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What Australian Banks Should Learn From the Buy Now, Pay Later (BNPL) Phenomenon

Dr. Adam Flesch
Dr. Adam Flesch

Buy now, pay later (BNPL) has emerged as the latest battleground between incumbent banks and challenger brands. For incumbents, the battle is less about competing for the BNPL segment itself, and more about 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 and platform services. It can 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. Some have overlooked this segment’s importance, while others are 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 stacks. It may be too early to determine the perfect approach, but Australian banks’ widely different responses to the BNPL phenomenon illustrate a point of divergence in the local banking market’s evolution.

With 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 transforms current players into future leaders.


Dr. Adam Flesch

Senior Director Strategy & Consulting, Financial Services, Publicis Sapient

Catalyst for Change

Catalysts for change

Customers expect digital experiences that match those offered in other sectors and other countries; the COVID-19 pandemic has only accelerated consumer adoption of digital channels. In banking, new entrants use sleeker, smarter back-stage technology and harness data to create innovative services that provide greater convenience and ease of use for consumers. Incumbent banks, tied to legacy systems, are confined to product silos and have limited ability to tap into and take action against the massive volumes of data available.

Record-low interest rates are also putting margins under pressure just as remediation costs are at an all-time high. Banks are running major initiatives in response to regulatory changes brought about by Open Banking and Consumer Data Right (CDR). Huge teams are working to improve controls, increase customer orientation and remediate issues uncovered by the Banking Royal Commission.

Finally, COVID has revealed new areas requiring urgent attention ranging from distributed ways of working to branch network consolidation. Operational costs are also rising with more stringent credit decision-making processes.

Incumbent banks that fail to respond to these threats by fast-tracking their own digital transformation risk not only losing customers, but also carrying higher costs than their competitors, limiting their ability to self-fund their ongoing transformations. 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 digitalization and automation initiatives.

Lessons from the leaders

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

In Asia, intense competition from tech giants like Tencent and WeChat with high rates of digital adoption have spurred all major banks in the region to action. A leading bank in Thailand has delivered state-of-the-art, mobile-first experiences built on a next- generation banking infrastructure that allows new features and services to be added in weeks rather than months. The Bank's new mobile banking app gives customers unprecedented control over their financial data and access to more than 100 features that cover banking, mutual funds, insurance and the foreign exchange market.

Similarly, in the UK, Lloyds Banking Group’s investment in digital transformation has proven successful in eliminating departmental silos and focusing on customer experience. This has delivered increases in loan success while revamped on- boarding processes for new customers slashed the time it takes to open a savings account by one third. Now they are looking ahead at ways to accelerate transformation and increase the speed to market for customer focused innovations underpinned by cloud technology. In March 2020, they announced a long-term partnership with Google Cloud to drive its digital evolution. The bank’s ongoing investment in digital-first transformation to deliver best-in-class customer experiences is yielding value for both customers and the business.

Roadmap to Success

1. 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. Build a 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. 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. 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. Scale up the future stack by developing and launching new offerings through their challenger product. 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. Move 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, they need to take bolder, more deliberate steps with their transformation strategies. Drawing on the experiences of leading global players, their transformation strategies and execution approaches can benefit banks as they take on similar initiatives.

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

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