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Financial Services

What the BNPL Battle Tells us About How Australia’s Banks Approach Innovation

By Adam Flesch, Senior Director Strategy and Consulting, Publicis Sapient

Buy now, pay later (BNPL) has emerged as the latest battleground between incumbent banks and challenger brands. However, from an incumbent’s point of view, the battle is less about competition for the BNPL segment itself as it represents a relatively tiny market compared to the overall consumer finance revenue pool, both today and in the foreseeable future. For incumbents, competing in this market presents an opportunity to identify, justify and scale up their best strategies to quickly and successfully transform themselves into future-proof businesses.

The BNPL market is a novel market segment built around new customer and merchant value propositions with an innovative business and revenue model. It provides incumbent banks a relatively low-risk, ringfenced test market to experiment with new technologies, fintech partnerships, platform services, and to demonstrate to customers their overall value chain strategy and customer lifecycle approach.

The Australian major banks have approached the BNPL challenge in significantly different ways.

These range from total ignorance of the segment’s importance, to mimicking the leading BNPL proposition in the market with a technology-centric approach of building and leveraging state-of-the-art, front-to-back technology stack. Some apply a more traditional internal product development response with launching an innovative card product to compete with BNPL offerings, while another approaches involve the bank partnering with a leading BNPL provider to offer a white-label product manufacturing and tech platform capability with some distribution and commercial agreements in the background. 

Which one is the right approach? Well, it may be too early to draw that conclusion. But, Australian banks’ widely different responses to the BNPL phenomenon illustrates that we are reaching a point of divergence in the local banking market’s evolution.

At today’s heightened pace of change and need for transformation, the ability to identify the right strategic responses, take bold and unorthodox actions, and execute changes rigorously and at scale will be what makes current players the future leaders.



Catalysts for change

This comes at a time when customers are demanding more from banks, both locally and globally. They expect digital experiences that match those offered in other sectors and other countries. The COVID pandemic has only accelerated consumer adoption of digital channels.

Newcomer digital attackers in the banking market use sleeker, smarter back-stage technology and are able to harness data to offer innovative services that fit neatly into consumers’ lives. Incumbent banks, tied to legacy systems, are confined to product silos and have a limited ability to tap into and use the massive volumes of data available.

Incumbent banks that fail to respond to this threat by fast-tracking their own digital transformation risk not only losing customers, but also carry higher costs than their competitors, limiting their ability to self-fund their ongoing transformation trajectory.

Heightened competition is just one factor driving Australian banks to renew their focus on digital transformation.

Record low interest rates are putting margins under pressure just as remediation costs are at all-time high.

Banks are running major projects in response to regulatory changes brought about by Open Banking, Consumer Data Right (CDR). Huge teams are working to improve controls, increase customer orientation and remediate issues uncovered by the Banking Royal Commission. 

Heightened competition is just one factor driving Australian banks to renew their focus on digital transformation.

COVID has brought forward projects and revealed new areas requiring urgent attention ranging from distributed ways of working to branch network consolidation.

Operational costs are also rising with credit decision making processes having become more stringent.

Banks know that legacy technology is not flexible or secure enough to cope with emerging demands. It is unable to capture or process the volume of data needed to improve customer insights, allow business decisions to be made in, or near, real time or support changes required by Open Banking and CDR.

Banks know that better technology is available in the form of cloud-native next-generation core banking platforms. They are working hard to develop new data management capabilities supported by artificial intelligence. They have started off with business, product and process simplification, and they are driving digitalisation and automation initiatives.

These actions bring cost-to-income benefits while improving customer and banker experiences. They are relatively straightforward levers for incumbents in Australia today. The difficult part is making the change from old to new, aka “the migration pathway”.



Lessons from the leaders

Banks around the world are approaching the migration from various angles and are achieving varying degrees of success.

Internationally, the leaders are the banks that have taken an aggressive approach.

In Asia, intense competition from tech giants like Tencent and WeChat, and high rates of digital adoption have spurred all major banks in the region to action. Siam Commercial Bank (SCB) and Bangkok Bank are examples of leaders.

These banks have delivered state-of-the-art mobile-only propositions on next-gen core banking infrastructure that allows new features and services to be added in weeks rather than months.

They are launching disruptive value offerings to customers, such as Bangkok Bank’s Mobile Banking which gives customers unprecedented control over their financial data and access to more than 100 features that cover banking, mutual funds, insurance and forex.

Similarly, Lloyds in the U.K., following years of bank-wide incremental digital transformation activities, realised it was moving too slowly, and certain legacy bottlenecks were too difficult to overcome. Despite having had reaped significant benefits from evolutionary transformation activities in the past, the bank decided to build a new state-of-the-art front-to-back cloud-native, next-gen technology stack and has started to migrate its core customer business over. Its earlier success in eliminating departmental silos and focusing on customer experience had yielded the bank immediate improvements. Its loan success increased, while revamped on-boarding processes for new customers slashed the time it takes to open a savings account by one third. Yet, moving to a data-centric, cloud-native modern tech stack proved to be an inevitable transformation step.


Internationally, the leaders are the banks that have taken an aggressive approach.


Roadmap to success

Successful digital transformation requires five components.

  1. The first is to migrate core infrastructure to the cloud. Cloud-core banking will enable new capabilities, using best-of-breed components to differentiate value propositions and improve operations, and unlock the power of data.

  2. Next, banks should build their own challenger tech stack that is cloud-native, modular, microservices-based using open Application Programming Interface (API) architecture, leveraging next-gen core banking platforms with an integrated data infrastructure at the heart. Lloyds, SBC and Bangkok Bank have benefited from this approach. It can take different forms, but building a system in which every component from front to back uses new and best-of-breed technology offers a rapid pathway to the future that is ultimately less costly than an incremental approach.

  3. In parallel, banks need to simplify and streamline operations. This involves simplifying products, reducing process complexity and automating. End-to-end straight through digital processing should be applied to high-business-value and high-cost areas, such as onboarding and credit origination for retail credit applications and customer servicing. The aim is to cut costs, achieve a single universal customer view and prepare to migrate to the new stack without baking in unneeded complexities.

  4. With smoother operations, banks should scale up the future stack by developing and launching new offerings through their challenger. Rapid scaling is critical to improving returns on investment and building momentum for the broader bank. It also means cultivating new ways of working and new technology capabilities.

  5. The final stage is to migrate the existing customer portfolio and business operations to the new tech stack. There will always be a period in which legacy core and next-gen cloud-native core coexist. Certain elements of the business may benefit from staying on legacy components for longer than others. Successfully navigating this stage requires an agile and iterative design approach driven by customer value and business risk considerations.


By no means are Australia’s major banks lagging, but to keep pace with the global front runners, we believe they need to take bolder, more deliberate steps with their transformation strategies.


Australia’s major banks are working through key design questions that arise in the initial stages – such as selecting the right transition strategy from the legacy to next-gen model and determining timing.

Meanwhile, they are attempting to simplify and streamline operations and simultaneously launch their versions of a digital challenger.

By no means are Australia’s major banks lagging, but to keep pace with the global front runners, we believe they need to take bolder, more deliberate steps with their transformation strategies.

Australian banks’ varying responses to the BNPL opportunity anticipates rather heterogenous transformation trajectories in the years to come. Drawing on the direct experiences of leading global players with regards to transformation strategies and execution approaches can be a game changer – something that we can provide relevant expertise on locally.


Dr. Adam Flesch
Dr. Adam Flesch
Senior Director, Strategy and Consulting

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