Banking is no longer confined to brick-and-mortar institutions. From neo-banks to AI customer support to invisible banking, how customers perceive finance and banking has shifted.  

In this dynamic environment, banks must adapt and diversify their sources of income to stay competitive. In this article, we take a journey through four key strategies that can allow banks to generate new income and become pioneers in the ever-evolving world of finance.  

4 potential revenue streams for modern banks  

Embedded finance

Embedded finance, or Banking-as-a-Service (BaaS), is the financial industry's answer to a world where customers expect fully personalized and seamless experiences.  

The BaaS market was valued at $66.8 billion in 2022 and is projected to reach $622.9 billion by 2032.  

Banks can provide financial infrastructure through APIs. Through these APIs, businesses can offer their customers a tailored experience replete with branded credit cards, insurance products, loans, embedded payments, and much more.  

For banks, this provides several benefits:  

• New revenue streams: Sources include service fees, API subscription fees, and commissions.    
• Acquisition: At a fraction of the standard costs, banks can reach a much larger customer base  
• Cost-effective: The infrastructure and IT already exist; it’s just a matter of adapting them for a BaaS model and third-party usage.  
• Forward-looking: The BaaS model allows banks to reach new customers and adapt to the changing landscape.    

Integrating crypto services  

After a sharp dip in 2021, the digital asset market is expected to reach $56.42 billion this year, and research predicts a market value of $102 billion by 2027.  

Mastercard research has revealed that 65% of customers are interested in their bank offering crypto services. And, according to Visa, 35% of crypto owners surveyed indicated that they are likely to switch to a bank that offers crypto products within the next 12 months.    

Although there are risks, it’s clear that there is a place for crypto products from banks and other financial institutions.  

With the introduction of the MiCA (Markets in Crypto-Assets) regulation in the EU, companies that offer crypto services must gain licenses from national authorities and implement security measures and AML compliance. While this may seem like another barrier for banks hesitant to enter the digital asset space, working with crypto-native fintech organizations will help banks overcome this safely.  

Some services that banks can offer include:  

• Onboarding: KYC, AML checks, and compliance with regulatory requirements  

• Asset management and custody solutions: For institutional clients and high-net-worth individuals, cryptocurrency custody services allow them to manage their entire financial portfolio, both fiat and crypto.    
• Trading services: Customers can buy, sell, and trade cryptocurrencies directly through their bank accounts.  

Offering crypto services has a wide range of benefits for banks:  

• Diversified revenue streams: New income opportunities for banks include transaction fees, custody fees, and trading commissions.  
• Customer attraction and retention: Banks can attract a tech-savvy and younger customer base looking for integrated crypto services, increasing customer loyalty.  
• Increased investment opportunities: Banks can provide access to the liquidity of the cryptocurrency market, expanding investment options for their clients.  
• Enhanced security: By leveraging their existing security infrastructure, banks can offer a higher level of security for cryptocurrency holdings.  
• Competitive edge: Banks that integrate cryptocurrency services position themselves as pioneers in the evolving financial landscape.  

Tokenization  

Predicted to reach a market value of $10.75 billion by 2030, the tokenization sector has great potential to revolutionize how we manage, trade, and perceive assets.  

Tokenization is the use of smart contracts and blockchain technology to represent ownership or rights to an asset. Banks can provide asset tokenization services that involve evaluating assets and then converting physical or financial assets into digital tokens on a blockchain.  

It should be noted that under the MiCA regulation, set to come into full effect at the end of 2024, banks will be required to have a certain level of equity to offer these services. Again, partnership with crypto-focused fintechs will help set out a fully compliant path for banks.  

Tokenization benefits include:  

• Tokenization fees: Banks can charge fees for the tokenization process, custody, trading, and secondary market services.  
• Enhanced liquidity: Tokenization makes traditionally illiquid assets more liquid and accessible for investors.  
• Market expansion: Attract new customers and investors looking to diversify their portfolios with tokenized assets.  
• Compliance and trust: Banks can ensure that the tokenization process adheres to legal and regulatory standards, providing trust and security to investors.  
• Competitive position: Banks can establish themselves as leaders in the evolving world of asset tokenization.  

AI-powered personal finance management  

AI-Powered Personal Financial Management (PFM) is a cutting-edge approach for banks to offer customers highly personalized financial advice, insights, and recommendations.  

Source  

Banks already have access to huge swathes of customer data. With permission, AI can analyze a customer's financial behavior, goals, and risk tolerance to provide tailored financial recommendations.  

Benefits include:  

• Enhanced customer engagement: AI-driven financial advice keeps customers engaged with the bank's services, increasing customer loyalty.  
• Increased assets under management: By offering personalized investment recommendations, banks can attract more customers to invest through their platforms.  
• Cost savings: The aggregate potential cost savings for banks from AI applications is estimated at $447 billion in 2023.  
• New revenue sources: This service can be monetized through subscription models, service fees based on assets under management, or as a premium feature for certain account tiers.
• Competitive advantage: Offering advanced AI-driven financial advice sets banks apart from competitors and fintech startups.  

Future-proof your revenue streams  

The future of banking is marked by innovation, convenience, and personalization. Banks that adopt these strategies are poised to deliver exceptional customer experiences and unlock new revenue streams. By combining traditional financial services with cutting-edge technology, banks can not only thrive in the digital era but also shape the future itself.

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