow and insufficient to run a viable business. Detailed insights into the impact of new products will help decide the product portfolio roadmap. Similar to the evaluation of the business model, the product roadmap also needs to be continuously reviewed in conjunction with product development experts in the team.
After several iterations of the value proposition and product roadmap there should be a coherent business plan with a validated value proposition and business model. The business model provides the foundation for the design of the new venture. The financial plan provides an overview of the required budgets, potential revenue and (expected) time to break-even.
In the next blog in this series we will look at the implementation phase of building a digital bank with particular emphasis on the target operating model, processes and activities, and technology as well as the human resource requirements.
How to successfully build a digital bank blog series
This blog post is part of a special series around successfully building a digital bank. These are all the blog posts in the series for further reading.
|1||Digital banks that do it well|
|2||The evolution of digital banking|
|3||Neobank, keys to develop a winning business plan|
|4||How to build a digital bank|
|5||Regulatory framework: required to provide financial services|
|6||How to scale a neobank|
The content of these blog posts was written with our exclusive guide 'How to successfully build a digital bank' in mind.
This is a three-step guide that will take you through what kind of digital bank to build, including the value proposition and business plan; how to build a digital bank, with a detailed description of each of the key elements including the regulatory framework, organisation design, technology, and people capabilities; and finally how to scale a digital bank into a sufficiently large and sustainable business.
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