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New business models, big opportunity: Financial services
The financial services industry is turning to bold initiatives to propel from pandemic response to business growth.
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In association with Oracle
By any measure, 2021 corporate planning isn’t business as usual. As the coronavirus pandemic grinds on, financial services institutions are coming out of crisis mode— addressing immediate cash management and operational challenges—with a renewed readiness for business growth.
Fortunately, most businesses across industries are doing a good job of navigating the pandemic and its economic fallout. According to a survey conducted by MIT Technology Review Insights, in association with Oracle, 80% of executives feel upbeat about their companies’ ultimate objectives for 2021. They’re either expecting to thrive—that is, sell more products and services—or change the way they do business. The worldwide research surveyed 297 executives in more than a dozen industries, primarily finance directors, C-suite, and information technology (IT) leaders. Forty-four, or or 15%, of the execu-tives work at banks or other financial services institutions.
That 15% is a bold bunch—93% of them have over the past year made at least one big business move, overhauling tech infrastructure, for example, or acquiring or merging with another company—and nearly 80% will change the way they do business, by pivoting to new markets or focusing on better customer experiences.
New business models, big opportunity: Financial Services
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More motivated than ever, organizations in all industries are ready to cut expenses that lack a clear return on investment. So it’s no surprise that survey respondents highlight computing projects—all highly measurable— as priorities in their 2021 plans. Among financial services institutions, 62% are looking to ramp up tech investments, and another 62% expect to move IT and business functions to the cloud, compared with 46% across industries. In a recent report, Nucleus Research found that cloud deployments deliver four times the return on investment as on-premises deployments do.
Planning beyond the pandemic
The Guardian Life Insurance Company of America is an exemplar of a progressive cloud adopter—it’s now moving many of its core financial systems to the cloud. The insurer was motivated to do so—an internal study had found several opportunities, including insufficient data management, a need for lower-level data for better analytics, a lack of system integration, and manual reconciliation issues. “These pain points helped create the need for a new system,” says Marcel Esqueu, assistant vice president for financial systems transformation at Guardian. “We looked at moving to the cloud about five years ago, but we didn’t think it was ready.” Now the company deems cloud services mature enough to support the advanced functionality it requires.
Financial institutions are also looking at mergers and acquisitions as a path beyond pandemic survival. In fact, according to a Reuters report, such deals were up 80% in July, August, and September 2020 from the previous fiscal quarter to hit a whopping $1 trillion in transactions. In the MIT Technology Review Insights survey, 41% of financial services execs report that their organizations acted on a business merger or acquisition or will do so over the coming year.
“People have realized they need to consolidate to create stronger and better-equipped businesses to deal with what the world looks like going forward,” says Alison Harding-Jones, managing director at Citigroup, in the Reuters report.
Mergers and acquisitions have long been a way for an organization to expand its core business—or even gain expertise in emerging technologies. For example, while many financial institutions buy business software with built-in artificial intelligence (AI) capabilities, Mastercard acquired a Canadian AI platform company called Brighterion in 2017 to provide “mission-critical intelligence from any data source,” says Gautam Aggarwal, regional chief technology officer (CTO) at Mastercard Asia-Pacific. The company first used Brighterion’s technology for fraud detection but now puts it to work in credit scoring, anti-money laundering, and the company’s marketing efforts. “We’ve really taken Brighterion and applied it not just for the payment use case but beyond,” says Aggarwal.
Business change, outside and in
Indeed, organizations have had to innovate and respond fast to survive in the covid economy. In the survey, 81% of organizations across industries have evaluated new business models in 2020 or are planning to launch them over the next year. Among financial services institutions, improving the customer experience is paramount, with 55% reporting that they’re improving the experience they offer their customers, compared with 35% across industries.
That’s true for Jimmy Ng, group chief information officer (CIO) at Singapore-based DBS Bank. When physical branches closed during lockdowns, DBS customers— like other bank patrons the world over—did their banking online. But some of them did so only because they had to. “The question is whether this group of people will continue staying on the digital channel.” So DBS is exploring ways to keep customers who prefer in-person service engaged, exploring technologies such as augmented and virtual reality and the 5G mobile network, which enables superfast connections. “How do we enable a joyful customer journey in this remote way of engagement?”
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The banks’ business model – between function and transformation
Perspectives.
Mon 11 Dec 2017
The vast array of legal and supervisory requirements for determining a business model draws attention away from the inherent and indispensable need that a successful entrepreneur has for such a model. In the past, was an entrepreneur who had decided to run a bank ever asked about their business model?
What is a business model?
Magretta delineated the business model from the point of view of an entrepreneur: “Who is the customer? And what does the customer value? It also answers the fundamental questions every manager must ask: how do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?” According to Skarzynski and Gibson, “We define a business model as a conceptual framework for identifying how a company creates, delivers and extracts value. It typically includes a whole set of integrated components, all of which can be looked on as opportunities for innovation and competitive advantage.”
Business models have many dimensions and levels. The traditional view has not lost its significance, even if business models today are presented as a type of unit of analysis going beyond the traditional approach. This requires that the company asks itself about not only the benefits that it brings to the customer, but also about which sources it can generate profits from along the value chain. A company must deal with the dimensions of effectiveness and efficiency in its work, which ultimately determine its comparative competitive advantage. This can be defended both commercially and with regard to the competitive position achieved. Determining a business model continues to bring together customer and corporate perspectives through the overarching objective of generating and securing a competitive advantage. An essential dimension in determining a business model is innovation, and the customer remains the primary reference point for this. Therefore, the questions that traditionally have to be asked are: what is a bank to a customer? Or: which services do customers expect from a bank? What are the company’s profit sources and influencing factors?
What customers expect from a bank , by which means and via which methods customers’ wishes are fulfilled, as well as how these services can be rendered while generating sustainable corporate success, have fundamentally changed in recent years. Today’s technical possibilities also provide customers with the transparency to compare and use not only the market for the bank services they are looking for, but also the market for other providers. Today, business models must reflect the evolutionary and disruptive changes in economic and social communal life. Customers are not interested in the generalised services offered by the bank, but rather in the tailored solutions offered to help them attain their specific life goals, which are determined ever more strongly by digitalisation (as a transformative process in economic areas).
Banks are facing new competitors that are not even banks, but are, for example, FinTechs and RegTechs. The financial services market is being penetrated ever more rapidly by companies from the technology sector, since these companies are not burdened by prior developments in the financial services market. These companies offer products that are, for the most part, subject to fewer regulatory requirements than traditional banking business, in particular in the area of payment services.
Banks’ typical and most important profit source , interest income, has fallen away to an enormous extent. The intensifying competitive situation for banks has already been accompanied by a persistently low interest rate phase for a very long time. Naturally, the low interest rate environment most intensely affects the collective savings and risk models, such as those of a building society. Overall, a weakening of a large number of banks can be observed as a consequence. The growth in the income sources of fees and provisions has not compensated for the decline in interest income so far.
The changed role of banks is reflected in the development of the DAX, in the domestic product and in the number of staff employed at banks. However, financing the economy remains an important macroeconomic responsibility of the banks.
The number and complexity of the legal and supervisory requirements of companies that offer bank services to customers has expanded enormously. The objective of reliably ensuring the banks’ role as important financial intermediaries is, however, also associated with rules that place definite limits on business models. Implementing the legal and supervisory requirements is therefore associated with a considerable financial impact, which is even more daunting in the face of weakened profit sources from the regulated activity.
Responding incorrectly to these business administration issues is not the only way in which a company can end up in a situation that threatens its very existence. More than just painful consequences can arise rapidly for companies that use the business model of a bank and yet do not recognise the sensitive and multidimensional interaction between legal and supervisory regulations tied to the business model and business strategy. For example, the minimum requirements of risk management require that the directors set out a sustainable business strategy that illustrates the objectives for the business activity and the measures that must be taken to achieve these. The business strategy must encompass the objectives for managing the core business activities and the measures to achieve these objectives, in particular with regard to the earnings situation; this requires familiarity with the profit sources. The accounting standard IFRS 9 “Financial Instruments” – the central standard for illustrating the business activity of financial instruments in the annual financial statement, including evidence of success – is linked to the business model. Meanwhile, this is the basis for regulatory reports published by banks. The connection between a business strategy that is to be determined according to the minimum requirements of risk management and the underlying business model for classifying the financial instruments, which is in accordance with IFRS 9, is therefore given a key role, even if the business strategy and the business model have other aggregation levels or evaluation levels. The requirements for determining the business model from the perspective of risk management and accounting are the basis not only for the evaluation of a bank by the market and by the supervisory authorities, but also for determining the very expensive maintenance of minimum capital.
New information technologies are seen as a solution in the fight against the loss of customers and in the fight for profitability in the traditional banking business.
Generating regulatory efficiency is one of the most important management topics in determining the key to success for banks. For example, RegTechs are the result of the search for efficient technological solutions for implementing the increasingly complex legal and supervisory requirements of banks. The use of innovative technologies, such as big data and data visualisation technologies, cloud-based services, block chain technologies, components of artificial intelligence and technologies that relate to the specialist and functional/process perspectives, are expected to provide efficient solutions.
A strong position in the banking market arises from a deep understanding of the customer. Large quantities of inhomogeneous data are processed at high speed from very different sources and with a wide variety of structures. Big data is an important production factor. The quantities of data and data points that can be evaluated are continuously increasing with the growing digitalisation of business models. To this end, company-internal data are generated using scientific research results from neuroscience, risk research, psychology and criminology. These data quantities are becoming an important asset.
This puts the issue of data security as competitive safeguard on the agenda. Cyber risks are developing as a new risk field. The increasing importance of data processing and technological information and communication networks requires that transactions are secured (cybersecurity). Modern technologies lead, on the one hand, to cost savings, but on the other hand, they result in an increase in costs for securing the data. The cost of big data may also arise from legal uncertainties associated with its use. The collection, analysis and generation of structured and unstructured information about customers and their behaviour are confronted with European data protection principles and regulatory frameworks (e.g. the General Data Protection Regulation – GDPR).
In conclusion: it is not without reason that the analysis of the sustainability of the business model as an elementary competitive factor for surviving rapid change processes is an essential component of the Supervision Review and Valuation Process (SREP) of bank supervision. The analysis of the business model focuses in particular on the success and risk drivers that the directors of the bank must be familiar with and that must be documented in a suitable manner for communicating to the supervisory authorities. The selection of a business model determines both the realisation of profits and the cost-risk structure. Cost minimisation and the analysis of profitability are consequently core elements of the supervisory authority’s business model analysis.
Modern technologies, such as block chain, the Internet of Things, machine learning, biometrics, cloud computing, internet technologies, ascertaining and using a virtual organisation as well as the reintermediation and the disintermediation of internet-based markets have found their way into the banks’ market. A financial market based on modern technologies will change continuously and ever more rapidly, requiring more than just an adjustment of business models; the development is associated with new risks, which must be anticipated in good time not only by companies, but also by the supervisory authorities.
Example: information technology as a key factor in business models
An example of a bank that recognises new information technologies not only as a factor for success, but has also made them a central element of its business model, is the Russian Sberbank. Its declared objective is to be a fully integrated financial institute with a comprehensive product range. This bank has made technological innovation the basis of its business model in order to become a market leader in the newest digital mobility and social technology, cybersecurity, analytics and working with big data. In the last few years, Sberbank has concluded its transformation from a type of savings bank into a general financial services provider. A high-performance infrastructure and highly effective IT systems are implemented to design and monitor both business processes and systems along the value chain in a standardised manner and to minimise the time taken for new product developments to launch on the market. The consistent automation of working areas in a large number of sectors led to changes in management hierarchies and to increasing centralisation. Computerisation also took place in specialist areas in which the replacement of highly qualified academics with machines was unthinkable just a few years ago, such as in the legal department, where, for example, even statements of claims are partly dealt with using artificial intelligence. The CEO of Sberbank estimated in 2016 that in five years’ time, artificial intelligence systems would be able to take over 80% of the decisions made in the bank by humans. The bank has already replaced thousands of employees with “robots”. By focusing on the development of technologies and innovations, the provision of new bank services for customers, such as consulting, IT training, the provision of cyber insurance policies (combined with consultation in the area of insurance cover) and cloud computing, was expanded. Virtual laboratories and cyber practice areas, as well as collaborations with universities and globally leading IT companies, form the foundation for further innovation processes.
Compared with standardisation as a solution for increasing efficiency and reducing costs, implementing tailor-made concepts for customers appears at first glance to be inconsistent with business objectives. Innovative information technologies are, in many respects, the key to minimising costs for Sberbank, on the one hand in relation to the organisation of business processes and on the other hand in relation to risk costs. The use of big data led to a reduction in non-performing loans. By using big data, it was possible to offer loans tailored to the needs of the customer which also have comparatively low and risk-adjusted interest rates.
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S.1255 the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Senate Banking Bill”) was passed on March 14, 2018 after a strongly bipartisan 67-31 vote. On May 22, 2018, the House passed the Senate Banking Bill with 258 yeas (225 Republicans and 33 Democrats) and 159 nays (1 Republican and 158 Democrats). The bill […]
Sizing Up Amazon Web Services
Fintech is prominent in today’s business lexicon, having migrated from the back office to a prominent position in both consumer and commercial finance. Its core functionality on mobile devices and wide application in artificial intelligence (AI) spans blockchain, smart contracts, banking, insurance, regulation and cybersecurity. And Amazon Web Services (AWS), a major cloud player, is […]
Implications of the Revised Banking Chart of Accounts for the West African Financial System
Reforms to an accounting system that has been in force for nearly 20 years will help to increase the security and robustness of the West African financial system, while improving the quality of financial reporting. The Revised Banking Chart of Accounts has been adopted by the monetary authorities in the course of convergence towards Basel […]
Action Plan for Banks in the West African Monetary Union
A new prudential framework applicable to banks and credit institutions in the West African Economic and Monetary Union (WAEMU) is set to come into force on 1 January 2018. However, a significant delay has been observed in implanting reforms in the majority of banks, where the scale and implications of the necessary work are widely […]
Podcast: Why banks need to address cyber security
In this podcast Greg Simpson discusses cyber security with our expert Francisco Sanches. They discuss major threats such as emerging risks, FCA guidance on cloud data storage and the cyber security skill gaps to name a few. Podcast player
The Evolution of Banking
Over a decade ago looking at the state banking webpage for my home state of New Jersey, there were approximately 250 banks doing business in the state then. A similar check today would yield a list of less than 150 or so; a more than 40% decline. With banking regulation at an all-time high, the […]
New constraints threaten the future of internal model approaches
At the same time as regulators as a whole express their support for the harmonisation, transparency and comparability of banking models at the European level, a new consultative document published by the Basel Committee on 24 March 2016 partly calls into question the use of internal model approaches when evaluating credit risk. The release of […]
Italian banking – a Brexit-fueled calamity
Brexit continues to dominate the political and financial world across Europe and beyond as people wrestle with its impact. But there’s another massive storm on the horizon for the EU that has been brewing for some time and Brexit may well have brought forward its impact: The Italian Banking Crisis. As reported in the Wall […]
BCBS’ amendments on Simple, Transparent and Comparable (STC) securitisations
As implied in the BCBS consultative document on November 2015, the BCBS published new standards on 11 July 2016 to include amendments on STC securitisations and thus make its final decision for their calibration. The securitisation framework was highlighted in the 2008 financial crisis because of the major role of subprimes in the collapse of […]
Data governance : the key to reconciling contradictory requirements
Confronted with legislation that is becoming increasingly constrictive, banks must optimize the management of their data. It’s a challenge that is compounded by the fact that data is often dispersed throughout information systems – a fact that aggregators are capitalising on to offer new multi-bank applications. Banks have a role to play in detecting abnormal […]
Innovation in payments with Compte Nickel
Compte Nickel is a current account service accessible to all. Operated by the Financial Supervisory Committee of electronic payments (EPF), this new payment account which has been launched recently in France can be opened in 5 minutes at a newsagent/tobacconist by anyone regardless of income requirement. Ryad BOULANOUAR, President of the the French Financial Supervisory […]
Harmonisation of internal model approaches, a new era for banks?
Basel 4 and Single Supervisory Mechanism act to reduce the excessive variability in the results of internal model approaches to credit risk. For more than ten years, Basel reform has encouraged the development and use of internal models designed to better place risk management at the heart of banks’ control arrangements. Basel II saw massive banking […]
Capital Markets Union: The Impact on Banks
Business funding diversification, helping to increase options for savers and making the economy more resilient are some of the main objectives set out in the European Commission’s Action Plan on Building a Capital Markets Union (CMU) published on 30 September 2015. While a better spread of financing sources over the capital markets, insurers, households and […]
Latest consultation puts systemically important banks (G-SIBs) under the microscope
On 6 April 2016, the Basel Committee published a new consultative document outlining revision plans for the calculation of the leverage ratio and submit proposals for additional requirements applicable to systemically important banks (G-SIBs). This new consultation comes as no surprise. Since 2014 the leverage ratio, calculated by dividing Tier 1 capital by the bank’s […]
Banks: Five Tactics to Survive Fintech Disruption
The revised Payment Services Directive (PSD2) that comes into force in January 2018 will essentially remove many of the barriers to new players looking to enter the payments market by providing access to customer data and accounts through an EEA wide common legislative platform. Already under pressure from regulatory change and increased competition PSD2 is […]
Permanent tsb: Digitalisation’s role in the ethical banking mix
The arrival of technology has been a game changer for Ireland’s banking industry. Niall O’Grady Commercial Director of permanent tsb (PTSB) talks to Liam McKenna Partner Consulting Services – Mazars Ireland, about how the bank is using digitalisation to create more meaningful relationships with customers. Liam McKenna: Where does technology fit into PTSB’s proposition – as an […]
Digital Finance : Meeting Ethics and Compliance Challenges in Financial Services
We recognise digitisation as an important topic for the financial services industry; for this reason, we have developed a content programme with the Economist Intelligence Unit that focuses on how Financial Services companies are adapting their risk and reporting procedures to the new digital environment. This unique programme of thought leadership examines the new challenges in […]
The use of Big Data tools to improve the effectiveness for AML/CFT and KYC policy
A series of initiatives designed to help combat terrorism financing have put electronic payment cards in the spotlight due to the fact they guarantee anonymity in the use of small sums. Announced on 23 November 2015, these initiatives supplement the action plan for combatting the financing of the terrorism presented by the Minister on 18 […]
Creating a Digital Map for Unclaimed Policies
3 Questions to Mister Doe When it comes to the administration of dormant bank accounts and unclaimed life policies, the quality of data, the inflexibility of internal procedures and complex processing is causing banks and insurers big problems. Vladimir Nguekam, CEO of digital analytical firm Mister Doe talks to Mazars about how taking a digital approach […]
Digital Banking: Lessons from Millennials
By 2025, The Wall Street Journal ([1]) estimated that Generation Y, also known as Millennials, would represent nearly half of the total active population in the world. The challenge for banks is to adapt their strategy to match Generation Y consumer habits and behaviours. Unlike previous generations, Millennials have the increased ability to choose between […]
Risk culture and supervision: beyond the box-ticking exercise, striving for fair balance
Since the 2008 crisis, the financial sector has been under scrutiny. Identified as one of the crisis root causes, the importance of risk management framework and risk culture and its interconnectedness to ensure the long run financial stability of each organisation has been revealed. Accordingly, institutions are expected to develop an effective risk management framework […]
Simplicity is a complex issue
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A good bank requires good supervision
To be a ‘good bank’, a bank must be efficient, innovative and trustworthy. Given its central role at the heart of the economy and financial system and the risks associated with fulfilling its role, banks have to operate within an environment subject to laws, regulations and directives. Outcomes can often be subject to the constraints […]
Ifs and Buts
The Brexit debate last week was overshadowed by Theresa May becoming the UK’s new Prime Minister and some of her more radical appointments to her Cabinet. On top came the horrific terror attack in Nice and the failed coup d’état in Turkey. Understandably, the core Brexit debate did not take centre stage but instead provided […]
Brexit: opportunities for smaller overseas banks
The impact of Brexit on foreign banks, and especially the larger ones, has already been the subject of extensive media coverage and speculation. Discussions on the advantages and disadvantages of Brexit for larger overseas banks have been wide-ranging. Will the uncertainty over business models be solved in the short or mid-term? Would relocation bring cost […]
Podcast: Banking Regulatory Outlook
Along with Mazars banking regulatory advisory specialists Pauline Pelissier and Audrey Cauchet, Greg Simpson provides an overview of the banking regulatory outlook in the UK and Europe over the next 12 to 18 months. They also discuss IFRS9 in the context of regulatory treatments, credit risk management, non-performing loans, CRD5 and CRR2. Podcast player
Empower your people to protect the bank
Cyberattacks aren’t just getting more frequent, they are also becoming significantly more vicious and sophisticated. The majority of today’s data breaches result from human error, making cybersecurity a “people problem” as well as a technology issue. The solution to this people problem can’t be solved by purchasing new hardware or software or implementing sophisticated network […]
The Supervisory Answer to Hong Kong’s Worsening Economic Performance
Pierre Latrobe at Mazars discusses the measures the HKMA has taken so far to strengthen its macroprudential supervisory toolkit and address potential risks to the wider financial system. The Hong Kong economy is suffering from several lingering negative factors, the US-China trade war, the global economic slowdown and the ongoing protests, to name but a […]
Four routes to better mobilisation of capital in Europe
Efficient supervision of capital markets is a priority of the Capital Markets Union (CMU) given its role in facilitating market integration and European cross-border transactions. But there are currently a number of supervisory barriers halting progress of European mobilisation of capital that now need to be addressed urgently. Following discussions at the CMU’s mid-term conference […]
Podcast: Implications of Banks Implementing IFRS 9
Greg Simpson, Head of Banking UK and banking experts Paul Hodgett and Pierre Latrobe discuss the implications of IFRS9, more specifically they share some of their experience on helping banks implement IFRS 9. As the standard starts on 1 January 2018, they will also comment on some of the areas that banks need to consider […]
Unilateral deregulation by the USA would lead banks to seek new trade-offs
Solvency, liquidity, transparency and oversight requirements: as the Basel Committee meeting in Santiago, Chile in November 2016 demonstrated, there is still much to be discussed on the finalisation of the Basel III agreements. However, the inauguration of the new President of the USA could change the condition of the international dialog. Some might decide to […]
IFRS 9 new provisioning and the phase-in period of regulatory capital: a discretionary approach
In about nine months, IFRS 9 will replace IAS 39 and the new accounting environment won’t be the only element to be impacted. In recent months, the Basel Committee on Banking Supervision (BCBS), the EU Commission and the European Banking Authority (EBA) have also been tackling the impact of the new IFRS 9 provisioning on […]
A closer look at the factors underlying the decision to sell NPLs in Italy
There is a clear pipeline of jumbo disposal Non-Performing Loans (NPLs) in Italy, thanks to the ECB push, however vendors will need to take into careful consideration a few factors in their decision, such as recent regulatory reforms of insolvency and foreclosure and a possible EU bad bank. 1. ECB Push Europe’s NPL assets are […]
EBA opinion on IFRS 9 and the impact on regulatory capital
After the Basel Committee consultation in October and then the European Commission’s legislative proposal of the package CRR II / CRD V in November 2016, the EBA has now given its opinion on the management impact of IFRS 9 on regulatory capital, notwithstanding a second impact study has just been completed. This opinion, primarily addressed […]
Creating a compliance pathway for dealing with NPLs
Non-Performing Loans (NPLs) are a key issue and will continue to be on the European agenda as a top priority for a long time. On the one hand, the ECB guidelines are already applicable, as they represent a best practice reference for the day-by-day work of the Joint Supervisory Teams. On the other hand, the […]
Are you prepared? New York State issues new BSA/AML/OFAC transaction monitoring and filtering program regulation
Recently released guidelines require institutions to adopt risk-based programs to monitor and filter transactions for potentially suspicious activity. Beginning January 1, 2017, financial institutions registered under the New York banking law are responsible for complying with anti-terrorism transaction monitoring and filtering program regulations, established by the New York Department of Financial Services (NYDFS). Last month, […]
What’s at stake with the ECB draft guidance to banks on non-performing loans?
The European Central Bank (“ECB”) recently launched public consultation on guidance to banks on non-performing loans (“NPL”). Consultation periods runs until 15 of November 2016. As NPL harms the profitability, funding and capital of banks and more globally the real economy, the ECB issued this guidance, aiming to achieve common practices for how to handle […]
Arkéa Banking Services : Innovation in Banking
Arkéa Banking Services began life in 2009 by offering white label banking services on behalf of third parties. CEO, Christophe Bitner tells Mazars why offering support to Fintechs is now an important next step. What’s the driving force behind the evolution of Arkéa Banking Services and what are the levers for growth? Christope Bitner: when the […]
Brexit – playing for a draw?
On 20th October, I was delighted to chair an event in collaboration with OMFIF on the implications of Brexit for the financial services industry. We had an excellent panel of experts representing banks and asset managers as well as the City of London in general. The event was badged as a 100 days post referendum […]
SEC Adopts Amendments to Investment Adviser Act Rules
On August 25, 2016, the Securities and Exchange Commission (the “SEC” or the “Commission”) adopted amendments to various rules under the Investment Advisers Act of 1940 (the “Act”). The amendments will be effective 60 days after the date of publication in the Federal Register, but investment advisers are expected to comply with the amendments after […]
Digital finance: governance & blockchain
“Blockchain is a bit like gluten. Everyone is talking about it, but no one knows what it is,” said Tim Swanson, head of research at R3, the financial technology innovation firm that is leading a consortium partnership working on blockchain to develop industry-wide common practices and standards, architecture models and specific transaction systems for use […]
Sustainable banks must manage their risks
At a time when the European Banking Authority’s stress tests have provided valuable insights into the solvency levels of European banks, these banks are continuing their efforts to formalise the conceptual and operational framework of risk management. While changes in capital requirements (the Basel Pillar 1 quantitative requirements) still command the attention of bankers and […]
BREXIT! – Not GREXIT?
Greece’s financial systems have been tightly monitored by the institutions – once called the Troika – of ECB, IMF and EU Commission in recent years. The systemically relevant Greek banks are under close control of the Joint Supervisory Team (JST), consisting of staff from the European Central Bank and members of the Bank of Greece, […]
IBOR Reform – key takeaways
With significant IBOR reform on the horizon, Mazars brought together industry experts, practitioners and regulators to discuss the challenges and opportunities they face. Speakers included the Bank of England Market Division’s Alastair Hughes, EFRAG’s Didier Andries and Mazars’ IBOR lead, Pauline Pelissier. From a comprehensive and illuminating session, Pauline sums up the key takeaways: “What […]
A looming climate crisis?
Persistant negative interest rates, the inherent risk of a trade war between China and the United States, fears of a recession… all worrying signs of an imminent new crisis. However, the real question is not if but when the next crisis will hit. More than ten years after the financial and sovereign debt crisis, it […]
Conduct Risk should not be underestimated during IBOR Transition
With little more than two years to go, Libor’s cessation date continues to near. The voluntary agreement of panel banks submitting to Libor will conclude at the end of 2021, from which risk-free rates (RFR) are expected to replace Libor and similar indices. Are corporates paying enough attention to Libor updates? Libor’s cessation should be […]
First ACPR climate stress test pilot exercise results
Climate change introduces considerable economic challenges. On the one hand, financial institutions must contribute to the transition to a low-carbon and balanced economy to effectively combat global warming. On the other hand, the financial sector is exposed to climate-related and environmental risks and therefore needs to implement appropriate risk management practices within a financial stability […]
Can banks balance the opportunities and challenges of digitalisation?
The Covid-19 pandemic has amplified technology’s impact on the banking sector, helping to prove that technology now stands at the core of business sustainability for banks. In their constant search for convenience, digitally-savvy customers have pushed banks’ focus towards providing global business solutions more than ever. A new normal has emerged: an environment where banks’ […]
New European authority aims to strengthen framework to fight money laundering
The creation of a new Anti-Money Laundering Authority will transform the supervision of money laundering and financing terrorism (AML/CFT) in the EU. Proposed reforms also extend the AML/CFT rules to all crypto-asset service providers, as well as include specific rules concerning due diligence on customers and beneficial ownership. It is expected that some of these […]
Regulated firms: A matter of life and death
As the PRA transitions from a “rule-taker” to a “rule-maker”, small and medium-sized banks operating in the UK can expect to benefit from a more “streamlined” regulatory regime that could be easier to interpret, implement and maintain; but at the same time, they can also expect the PRA to be progressively more involved in scrutinising […]
NPL secondary market may solve the increase in credit risk
The identification and management of non-performing loans or NPLs as early as possible by banks are among supervisors’ current high-level priorities. Indeed, when prudential, monetary, and fiscal crisis mitigation mechanisms are tapered, the weakening of borrowers’ creditworthiness could materialise, along with increasing credit risks and therefore NPLs. This expected rise of new NPLs in European […]
The road to implementing the final Basel agreements
The unveiling of the new banking package “CRR3 – CRD6” on 27 October 2021 presents a further landmark on the road to implementing the final Basel III agreements. The regulatory scheme will also focus on the revision of the market risk framework from January 2019, as well as the latest developments in pillar 3 requirements. […]
Banking consolidation in Europe: What can we expect?
The low level of banking consolidation in Europe compared to other countries is raising concerns among the supervisory community in Europe. It is a trend further reinforced after the financial crisis of 2007/2008 that produced a noticeable slowdown in consolidation operations in the EU. So what has been the impact, and what can we expect […]
The Single Supervisory Mechanism: Post-pandemic actions and expectations
On 30 July, the European Central Bank unveiled the 2021 supervisory stress test results, which demonstrated that the region’s banking system is resilient in an unfavourable environment. The Common Equity Tier 1 (CET1) ratio has fallen 5.2% to 9.9% under the 3-year adverse scenario, while under the baseline scenario the CET1 ratio will reach 15.8% […]
Sustainability and climate risk: what can banks expect?
The growing importance of sustainability issues and the role of credit institutions in financing transformation places climate and environmental risks at the core of regulatory and supervisory scrutiny today. For some years now, the Network for Greening the Financial System (NGFS), comprising central banks and national supervisory authorities, has been working to enhance sustainability and […]
How banks can address supply chain risk
Local and international trends have transformed the way banks operate, affecting their capital positions and profitability. In particular, ongoing digitalisation programmes and technological innovation continue to add pressure on traditional banking models, including the supply chain. While management’s focus on capital preservation, profitability and growth for shareholders remains, risks from an operational perspective have intensified. […]
Five steps to transforming banking operating models
With the current ultra-low interest rate environment and market volatility having a negative impact on banks’ returns and, ultimately, their capital positions, operating models must quickly adapt and become more cost-efficient to maintain profitability. This drive for cost-efficiency has become more apparent as innovation in technology and ongoing digitalisation have further upended traditional banking systems […]
2021: The year of Brexit for banks
Brexit, or the UK’s departure from the European Union, became a reality on 1 January 2021. In terms of the regulatory impact for the financial sector, and the banking sector in particular, the UK being a third country, UK banks can no longer benefit from the European passport for their continental activities. Therefore, they can […]
EBA: draft technical standards on Pillar 3 disclosures of ESG risks
On 1 March 2021, the European Banking Authority (EBA) launched a public consultation on draft implementing technical standards (ITS) for Pillar 3 disclosures of environmental, social and governance (ESG) risks, under its capital requirements regulation (CRR) mandate. The consultation will end on 1 June 2021. Large banking institutions with securities traded on a regulated market […]
Achieving digital operational resilience
The digitalisation of banking processes and the introduction of AI-led technology impact the central and strategic role of information systems within the banking system. The growing use of information and communication technology (ICT) exposes all financial institutions to an increasing level of digital risk that could weaken their operational resilience, in particular, due to more […]
Key takeaways & industry challenges following the ECB TRIM project – a focus on credit risk (Part 2)
The Targeted Review of Internal Models (TRIM) was one of the largest projects by the European Central Bank (ECB) aimed at identifying potential sources of unwarranted or non-risk based variability in Significant Institutions (SIs) risk-weighted assets (RWA) from the use of Pillar 1 internal models such as Probability of Default (PD), Loss Given Default (LGD) […]
The Basel Committee: updated guidance on the external audit of banks
Against the background of a new year still severely affected by the persistence of the pandemic throughout the world and economies facing an unprecedented global macro-economic shock, the Basel Committee has felt it necessary to address the audit of the expected credit loss (ECL) accounting estimate within the overall financial statement audit. With IFRS 9 […]
The imperative of expanding the traditional MRM function
Financial institutions and non-bank financial technology companies (FinTechs) alike make extensive use of various machine learning models (MLOps) in core and non-core areas of their business. Banks, for example, rely on such models for a range of risk assessments, including predictive underwriting, credit risk management, suspicious and/or fraudulent activity management, fair lending compliance, derivative and […]
Quarterly SSM briefing: spotlight on supervisory priorities, banking union and liquidity ratio
Supervisory priorities 2022-2024 In December 2021, the European Central Bank (ECB) and the national supervisory authorities of the Eurozone countries published their supervisory priorities for 2022-2024. The three-year coverage enables the ECB banking supervision to achieve good progress in addressing the identified vulnerabilities while at the same time affording enough flexibility in any corresponding actions […]
Managing an increase in bank credit risk
While 2020 went relatively smoothly for the banking sector, uncertainties remain on the potential effects of Covid-19 on the real economy. Any negative impact could lead to heavy losses for the sector, especially when support measures are gradually phased out. These measures have not only contained the anticipated increase in credit risks, but have also […]
The digital euro: the future of central banking in Europe?
Central Bank Digital Currencies (CBDCs) continue to receive increasing attention not only from the ECB but all over the world. So far, 10 countries [1] have already deployed CBDC programmes with another 15 countries [2] currently conducting pilot programmes. In total, 105 countries are considering using CBDC programmes, representing over 95% of global GDP and […]
Spotlight on main European banks’ credit risk
After two years marked by the Covid-19 crisis, the first half of 2022 offered the prospect of a return to a certain economic normality. However, the outbreak of war in Ukraine combined with a deteriorating economic environment have reshuffled the cards and once again brought banks into a zone of turbulence and uncertainty. So how […]
EBA considers bottom-up stress testing with top-down elements
The European Banking Authority (EBA) is tasked, in cooperation with the European Systematic Risk Board (ESRB), to initiate and coordinate biennial EU-wide stress testing exercises to assess the resilience of institutions to adverse market developments. The objective is to provide supervisors, banks, and other market participants with a common analytical framework to consistently compare and […]
The FED announced a pilot climate scenario analysis exercise for early 2023
The Federal Reserve Board (FED) will commence its first bottom-up climate scenario analysis exercise at the beginning of 2023, as announced on 29 September. The exercise will be exploratory in nature and will not result in extra capital requirements. The list of designated participants consists of six of the largest U.S. banks, i.e., Bank of […]
Results of the ECB 2022 climate risk stress test
The first supervisory climate risk stress test (2022 CST) conducted by the European Central Bank (ECB) has concluded with official results and findings made public on 8 July 2022. The exercise has complemented the broader ECB’s agenda to assess the readiness of banks in Europe to manage climate-related and environmental risks. The 2022 CST was […]
How to address climate risk in the banking prudential framework
Climate change is now firmly in the focus of prudential regulators and supervisors across the globe. Against this background, the European Banking Authority (EBA) is mandated to assess whether a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and social objectives would be justified. Based on its findings, the […]
Quarterly SSM briefing: stable supervisory priorities and the ECB’s green agenda
The last few weeks have been marked by an ongoing review of the supervisory priorities initially listed by the Single Supervisory Mechanism (SSM) for 2022-24, and developments in the climate agenda outlined by the European Central Bank (ECB). ECB’s supervisory priorities for 2022-24 remain stable despite geopolitical instabilities and challenges At the beginning of 2022, […]
The return of inflation: what consequences for banks?
For several months now, we have been in an economic and financial environment that we have not seen for some years. In May, inflation in the Eurozone reached 8.1%, with six countries exceeding 10%, while the United States recorded an 8.6% year-on-year price increase. The short-term reasons for the return of inflation are well known, […]
Leveraged transactions: supervisory expectations in the Eurozone
The chair of the European Central Bank’s Supervisory Board, Andrea Enria, has voiced several times in the past months the supervisor’s concern with the increasing growth of the leveraged finance sector, which deals with loans to highly indebted borrowers. By mid-2021, the combination of a strong global loan moratoria policy and the long-standing low interest […]
Implications of Covid-19 for the LSIs and the supervisory focus: an interview with Patrick Amis, ECB
On 19 January 2022, Mr Patrick Amis, the head of ECB Directorate General Specialised Institutions and Less Significant Institutions (DG/SPL) had a formal meeting with Mazars to discuss the implications of the pandemic for the LSIs and the supervisory focus. The main risks outlined by Mr Amis, were in the areas of NPLs, digitalisation, IRRBB, […]
Impacts and consequences of the war in Ukraine for banks and insurance companies
The war in Ukraine, as well as the unprecedented sanctions imposed by the European Union, the United States and their partners against Russia have had major consequences for financial services institutions. For foreign companies operating in Russia or Ukraine, the first concern was the safety of their staff. They had to make difficult choices to […]
Can markets in crypto-assets (MiCA) give banks a regulatory edge?
Crypto-asset markets have been on banks’ radar for some time. While interest and involvement have varied, regulatory developments have been a driving force. In September 2020, the European Union (EU) published a proposal for the regulation of Markets in Crypto-assets (MiCA), offering a uniform legal framework for crypto-assets in the EU. On 14 March 2022, […]
Banks need to step up efforts on climate and environmental risk disclosures
In March 2022, the European Central Bank (ECB) published its second snapshot of climate-related and environmental risk disclosure levels among significant institutions under its direct supervision. In line with the results of the first snapshot published in November 2020 – regarded as the baseline measurement – none of the institutions in scope for this second […]
Prudential risks for banks with a Russian presence
The invasion of Ukraine by Russia on 24 February 2022 is considered the most significant geopolitical event since the Second World War. While there is no question of military intervention by the European Union (EU) at the moment, the EU has nevertheless decided on a major package of sanctions that will have a heavy impact […]
EBA launches a central database for AML/CFT
A central database to strengthen the anti-money laundering and counter-terrorist financing (AML/CFT) framework was launched by the European Banking Authority (EBA) on 31 January 2022. Called EuReCA, the new database will be essential to coordinate efforts by national competent authorities and the EBA to prevent and fight money laundering and terrorist financing (ML/TF) risks throughout […]
Fast close implications for real estate management companies
The market is seeing a growing trend for real estate management companies seeking to speed up the process of closing their accounts. This is largely due to the positioning of real estate funds in life insurance contracts requiring increasingly shorter valuation intervals. Furthermore, as the regulatory obligation to publish Net Asset Values (NAVs) within the […]
The long road to proportionality in prudential regulation and supervision
The great financial crisis triggered a massive wave of bankruptcies in the worldwide banking sector, affected not only large international banks such as Lehman Brothers but also local ones such as Northern Rock in the UK. Basel prudential standards are designed to cope with financial risks stemming from the global banking system without taking into […]
Shaping the future of banking with 5G
Over the past decade, the financial services industry has been disrupted by the arrival of new players whose rise to prominence has pushed traditional banks – previously faced with little competition – to transform themselves. In this context, technology and innovation, particularly 5G, will allow the most skilful and agile banking organisations to take advantage […]
The impact of credit risk on 2021 stress tests
On 13 November 2020, the EBA published the final methodological note for the 2021 EU-wide stress-testing exercise. The aim of the stress tests is to assess the resilience of financial institutions to adverse economic and financial developments, in particular in the event of an increase in credit risk due to the default of the borrower. […]
Climate change valuation adjustment: introducing a climate change scenario extrapolation to long dated CDS curve
The global climate crisis has triggered the financial sphere to address the way in which it conducts business. Climate risk consideration is currently growing in the banking industry but should also be considered by banks in the Credit Valuation Adjustment (CVA) when pricing derivatives. The credit risk for long dated derivatives (beyond 10 years), reflected […]
COVID-19: Phase 1 of SFTR delayed
The European Securities and Markets Authority (ESMA) has issued a public statement to announce the delay of the industry’s compliance with phase one of the Securities Financing Transactions Regulation (SFTR). This is in response to ESMA’s awareness of the financial industry’s struggle to devote resources to comply with the new reporting obligation, as firms face […]
Progress on transitioning to SONIA
The Risk-Free Rates Working Group (RFRWG) published an update on the impact of COVID-19 on the timeline for firm’s plans to transition away from GBP LIBOR on the 29th April. While the central assumption of LIBOR’s publication being ceased after the end of 2021 remains intact, the Working Group has amended the timeline for the […]
HKMA Support Measures and the Impact to the Banking Industry
Pierre Latrobe at Mazars discusses recent HKMA initiatives taken in response to Covid-19 and their implications for Hong Kong banks, highlighting credit risk as a growing threat. The Hong Kong economy has been confronted by several downside factors over the last two years. The first hit was the initiation of the US trade war with […]
ARRC acts for a smooth IBOR transition
The Alternative Reference Rates Committee (ARRC) continues to support market participants in their efforts to transition from USD London Interbank Offered Rate (LIBOR) towards the Securities Overnight Reference Rate (SOFR). Following the Financial Conduct Authority’s (FCA) March 2020 statement that the expected LIBOR cessation deadline remains unaltered – i.e. end of 2021 – ARRC published […]
Rebuilding Credit Card Profitability post COVID-19
The current pandemic is having far reaching consequences across all aspects of society. Compared to other industries the impact on the credit card industry is relatively mild and from a customer perspective the value of on-demand liquidity is now clearer than ever. However, there will be significant impacts on industry profitability. Reduced international travel will […]
How banks can prepare for life after containment
Covid-19 disruption to the banking sector is widespread, including changes to working patterns, changes in customer behaviour, changes to partner-supplier dynamics and direct impacts on profit and loss accounts. The phase of immediate action to ensure business continuity is now largely complete. As infection curves flatten, restrictions are gradually eased and light starts to emerge […]
Regulatory flexibility gives banks the tools to support the economy during the Covid-19 pandemic
With banks no longer the weak link in the financial system, they now have a key role to play in supporting the real economy to survive the crisis caused by the Covid-19 pandemic. The significant strengthening of prudential regulation over the past decade since the 2008 financial crisis has enabled banking institutions to post solid levels […]
Covid-19: Major risk considerations for the banking sector
As we continue to feel the effects of the global pandemic, the banking sector, like many other sectors, now faces unprecedented uncertainty about the economic outlook ahead. While banks go into this pandemic in a stronger position than the global financial crisis of 2008, the current environment presents particular challenges and disruption to standard accounting […]
COVID-19, banks and regulation: the road ahead in the UK and Europe
The Covid-19 outbreak and the unprecedented emergency it presents has created a unique threat to the world’s economy. Like all sectors, banking has been impacted, and its stakeholders have felt excessive pressure over the last few weeks to get things right. Regulators in financial markets around the globe have all announced Covid-19 action plans, which […]
Covid-19 US policy changes: what banks need to know
Impacts from the COVID-19 pandemic have reverberated across every part of the global economy. Small businesses are struggling to pay their employees, banks are grappling with collapsing local economies, and many borrowers across the nation cannot meet their monthly mortgage payments. Banks will play a critical role in supporting their communities through this crisis, and […]
IBOR transition: Fallback language developments
The expected 2021 disappearance of LIBOR requires robust fallback language for cash products and derivatives alike. Industry associations have taken initiatives to reform the historic fallback language of securities, with ISDA proactively leading the way on derivatives and national working groups proposing enhancements for cash products. While the derivatives market is expected to be harmonized […]
Do Asian market Libor preparations pose systemic risk to world markets?
Since Libor was first used in financial markets in 1986, it has become the foundation of the global interbank funding market. However, regulators ruled that Libor’s volatility during the last global financial crisis (GFC) and a rate-rigging crisis in 20121 involving the world’s largest banks exposed a fundamental weakness with the rate’s publication methodology. Yet, […]
Re-engineering the banking sector
In recent years, disruption to the banking sector has seen an increasing number of partnerships between banks and FinTechs, as banks look to acquire the digital expertise now required for 21st century banking and FinTechs look to tap into the finance knowledge and consumer reach that traditional banks enjoy. More recently, this quest for technological […]
New prudential regulation for investment firms in Europe
At the end of nearly two years of legislative work, the reform of the prudential regulation of investment firms completed its final phase with the publication in the Official Journal of the European Union of two new regulatory texts: Regulation 2019/2033 on the prudential requirements of investment firms (IFR), and Directive 2019/2034 on the prudential […]
Is Asia on its way to IBOR transition?
With Libor’s cessation date at the end of 2021 looming, global regulators are hastening their IBOR fallback strategies. Yet while market momentum has increased for multiple published RFR indices, among them the GBP SONIA, the EUR €STR, and the USD SOFR, Asian economies, some of which rank among the world’s largest, continue to lag. While […]
Is SOFR the ultimate replacement for USD LIBOR?
Financial market participants – at least the largest ones – are actively preparing for the expected discontinuation of the London Inter-Bank Offered Rate (LIBOR) after 2021. Transitioning towards a LIBOR-free world is a challenge that requires the involvement and coordination of the whole industry in order to find appropriate solutions to replace the 35 different […]
EBA’s Stress Test 2020 Methodology – What’s new for the banks?
The methodology for an exercise to assess the resilience of EU banks to adverse market conditions and test the state of their capital allocations has been released by the European Banking Authority (EBA). The exercise – part of EU-wide stress testing – will apply to broadly 70% of the European banking sector[1]. Some 52 banks […]
Are banks underestimating the risks of Covid Emergency Loans?
During the last few weeks, the volume of loans issued by banks has snowballed as governments release programmes to bail out businesses affected by Covid-19. As a result of these higher volumes, the exceptional increase in underwriting activity raises several issues for banks. Most notably, banks, like all commercial institutions, are also having to cope […]
Is SOFR a strong enough USD LIBOR alternative?
With COVID-19, being declared a pandemic on March 11, 2020, financial institutions have had to shift most of their resources to mitigate the risks that have arisen. This has adversely affected important activities, one of which is market participants’ efforts to detach from LIBOR before its cessation at the end of 2021. As a result, […]
2021 stress tests planned as banks face worsening crisis
The publication on 29 January of baseline and adverse scenarios, output templates, instructions and market assumptions required to carry out stress tests signals the go-ahead by the European Banking Association (EBA) for the 2021 regulatory exercise. Because of the Covid-19 pandemic, these tests, originally planned for 2020, will take place between now and 31 July […]
2021 Stress testing the UK banking system: the Bank of England’s approach
March 2020 marked the first time – since its inception in 2014 – that the Bank of England (BoE) cancelled its annual stress tests for the UK’s biggest lenders. Instead, they undertook a desktop analysis of the UK banking sector resilience. In late 2020, the Financial Policy Committee (FPC) judged that most banks have capital […]
Resolvability is now the SRB’s key focus
With the economic repercussions of the Covid-19 crisis yet to be fully assessed, a robust resolution framework is essential to ensure the stability of the banking system. While the banks were given leave to postpone the reporting of some less urgent information in spring 2020, the Single Resolution Board (SRB) has reiterated the importance of […]
EBA discussion paper on the management and supervision of ESG risks
European sustainable finance regulations evolved considerably in 2020, and the European Banking Authority (EBA) is continuing this trend into 2021. It recently published a discussion paper assessing the potential inclusion of Environmental, Social and Governance (ESG) risks in the supervisory review and evaluation process (SREP) performed by national competent authorities (NCAs)[1]. What firms need to […]
Can Africa’s banking sector maintain its growth momentum?
With more than half of the world’s fastest-growing economies located in Africa1, the continent’s economic outlook is a positive one. Average annual GDP growth since 2000 is over 5%, placing Africa as the second-fastest growing economy behind Latin America. Real GDP growth, estimated at 3.4% for 2019, is projected to accelerate to 4.1% in 2021. […]
Reimagining the office in the work from home era
The working environment has always been an important factor for companies’ performance and their ability to attract talent. With the rise of remote work, this aspect has become critical: companies now have to ‘seduce’ staff to return to the office. Therefore, real estate services will play a crucial role in helping businesses upgrade working environments […]
Mazars’ banking regulatory radar: 2020-2025
In this edition of our Banking Regulatory Radar, we cover the key regulatory developments in the banking sector for 2020-2025. The latest version of the Mazars’ Regulatory Radar has been updated with all the Level 2 legislation published in 2020, as well as the measures that were taken in the context of the Covid-19 pandemic. […]
Can regulatory systems come to terms with Facebook’s stablecoin?
Facebook’s ambition to create a transferable global digital coin between users on the social media giant’s messaging platforms WhatsApp and Messenger has been controversial from the outset. Perhaps not surprisingly, the backlash from regulators around the world was substantial from day one. The world’s leading economies were less than enthusiastic of the possibility of a […]
Why rethinking CSR is vital for real estate strategies
The pandemic has had a significant impact on our entire ecosystem. We have seen global CO2 emissions fall by a record 7% in 20201 benefitting the environment. Yet, at the same time, we have seen adverse consequences for the mental health of staff working remotely, with almost half (49%) of those working from home saying […]
UK supervision of international banks post Brexit
Around one-fifth of global banking activity is undertaken in the UK. Almost half of the UK’s banking assets are held by international banks. The PRA currently supervises approximately 250 international banks, both branches and subsidiaries, which are part of around 180 international groups. Background On 11 January 2021, the PRA shared in a Consultation Paper […]
Federal reserve board publishes 2020 stress testing results and additional sensitivity analysis
The Federal Reserve Board released stress test results for DFAST 2020 including additional sensitivity analysis, considering the COVID19 outbreak, to assess the resiliency of large banks under three hypothetical recessions, or downside scenarios, that could result from the coronavirus event. Furthermore, the Board provides guidance for large banks to maintain resiliency during economic uncertainties from […]
IBOR Transition: Modelling RFR term rates to price IR derivatives
One of the anticipated challenges in the transition from IBOR rates to risk-free rates (RFRs) is the management of its impact on quantitative models. The ones currently used for pricing IBOR-linked financial instruments account for term rates which are “forward-looking”. The RFRs replacing the IBORs are all overnight rates. This means that a term rate […]
Reducing reporting burden for European banks while increasing data quality: a challenge for the EBA
Under article 430c of the updated Capital Requirements Regulation (CRR 2), the European Parliament and the Council of the European Union mandate that the European Banking Authority (EBA) perform a feasibility study on reducing the reporting burden for the European banking sector while ensuring data collection for monetary policy, resolution and supervisory purposes and take […]
IBOR transition: impacts of the SOFR discounting switch
An important milestone in the IBOR transition is the change in rates used by LCH and CME for discounting and Price Alignment Interest (PAI) calculations for USD OTC cleared swaps. Indeed, on October 16, 2020, they moved from using the daily Effective Federal Funds Rate (Fed Funds) to the Secured Overnight Funding Rate (SOFR) for […]
Bank stress tests – the post Covid agenda
In the early 1990s, stress tests became a popular internal tool for international banks to examine risks and gain a better understanding of threats to the institutions’ balance sheet. From there, the Basel Accord was amended in the mid- ’90s and required banks and investment firms to conduct stress tests. However, these were more internal […]
IBOR transition and FRTB cross dependencies highlighted
The revised market risk framework – also known as the Fundamental Review of the Trading Book (‘FRTB’) – not only impacts an institution’s regulatory capital charge calculation for market risk, but also affects operational, governance and business strategies. FRTB brings significant change. With the aim of harmonising capital standards for market risks across jurisdictions and […]
IBOR Transition: modelling of SOFR risk factors
One of the major challenges of IBOR transition is the availability of historical data on alternative risk-free rates (RFRs) required to implement interest rate model changes or re-calibration. With the Secured Overnight Financing Rate (SOFR) only published since April 2018, the available time series do not provide enough observations for risk modelling. Adding to that, […]
Acceleration in changing the prudential treatment for Software Assets: Covid-19 impact
Over recent years, technology and software have become strategic assets for competitiveness and resilience in the banking sector. Institutions have no choice but to invest to develop and deliver innovative services whilst managing ever greater IT and cybersecurity risks. The pandemic and announcement of lockdown measures posed a significant challenge for banks’ technology teams as […]
Looking ahead – ECB and NCA focus 2016, and what does it mean for the market participants?
The last five years have been a time of much challenge and change for the Central Banking Fraternity in Europe. Crisis, both economic and political, has been followed by much adjustment and change, including both practical economic and policy interventions, structural change in the form of Banking Union, much new regulation and most recently the […]
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Financial modeling spreadsheets and templates in Excel & Google Sheets
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Financial Services
Pricing Excel Model – Van Westendorp Price Sensitivity Meter
The Van Westendorp Price Sensitivity Meter (PSM) is a market research tool that helps businesses understand consumer price sensitivity for…
- Excel Model – $35.00 Version 2
Dynamic Lender Debt Investment Model
Pro Forma Models created this financial model to calculate and analyze the financial return of a debt investment from the perspective…
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Real Estate Brokerage Business Plan with Return Calculation
Pro Forma Models created this model to analyze the financial return of acquiring an existing real estate brokerage company (M&A), operating…
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Property Manager Plan with Return Calculations & M&A Model
Pro Forma Models created this model to analyze the financial return of acquiring an existing property management company (M&A), operating an…
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Leveraged Buyout (LBO) Financial Projection Model
User-friendly financial model to project and analyse the financial outcomes (IRR, projected financials, key ratios, sources & uses of funds,…
- Excel Model - Populated – $89.00 Version 1
- Excel Model - Not Populated – $89.00 Version 1
- PDF Example – $0.00 Version 1
Bond, Loan or Note Make Whole Calculator
The model is designed to evaluate a make-whole calculator for a loan or note, such as bonds or structured notes.
- Excel Model – $5.00 Version 1
Equity Portfolio Investment Return Calculator
Excel model to calculate the expected value and return for a portfolio of equity investments using Monte Carlo simulation analysis…
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Crypto Currency Portfolio Investment Return Calculator
Excel model to calculate the expected value and return for a portfolio of crypto currency investments using Monte Carlo simulation…
- Excel Model Populated – $49.00 Version 1
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The Bictoin Farm Model – Economics
The primary purpose of this model is to assess the feasibility of a Bitcoin farm by taking into account key…
Investment Fund Preferred Return Tracker: Up to 30 Members
Track preferred returns for investors in a fund with this template. Premium joint venture tracking tool.
Real Estate Brokerage Economic Analysis
Create up to a 10 year financial forecast for a real estate brokerage operator. Includes three way model, DCF Analysis,…
Savings Bank Financial Model Excel Template
Savings Bank Budget Template There's power in Cash Flow Projections and the insight they can provide your business . Buy…
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Retail Bank Financial Model Excel Template
Retail Bank Financial Model There's power in Cash Flow Projections and the insight they can provide your business . Buy…
Offshore Bank Financial Model Excel Template
Offshore Bank Financial Model Enhance your pitches and impress potential investors with the expected financial metrics. Shop Now Offshore Bank…
Mortgage Bank Financial Model Excel Template
Mortgage Bank Budget Template Create fully-integrated financial projection for 5 years With 3 way financial statements inside. Shop Now A…
Dividend Discount Model Template
This Pro Forma Model showcases the pro forma indicative return valuing an equity security using various dividend discount models including…
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Private Equity Profit Distribution Waterfall Model
The model allows for the distribution of funds between the Limited Partners ('LPs') and the General Partner ('GP') for investment…
- Excel Model – $35.00
Land Development Bank Financial Model Excel Template
Land Development Bank Pro Forma Template Enhance your pitches and impress potential investors with the expected financial metrics. Shop Now…
Investment Bank Financial Model Excel Template
Investment Bank Pro Forma Template Solid package of print-ready reports: P&L and Cash Flow statement, and a complete set of…
Internet Bank Financial Model Excel Template
Internet Bank Pro Forma Template There's power in Cash Flow Projections and the insight they can provide your business .…
Treasury Monitor Excel Template
This financial model attempts to give a CFO a daily monitor of the existing bank balances for all entities in…
Exchange Bank Financial Model Excel Template
Exchange Bank Financial Model Allows investors and business owners to make a complete financial projection in less than 90 mins.…
Industrial Bank Financial Model Excel Template
Industrial Bank Budget Template Based on years of experience at an affordable price. Buy Now Five year Industrial Bank excel…
Agricultural Bank Financial Model Excel Template
Agricultural Bank Pro Forma Template There's power in Cash Flow Projections and the insight they can provide your business .…
Bank Financial Model Excel Template
Bank Pro Forma Template Create fully-integrated financial projection for 5 years With 3 way financial statements inside. Buy Now Creates…
Credit Facility Model
The Credit Facility model breaks down the financing structure where consumers borrow against a pre-approved credit line through a credit…
- Excel Version – $35.00
- PDF File – $0.00
Mergers and Acquisition (M&A) Financial Projection Model
User-friendly financial model to project and analyze the financial outcomes and feasibility of an Merger and Acquisition transaction.
- Populated Excel Model – $69.00
- PDF Free Preview – $0.00
Sustainability Policy for Financial Services – eBook Template
A complete example sustainability policy suite that can be adapted and used by any business.
Asset Management Business Financial Projection 3 Statement Model
3-Statement 5 year rolling financial projection Excel model with valuation for existing/startup Asset Management business managing customer investments and generating…
- Excel Model – $79.00
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Professional Services Project Proposal on Three Pages: Actual Example and Template
An actual example and template of a successful Professional Services Project Proposal on Three Pages
- Proposal Template – $28.00
- Free PDF Demo – $0.00
Lending Company Financial Model – 5 Year Forecast
Financial Model analyzing operations and performing valuation for a Lending Company.
- Excel Financial Model – $129.00 Version 1
- PDF Free Demo – $0.00 Version 1
Multi-Member Investment Fund Portfolio and Distribution Tracker
A fund management tool to track many positions over time as well as distributions to up to 20 members. Includes…
Purchase Price Allocation Simple Guidance + Goodwill & Consolidated Balance Sheet Template
This is a simple excel explanation model of Purchase Price Allocation with a dynamic and ready-to-use consolidated balance sheet template…
- PDF Free Demo – $0.00
- Excel Version – $20.00
Buy Now Pay Later ALL IN ONE Integrated Financial Model + Market Insights
This is a real cased based ALL IN ONE integrated financial model of a BNPL (Buy Now Pay Later) business…
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- Full EXCEL version – $30.00
Discounted Cash Flow (DCF) Template
This template will allow you to calculate discounted cash flow in Excel and prove out the calculations.
Moneylending FINANCIER 20 year Business Model (large and small lenders) Three Statement Analysis and KPI’s
This Moneylending ( FINANCIERS) 20-year Business Model will provide you with the most detailed Cash Flow Statements and Analysis, Income…
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Insurance Company Financial Model – Dynamic 10 Year Forecast
Financial Model providing a dynamic up to 10-year financial forecast for an Insurance Company.
- Financial Model - Standard Version – $89.00
- Financial Model - Premium Version – $109.00
Lending Business Financial Projection 3 Statement Model
3 Statement 5 year rolling financial projection Excel model for existing/startup business borrowing money, providing loans and investing any surplus…
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Net Worth Statement Financial Model – Up to 10 Year Projection
This model can be used to prepare, forecast, and analyze personal net worth. The model has the ability to model…
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General Insurance Company Financial Projection 3 Statement Model
User-friendly Excel model for the preparation a of 5-year rolling 3 statement financial projection with a monthly timeline for a…
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Debt Schedule – Up to 30 Year Model with Prepay, Fixed/Floating, and Interest Only
This debt schedule model is dynamic, easy to use, and can handle complicated debt situations such as fixed/interest only, fixed…
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Loan Calculator Excel
This Loan Calculator Excel Template is Free to Download. Get this Free Simple Loan Payment Calculator now to keep track…
Commercial Bank Financial Model – Dynamic 10 Year Forecast
Financial Model analyzing operations and performing valuation for a Commercial Bank.
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Consulting Firm Financial Model – Dynamic 10 Year Forecast
Financial Model providing a dynamic up to 10-year financial forecast for a startup or existing Consulting Firm.
- Financial Model - Standard Version – $89.00 Version 1
- Financial Model - Premium Version – $129.00 Version 1
Flat Fee Lending Business: Operating Model
10-year financial model directly built for a flat fee / fixed fee lender. Includes leverage for originations if desired (toggled…
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Accounting Firm Financial Model – Dynamic 10 Year Forecast
Financial Model providing a dynamic up to 10-year financial forecast for a startup or existing Accounting Firm.
- Financial Model - Premium Version – $119.00
Venture Capital Returns Model Template
The Venture Capital Returns Model is used to provide an analysis of an investment return for a VC fund. This…
- Full Excel Version – $35.00
SIMPLE ASSET ALLOCATION MODEL
BASIC GUIDANCE ON HOW TO STRUCTURE YOUR ASSET PORTFOLIO, FOR SAFE AND EFFECTIVE INVESTMENT STRATEGY.
Startup Business Plan – Consulting Firm
If you dream to start a Consulting Firm Business, the template is the first step in making your dream into…
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Lending Model Startup Forecast: 10-Year Scaling – 3 Loan Types
This is a full 10-year startup lending business financial model, including a 3-statement model. Accurately scale the origination of 3…
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TRADING SYSTEM 2023 (fully editable, updated version)
Providing trading signals using mix of technical indicators and historical price trends. FULLY TESTED OVER 16YRS HISTORY. Designed to support…
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Insurance Managing General Agent (MGA) Financial Projection 3 Statement Model
Insurance Managing General Agent (MGA) 3 statement 5 year rolling financial projection Excel model
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Insurance Broker Financial Projection 3 Statement Model
3 statement 5 year rolling financial projection Excel model for a insurance broker business
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Salary-based Microfinance Lending Financial Model Template
Salary-based microfinance lending are considered low risk, high return business opportunity. It is a microfinance business that allows employees to…
- Full Excel Model – $69.00
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Alternative Investment Company Valuation Template
Alternative Investment Company Valuation: All-In-One Model for Private Equity, Asset Management, and Advisory Business Lines. Our full-fledged financial model in…
Consumer Loan Model Template
The Consumer Loan model breaks down the financing structure of a bundle of consumer loans absorbed by a lender. This…
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Grantor Trust Model Template
The Grantor Trust Model measures the life time value of executing a Grantor Trust over a Non-Grantor Trust with a…
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- Full Excel Version – $20.00
Due Diligence Tools and Methods
A suite of best practices to perform financial and commercial due diligence. Use it if you are considering a company…
- Full Excel Model – $150.00
- Free Demonstration – $0.00
Legal Services Financial Model Excel Template
Buy Legal Services Financial Plan. Based on years of experience at an affordable price. Generates 5-year legal services cashflow projection,…
Law Firm Financial Model Excel Template
Try Law Firm Financial Model Template. Allows you to start planning with no fuss and maximum of help Five-year financial…
The Financial Services Industry
- Credit Card Issuers
- Insurance companies
- Investment bankers
- Securities traders
- Financial Planners
- Security exchanges
- Potential Leads / income
- Risk Rating
- Availability of information
- Access to alternatives
- Money source
- Interest rates
- Economic conditions
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Types of Businesses in Financial Services
Banking – different types of services.
- Checking Accounts
- Savings Accounts
- Debit and Credit Cards
- Wealth Management
- Online, Mobile, and Tablet Banking
- Mobile Check Deposit
- Text Alerts
- eStatements
- Online Bill Payments
- Personal Loans
- Home Equity Loans
- Home Equity Lines of Credit
- Business Loans
Creating Financial Services Industry Financial Models
Financial model templates in excel for businesses in the financial service sector.
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What Is a Business Model?
Understanding business models, evaluating successful business models, how to create a business model.
- Business Model FAQs
The Bottom Line
Learn to understand a company's profit-making plan
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Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.
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Investopedia / Laura Porter
The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.
Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.
Key Takeaways
- A business model is a company's core strategy for profitably doing business.
- Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
- There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
- The two levers of a business model are pricing and costs.
- When evaluating a business model as an investor, consider whether the product being offer matches a true need in the market.
Business Model
A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.
A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.
Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .
When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.
A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.
One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.
The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.
When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.
Types of Business Models
There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .
Below are some common types of business models; note that the examples given may fall into multiple categories.
One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.
Example: Costco Wholesale
Manufacturer
A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.
Example: Ford Motor Company
Fee-for-Service
Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.
Example: DLA Piper LLP
Subscription
Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.
Example: Spotify
Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.
Example: LinkedIn/LinkedIn Premium
Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers free version and a premium version.
If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.
Example: AT&T
Marketplace
Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business models attempts to make transacting easier, safer, and faster.
Example: eBay
Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.
Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.
Razor Blade
Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.
Example: HP (printers and ink)
"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.
Reverse Razor Blade
Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.
Example: Apple (iPhones + applications)
The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.
Example: Domino's Pizza
Pay-As-You-Go
Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.
Example: Utility companies
A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.
Example: ReMax
There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:
- Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
- Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
- Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
- Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
- Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
- Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
- Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.
Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.
Criticism of Business Models
Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .
For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.
However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.
As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.
Example of Business Models
Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:
- Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
- Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
- More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.
A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.
What Is an Example of a Business Model?
Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.
What Are the Main Types of Business Models?
Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.
How Do I Build a Business Model?
There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, feel free to evaluate your plan and adjust your target audience, product line, or pricing as needed.
A company isn't just an entity that sells goods. It's an ecosystem that must have a plan in plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.
Harvard Business Review. " Why Business Models Matter ."
Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."
Microsoft. " Annual Report 2021 ."
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Evaluating the Financial Planning Services Business Model
Is it the right time to start a planning practice.
By Sidney Kess, JD, LLM, CPA and Edward Mendlowitz, CPA/PFS, ABV
Financial planning is a generic term for all of the services that CPAs perform that deal with a client’s individual wealth. It is also a specific term that relates to a single service that is performed. What can CPAs provide in this field, and how is a business established around financial planning services?
What Financial Planning Is
Financial planning as a generic title encompasses family budgeting; helping a client establish goals and a plan to achieve them; planning for children’s educational funding; compensation planning; retirement and estate planning, including family liquidity, postmortem, and estate tax planning; IRA, 401k, 403b and pension distribution planning; elder care planning, possibly including bill paying services; planning for someone who is terminally ill; insurance coverage; asset allocation; assistance with preparing an investment policy statement; evaluating investment performance, including the asset manager’s performance; investment and risk management; tax preparation, compliance, and planning; and, if the client owns a business, succession planning, buy-sell agreement planning, and exit strategies.
As a specific term, it involves reviewing an individual’s overall financial situation and goals, as well as considering the security they will need when they are no longer actively employed, and then helping to achieve those goals.
Financial Services
Many financial planners offer “financial services,” meaning financial products such as annuities, various insurance (e.g., life, long-term care, disability), and mortgages, as well as managing investments, either directly or through a professional investment management organization. Financial services fall under the umbrella of financial planning and will be covered here along with generic and specific financial planning.
Licensing and Credentials
The authors believe that the CPA certificate is the best credential for professionals providing financial services, but other designations also signify relevant expertise. These include the Personal Financial Specialist (PFS), accredited by the AICPA; the Certified Financial Planner (CFP), offered by the College of Financial Planning; and many other recognized credentials and certifications. [For more, see the authors’ September 2016 column (“Advisors Involved in Financial Planning,” http://bit.ly/2VZKK8d ).] Other things that may indicate expertise are article and book writing, speech presentations, purchased and self-published newsletters and brochures, blogs and websites, letters of endorsements from satisfied clients, being active in and serving on boards of professional organizations, and awards from recognized organizations.
How Services Are Performed
Financial planning services differ from attestation services in several important respects. The work is not scalable, systematized, or commoditized; it cannot be performed by lower-level staff; it does not employ uniform processes; and it cannot be done using artificial intelligence or robotics. Many of the planning services involve meetings, either in person or remotely, between the firm and the client. Some financial planning services require considerable back office work, such as when an estate plan is made and net worth statements and cash flow analyses need to be prepared, but most involve minimal back office attention and considerable face time with the client by the partner or expert.
Business Model for a Services Business
People in business need to make a living, accumulate funds for their retirement, and generate profits to distribute to the owners and invest in the business for future growth. Businesses also need to establish a sustainable cash flow stream and be somewhat leverageable. Those firms engaged in financial planning have staff-to-owner ratios much lower than those in similar-sized firms that perform traditional accounting and tax services.
Financial services involve selling and business development, some portfolio performance oversight, and interaction by the partner or a high-level staff person. The only part of financial services that is scalable is investment management, which is discussed separately below.
Another factor of financial services is selling annuities, life insurance, and mortgages. These are all commissionable activities, but usually involve one-time sales. They also require a high concentration of one-on-one time with clients by the owners of a CPA firm.
Competition
On some level, all CPA firms compete with all others. Some charge more, some less, but the basic ranges of services and fees are similar. In financial planning, and especially with investment and goal planning, the competition is not with other CPA firms, but with asset or investment managers, many of whom are or were accountants and offer these services either at no charge or reduced fees. Even tax returns are often prepared at fees lower than cost.
Accountants, and in particular CPAs who perform financial planning services, charge fees for those services, usually in line with their fee structure. Clients tend to believe the same services are available at much lower fees from equally qualified asset managers. In many cases this is so; however, the primary focus of CPAs is to provide the best advice they can to the client, while asset managers want to sign up clients that will provide substantial revenue for a prolonged period. A 1% “assets under management” (AUM) fee on $1 million for 10 years is $100,000 in potential revenue, without taking into account portfolio growth. An accountant’s fee, however, could be a onetime fee somewhere between $2,000 and $5,000, plus fees for annual look-sees at about half of the original fee. Note that a CPA’s fee will be higher for clients with greater investable assets since more work will need to be performed, more alternatives will need to be considered, and more meetings with the client will be required. For example, someone with a $10 million portfolio can expect to be charged about $15,000 to $20,000 by a CPA.
There are various methods by which CPA financial planners charge for their services, but they are all in the same, relatively small range. In contrast, the potential annual fees to an investment manager could be $75,000—$125,000 a year on a $10 million portfolio. With that potential, many services can be provided for minimal charge.
The accountant’s charges are miniscule compared to the potential overall costs to the client, but there is still a reluctance to engage accountants for financial planning; their fee is being compared to either no fee or an unrealistically low fee used by asset managers to weed out curiosity seekers. To many in the general public, there is no perception of differences in who performs financial planning services. But the authors believe that CPAs who do not manage assets provide totally objective analysis, while some asset managers have a strong bias to recommend courses of action that result in substantial continuing cash flow for themselves.
The authors do not want to give the impression that asset managers perform subpar services; there are many who do excellent jobs, especially those who are CPAs and have the PFS accreditation. Furthermore, the purpose of this article is to discuss personal financial planning as a business model, not to assess the services various groups perform.
The authors believe the above is pretty well known among active financial planners and the investment management community, but not so much among the traditional smaller CPA firms that actually make up over 90% of all firms. It is the authors’ opinion that financial planning as a stand-alone service is not a viable business model for most smaller firms, and that many of the more knowledgeable CPA financial planners are entering the asset management business using their expertise and experience to attract clients. There is a marked disparity in the potential for sustainable cash flow for CPAs who do not manage assets, compared with those who do.
Becoming an Investment Manager
Entering the asset management space is not difficult. Licensing is necessary, which can take approximately six months. The next step is affiliating with an investment management organization, of which there are many. The authors do not believe it is difficult to find and vet, or be found and vetted by, such organizations. There are also many CPA firms that manage investments; Top 50, 100, and 150 lists are published annually that list the firms, AUM, and the number of personnel. Looking at these lists shows that many firms managing from $100 to $500 million have only two, three, or four employees. The ones with larger staffs usually manage the funds themselves with research departments, traders, investment managers, and compliance departments. The ones with smaller staffs usually have the investments managed by larger investment management organizations; the financial planner works with these organizations as an affiliate, and the remainder of the staff handle sales, customer relations, some investment oversight, and possibly initial and periodic financial planning services and tax preparation. None spend considerable time in investment management. These firms receive a percentage of what the actual investment manager collects, including commissions from sales of products such as annuities and life insurance.
The Future of Traditional Services
The authors believe the future is very bright for smaller CPA firms, particularly with respect to small business consulting. Some traditional services will decline, however, such as tax return preparation and compilations of financial statements. In addition, many smaller CPA firms are exiting the attestation space because of the growing costs of remaining competitive. These services are being replaced by outsourced CFO-type services and strategic business planning. CPAs are also continually adding to their arsenal of services, as with the asset management model. They are looking for new ways to service clients, and clients are trending toward consolidating their financial service purveyors, including tax and accounting services and asset management and oversight.
In short, the authors believe the financial planning services model is not viable for many CPA firms, and that investment management is an area that will grow and ultimately replace it in many firms.
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Top Services Business Financial Models
Table of Contents
Services businesses have a history as old as time. The industry has seen dramatic changes throughout time. As human needs and wants have been varying from early ages to today, there have been infinite services businesses out there. But one thing that remains constant is the need for people to provide those services. And that’s the same reason why so people keep searching for a services business financial model.
A Misconception About Services Business
One of the common misconceptions about starting a service business is that you need to have all your clients lined up ahead of time before you even begin operations. While this approach may work for some businesses, it is not the best way to go unless you offer a basic human need. For example, if you are setting up an ambulance service business, your demand for customers will be very high because so many people will require this kind of service. But, on the other hand, if you are starting a pest control business, your demand is unlikely so high as people usually take a lot of time to hire a company for this service.
How to Have Your Customers Lined Up Before You Start
Many services businesses do not have customers lined up ahead of time. There are many ways to create demand for your service. One of the most common ways is by offering an in-demand or unique service that will increase your clientele in time. Another way is by advertising for your business where you can offer a free consultation session about your services, which can help generate leads. But one of the best methods out there for generating demand for your service business is by offering value and making yourself an essential part of your client’s lives. Many services businesses offer their customers a lifetime warranty on certain parts of their service and even provide them with free consultations at any time in case there is a problem or doubt about the job. This makes customers realize how important it is to have your service in their lives.
Stand Out When Competition is Tight!
That is why all successful service businesses have to be ethical and offer value to their customers. You have to realize that many companies are out there providing the same kind of services like yours, so you need to stand out from them by offering something better than they do. For example, if your home insulation business isn’t doing very well, you can improve it by offering your customers complimentary tea or coffee when they visit your office. This will create a positive impression of that company in their minds and have them return for other services.
So, here is a list of top service businesses that we have shortlisted out of hundreds of others that you can start as an entrepreneur and finally be financially independent.
1) Baking Subscription-box service
2) Organic Cleaning service
3) Courier Service
4) Book subscription service
5) Car Wash service
6) Funeral Service
7) Legal Services
8) Carpet Cleaning services
9) Errand Service
10) Beauty Subscription box
Let’s quickly jump to our first service business on the list and find out how you can start with it.
1) Baking Subscription-Box | Services Business Financial Model in Excel
What is a baking subscription-box service?
It is a service where you provide all the essentials of baking to your customers and exciting recipes on a monthly basis. It can also be done on a weekly basis. This service is intended for new parents or people who love baking for themselves. But in general, new parents are the most in need of this service. Because baking is a fun activity to do with your children, it creates bonding and is a good activity for young minds. And at the end of the whole activity, you get to enjoy a delicious dessert!
How to start this business?
To begin with, you don’t have to invest in an expensive kitchen for this service. Because you are not delivering the baked products, you will need a decent place to store the raw materials for the baking kits. But there are many more requirements other than the storage space. And here they are:
Requirements for starting a Baking subscription-box service:
Study your niche well:.
It is essential to study your niche very well before starting this service. First, you have to understand what kind of products are trending in the baking industry and how you can incorporate them into your service. This way, you will be able to come up only with the products that sell. And as discussed in the intro, you should know who your customers are.
Competitors’ Research:
Once you know your target audience and the specific niche, you need to know about your competition. You can never ignore this part. All the sales depend on how competitive this market is in your area or where you propose to start this service. If the competition is very high, you will need to come strong. Because if you provide a similar service as the rest, why would anyone try a new service? This brings into discussion the USPs (Unique Selling Points). You need to figure out all the USPs the first thing. And that is only possible after you thoroughly research your competitors. What are they doing to make their customers come again? How are they marketing their business? What are their strengths and weaknesses? All these questions will help you figure out how to position your business before the audience.
Sample Subscription Box or Prototypes:
Once the above part is done, you need to know about the actual service – the subscription box. One of the easiest ways to find out about this is to first experiment yourself as a consumer. You can simply subscribe to any of the available services in your area. See what they provide in the box and how. This will help you come up with your first sample baking box. Then you need to sample it a little more. You can make 8 to 10 different boxes and distribute them to your friends, relatives, or even strangers to see their response. Of course, these samples should be free so that people actually tell you about their real experiences.
People like variety when it comes to subscription boxes. So instead of supplying only baking ingredients, you can mix things up by adding different kinds of items every month or week. You can even include coupons for items that go along with the theme of the baking box. For instance, if you are making a cake subscription box service, you can also include coupons for the ingredients of the cake in your sample boxes. This also builds up customer loyalty to your brand because they know that they will be able to get the products at discounted prices through your service.
Storage Space:
When it comes to the storage space, you should always start small and then adapt your business model according to what works and doesn’t. For instance, if you are doing a baking subscription-box service, you could go with a monthly subscription model. This means that people will get the box every month automatically. But keep in mind the returns as well. There is a possibility that some people will not like your subscription box, and they may choose to return them. So you should make sure that you have enough space to store all these boxes in such circumstances.
Marketing plan:
After all this study, you need to come up with a solid marketing plan for your service. By this step, you already know where your target market is. So, promote yourself there. Make sure they know who you are and what you offer. If more than 50% of your traffic comes through referrals, you are in the clear.
One of the most important things when it comes to a service business is a website. In the case of subscription-box services, most people prefer going online for such things because it is easier and faster. So, you need to make sure that you have your own site where the customers can subscribe, manage their accounts, and view their past orders. You can also create social media pages like Instagram, Facebook, and Twitter to help you expand your reach.
Your Services Business Financial Model – The Most Effective Use of Funds
Now that you know all the crucial aspects of your business, the next step is to come up with a detailed financial model. Make sure you include at least one year of income and expenditure details in this model. A services business financial model is NOT like the icing on the cake – It’s the CAKE. Because without a financial model, you will never know where you stand in the business financially. This is the step where you finalize your business idea, come up with a detailed plan of action to make it work, and then move on to making money. And the most important part of making money is to know about profits and losses. All of this is an essential part of a financial model.
Preparing a financial model for your baking subscription box from scratch is a daunting task because why should you do all the boring and hard stuff when there are experts who have already done it for you. We are talking about a ready-made excel financial model for your services business. Oak Business Consultant has one ready for you. It has every essential financial aspect that you will need to start your services business.
2) Organic Cleaning Service | Services Business Financial Model Excel Template
What is Organic Cleaning Service?
Every day, people are becoming more and more conscious about the environment. This is one of the primary reasons why organic cleaning services have become so popular in recent times. People want to go green by using eco-friendly products for their everyday chores. But the problem is that most of the commercially available cleaning products and services make use of chemicals. These chemicals are harmful to us and for the environment. This is where organic cleaning service comes in. Organic cleaning service means providing a home or office cleaning service where you will only use organic products such as baking soda, vinegar, lemon juice and essential oils.
Why Organic Cleaning Service?
This is one of the most common questions that come into people’s minds when they think about starting organic cleaning services. There are tons of cleaning services available in the market that claim to be using eco-friendly products but aren’t really. So, it’s better to stay only at the organic cleaning service. It may be tempting for you to jump into traditional cleaning services because of an already established client base. But think about the right thing, and the client base will come automatically.
How To Start This Business?
The first step is to know about your state or country’s laws regarding providing cleaning services.
State/Country Laws and Regulations:
Every state has its own laws and regulations when it comes to such services. Because to provide cleaning services, you need to enter private properties and company offices, etc. That’s why you will need a permit or a license. Even if your state or country doesn’t require you to have a license, it’s still better to have one. This way, you will be able to ensure that your customers trust your business. You will also be accountable for your provided services.
Insurance requirements:
Cleaning services are all about entering private properties and working in company offices. So, you need to make sure that you have proper insurance. If anything goes wrong, the business owner will be liable for it. There is a chance that you might face a lawsuit from your customers if they suffer any loss because of your service. Other problems such as damage to your cleaning equipment or any accidents can lead to huge losses for your business. So, make sure you have the proper insurance coverage.
Target Audience:
This is the most critical part of starting your services business. When you know about your target audience, you can better shape up your marketing campaign and provide better service according to customers’ needs. For example, the organic cleaning service should target people who are living a busy life and don’t have time to do household chores. Along with this routine, they also should prefer going green and environmentally friendly. This brings us to another important aspect. You will also need to run a lot of educational campaigns for your organic cleaning service. This will be a community service because a sustainable lifestyle is what people need today.
Market Study/ Competitors’ research:
The market is already pretty crowded with traditional cleaning services. This is why you will need your thorough research before jumping in. But the best part about this service is that you have an elite USP (Unique Selling Point) – which is organic products. This will be the main thing that sets you apart from your competitors. So, do some extensive research about these cleaning services and their advertisements to target your potential customers.
Plan All Required Equipment:
You will need a good amount of money to buy the essential tools. Some of the essential equipment are – mops, brooms, vacuum cleaners, cleaning solutions. You will also need to invest in high-quality cleaning tools that will help you reach inaccessible areas.
How to Market This Business?
You have to get your organic cleaning service out there so that people can know about your business. So, it’s better to go where your customers will be and that is online. The internet has made everything possible, and people also prefer choosing the efficient way to find products and services for their needs. Online platforms can help you reach your potential customers quickly, much more than any other traditional marketing strategy.
So, you have to create a website with your organic cleaning service being the main focus. The website should provide detailed information about your services and a place where people will place their orders. Make sure you include keywords in the page’s title tag that will help people find your service when they use a search engine to look for your business. Apart from these, take advantage of social media as well. Social media is another big player in the marketing world nowadays, and it’s here to stay. So, make sure you have all your social media accounts updated with the latest news, updates about your service and any promotional offers that can attract people.
Your Services Business Financial Model – Proper Utilization of Funds
When you have planned everything discussed above, you will need some financial details of this business. Since you will be providing services, a services business financial model will be the one for you. Especially someone has prepared it specifically for an organic cleaning service company. But wait! there is one already there. Yes, this is a financial model for your organic cleaning services business specifically. This financial model has all the relevant assumptions, such as the required investment you will need for this business, the target revenue, and the net cash flow. This financial model spreadsheet makes it easier to calculate everything and helps you manage your finances efficiently. We also have a ready-made business plan for your cleaning services business.
3) Courier Service | Services Business Financial Model Excel Template
Starting your own courier service business is an intelligent decision. Courier services have been around for decades and are still going strong because they offer convenience to people who want things delivered quickly. This industry is one that has been able to grow in recent years with the rise in online shopping and e-commerce.
Courier services can be divided into three categories: same-day delivery couriers, van couriers, and standard couriers. There is no one-size-fit-for-all approach towards these different types. So, our focus will mainly be on the standard courier services. We have discussed the ins and outs of starting your standard courier services below.
Narrow down a Courier Niche:
The first and most important step is to decide what you want to deliver through your courier service. For example, you can choose to deliver only small household items in the beginning to reduce the startup costs. But there are other options such as delivering sensitive decorative items or art pieces, etc. But then you will need highly professional staff if you choose to hire people for all the delivery work.
Get Reliable Vehicles:
In order for a courier company to be successful, they need reliable vehicles that can take on all kinds of weather and road conditions. Couriers get around this issue with older cars or cheaper models by outsourcing their maintenance. The downside of this is that it can be expensive in the long run. If possible, you should try to purchase reliable vehicles or lease them for a few years instead.
Storage Space Organization:
The next step towards starting your courier service business involves organizing storage space. Courier services need to have specific items readily available for pick-up or delivery. These could include equipment, paperwork, material, etc. The best way to get organized is by having everything in its place and marking it accordingly so that anyone can find what they are looking for quickly with a minimum of searching.
Purchase Equipment and Material:
Now that you have your reliable vehicle(s) and organized storage space, the next step is purchasing equipment and material for your courier service. Courier services need to purchase a variety of different supplies depending on what kind of work they do. For example, some couriers focus mainly on delivering small household items over shorter distances. At the same time, others specialize in transporting things over longer distances.
Market Study (Target Audience and Competitor Analysis):
Before starting your courier service, it is vital to do an extensive market study and competitor analysis. The first thing you need to figure out is who exactly will be your target audience? Once you know that answer, the next step towards marketing starts with choosing a good name for the business and a logo or brand identity representing your service.
One of the most important steps towards starting your courier service business involves competitor research. What are some other reputable courier services in the area? How do they stand out from each other, and what makes them unique compared to you? Understanding how much competition is out there for this type of business will help you make decisions on how to position your brand and market yourself.
Study Your Area Of Operation Thoroughly:
Since we have assumed that you are willing to start small, you will be delivering locally. That’s why it’s critical to know your area well. You should know about the topography, traffic patterns, public transportation routes and more. This can help you make better decisions on how to deliver items in a timely manner.
Legal Requirements:
Before starting a courier service business, it is important to look into the legal requirements. This way, you can protect yourself from any liabilities down the road. There are many legal requirements that courier services need to follow. You will need business insurance, a permit for operating your business. And you should register with appropriate government agencies depending on the kind of work you do. Also, make sure all vehicles used by your company meet specific criteria, such as having good safety features. These include looking up local licensing laws that apply specifically to this industry. Also, make sure that all vehicles included in the business are insured.
Marketing & Advertising Strategy:
Before starting, it is important to have a marketing strategy in place, so you know exactly where to advertise your services. Marketing a courier service can be difficult if several other companies are already operating near you. This is why it’s important to look for ways to differentiate yourself from them so people will choose your company over theirs. This brings us to USPs (Unique Selling Points).
Identify your USPs (Unique Selling Points):
It is important to point out some of your strengths as a courier service company. This can be done by listing some benefits that potential clients may not know about yet. For example, there could be many perks such as discounts on multiple orders or free delivery with minimum purchase requirements. These can be added to your website or flyers that you distribute.
Financial Model:
Start by creating a detailed list of all expenses that will incur in the beginning. In order to do this, you should find out how much money you have available at your disposal and start from there. If needed, try getting help from professionals who can provide assistance on starting up a courier service business. But guess what! These professionals have already done their part for you by preparing your services business financial model . This financial model is specific to your courier services business. It has everything that you need to start your services business like a professional. The best part about Oak Business Consultant’s financial services is that you also get your hands on a ready-made business plan for your courier service .
3. Book Subscription | Services Business Financial Model Excel
The book subscription service is a business that offers a monthly box of books to its customers. It’s great for kids since they get to read new and exciting things throughout the month. However, book subscription services are also perfect for adults who want to stay up-to-date with the latest releases in literature without having to worry about going out and buying every single one.
Here, we will discuss what it takes to start your own book subscription service from scratch. We will cover different types of subscriptions available, how you can make money off them, and what steps you need in order to be successful long term.
Deciding the Genre or Niche:
The first thing you need to do is select which books or genres of books are going into the subscription box. This will help your customers have a more enjoyable experience with what they’re reading. And it’s one way that you can stand out from other services that only offer general book subscriptions.
There are several different types of subscription services that you can offer. The most popular one is the monthly service, where customers receive a box filled with books every month. This method lets you have more control over what kinds of books people get to read. So, it’s better if there’s a specific genre or niche audience in mind. There are also quarterly and yearly subscriptions that work just like the monthly subscription.
The main idea is to give your customers a choice in what they’re reading each month, so you can’t go wrong with this step.
Setting up an Online Shop:
Once you know how many books are going into each box and which genre or niche market it’s aimed at, you can start looking for ways to sell your service. The first step is setting up an online shop where people can go and subscribe to the book service, whether it’s monthly or yearly. You’ll also want links in place so that they can buy individual books when needed throughout the month. But there’s much more to set up the online shop. For example, you will need to hire professional web designers and developers because the other way is quite time-consuming and difficult: learning to develop your own website and then setting it up and running. So, it’s always better to hire freelancers for such external services and stay focused on your main service.
Decide the delivery model:
The next step is finding a way to deliver each book to the customer every month. The most popular way is using Amazon’s subscription service for Prime members. You can sign up as an individual seller on their website and then start creating your own book subscriptions that customers can subscribe to. All you need to do is choose which books go into each box, how often they’re shipped out (monthly or yearly), and which costs are included in the subscription.
Here’s a list of things you need to do once each customer subscribes:
-Ship out their first box. It can be sent via USPS or Amazon with Prime Shipping, depending on how quickly they want it delivered.
-Send them an email when that happens, so they know the books have been shipped.
-For monthly subscriptions, you’ll need to send out a new box every month and make sure it gets in their hands before the due date for that month.
Now we will discuss how to be successful at starting your own book subscription service: The first thing is location because not all locations are suitable for this type of business. It’s best if the location is near a public library or bookstore, as they might be interested in buying from you after subscribing to your service. And don’t forget that it has to be an area where people are willing and able to pay for book subscription services like yours.
The next step will be getting the word out about your business. If you don’t have any way to advertise it, the best thing would be to use word of mouth from satisfied customers. But if that doesn’t work for you, there are other ways, such as creating a social media account or making an online shop on various websites like Etsy and eBay.
The next step is getting enough customers. The easiest way is to do research on other book subscription services and see what they’re offering for customers, such as discounts or free shipping depending on the number of boxes purchased at once. You can either match them or offer better deals, but you want your subscribers to be happy with it so that word will spread about how great your service is.
Storage Space:
It’s very important to have a properly maintained and secure storage space for all your inventory. Books need care and maintenance, so you have to keep them in a warehouse or storage space.
Your Services Business Financial Model:
It’s crucial to have a financial model in place before starting the business. The cost will depend on how you plan to compete with other book subscription services, so it’s important to understand your own costs and ways of getting revenue through subscriptions or individual books sold via the online shop. A financial model will help you understand how much money will come in and what your expenses are. That’s why your services business financial model should cover all expenses, including staff salaries and inventory costs. This is important because it affects everything else in your business, such as how much revenue comes in per month/year with a certain number of subscribers.
But you don’t need to worry about this book subscription service financial model at all. Oak Business Consultant has got your back. Our financial experts have carefully prepared this financial model specifically for your book subscription business. It has all the important things you need to know about your business.
Set of Financials
-Break-Even Analysis
-Profit & Loss Projections
-Cash Flow Projections
-Balance Sheet
-Business Ratios and much more.
4. Car Wash | Services Business Financial Model in Excel
Car wash services have been around for a long time and are an industry that is always in demand. The car wash service industry is a booming one. In the United States alone, over 60,000 car washes generate more than $1 billion in revenue each year. There are many different types of car washes, from hand washing to automated ones. Car washes can be either full service or express service, including quick vacuuming and windows cleaning. However, if you’re interested in starting your own business, you will need to know what’s involved. We have compiled an extensive list of steps and requirements that will help you start your own successful car wash service.
Earning Potential as a small business car wash:
As we already talked about how lucrative this industry is in the U.S. alone, you must have an idea by now. And this scope of the car wash industry is not limited to developed countries only. The car wash industry is growing even in developing countries like India. According to the Indian Auto-mobile Manufacturers’ Association (AIMA) , there are more than 50,000 car washes are just in the Delhi NCR region alone. So, wherever in the world you are, this business is always a good idea.
Things to know before getting into the car wash industry:
Of course, the most basic information you need is the prospect location of your business. First, you need to decide where your car wash will be based. You can either choose an already established location or you could set one up yourself in a new area not yet occupied by similar businesses. A good location means high traffic and people spending money since they are at their destination anyway. If you have chosen an existing site for your business, make sure there is enough room for parking as customers won’t want to walk too far. Also, check with local authorities about any restrictions regarding opening times etc.
Accessibility:
In addition to a good location, you also need your business to be easily accessible from the main road. This means that people will have an easy time finding it and entering your car wash service. Also, check if any licenses are needed regarding accessibility since every country has different rules about this issue.
Once you’ve decided on a place for your car wash service, you need to figure out if the location is legally permissible for such a venture. This means checking with local authorities and finding out what licenses, permits etc., are needed in order to operate your business.
Professional Equipment:
Your equipment determines how professional and efficient you look when running a car washing service. Because they say, the first impression counts. Therefore, you must invest in high-quality material and equipment. They should be durable and long-lasting, providing the best possible cleaning results for your customers. A professional car washing service also needs a high-pressure washer, vacuum cleaner etc. These kinds of equipment will give you great power over any dirt on the surface and will leave every client satisfied with their clean vehicle at the end of it all.
A car wash service can be a massive success in your area if you have the right marketing plan. First of all, make sure to do formal and informal research about businesses around you that are already operating similar services. You should also check out different media platforms like TV ads or social media campaigns where people promote their business for free. This will help boost brand awareness and attract more leads when starting up this kind of venture.
Start-up costs:
A small business’s main advantage over big companies is much lower start-up costs. That’s why it’s easier for young entrepreneurs with low budgets to get into something new without requiring an initial investment too large for them at first glance. For example, although starting any kind of business requires spending money, you can start a car washing service on the cheap with only basic equipment.
Your Services Business Financial Model – The Proper Utilization of Funds
Once you have everything set in place, it’s time to figure out your financial plan . How much money will be needed each month? What are the bills and expenses for running this business every year? Will there be enough profit at the end of a certain period so that you can slowly but steadily expand your operations and look into buying more equipment etc.? These kinds of questions need to be answered before anything else since they hold the key to future success or failure with your car wash service. It is very important to have a specific financial model and not a generic one.
And you are in luck because Oak Business Consultant’s experts have done all the hard work for you. We have prepared a services business financial model that is only prepared while keeping a car wash service business in mind. It has everything you will need to know about this kind of business, all the costs involved and ways to make your service more efficient.
5. Funeral Service | Services Business Financial Model
Starting a funeral service business requires careful planning and research. It can be daunting to think of starting your own business, but it is necessary to make sure that you are prepared for all the things that come with this responsibility. Here we will discuss the steps to starting a funeral service business from scratch, including how much money you need, what licenses are required in most states, and how to find clients when you’re just getting started out.
There are many different ways in which funeral service providers can earn money. But we are talking about standard funeral services, including the opening and closing of the casket, arranging for transportation to an appropriate facility or cemetery, seeing that necessary papers are prepared (e.g., death certificates), and helping families make all funeral arrangements etc.
People often think it is expensive to start this business, but that’s not true. You will find out more about start-up costs later in this section.
Types of Funeral Services:
Here are the different types of funeral services provided by a funeral service provider.
First call
This is when someone dies at home and you need to tend to them before they go to the morgue.
Pre-need planning
This is for people who want all arrangements taken care of in advance so that their loved ones don’t have much work after their death.
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Funeral directors must complete extensive training because embalming requires skillful hands and knowledge about many chemicals used during this process. Embalmers use formaldehyde or other strong chemicals that preserve dead bodies until an open casket viewing or burial takes place.
Dressing and cosmetology
Before a person is buried or cremated, the body must be bathed and dressed in special white clothes (called shrouds) which are usually provided by funeral homes. Cosmetologists help prepare the dead for open caskets by styling hair and applying make-up to their faces if necessary.
Selling burial plots
In some cases, you might have to sell burial plots, too, depending on where your business operates.
Hearse service
When someone dies at home, they will need professional assistance in transporting them from one location to another to make all arrangements before being taken off life support systems.
Now that you know all the services you will need to provide as a funeral services business let’s get into the specifics of starting this business.
Forming a Legal Entity:
First, you will need to decide if this business is going to be a sole proprietorship or limited liability company (LLC). A sole proprietorship doesn’t require much paperwork, whereas an LLC does. An advantage of forming an LLC is that it provides the owners with personal protection from debts and other legal liabilities incurred by the business.
You also have to check your state laws about how funeral providers are allowed to do their job in terms of certifications required for embalming, licensing required for selling caskets and burial plots, etc. Again, each state has different rules, so make sure you know all these details before starting out in one particular location.
Registration for Taxes:
Next, decide if you want to file taxes as a sole proprietor or an LLC. If you choose the latter, then your business will need to be registered with the IRS and other state agencies for tax purposes.
Setting up the business bank account:
The next step is to set up a bank account for your business. Make sure the name of your business appears as such on all documents related to it, including insurance, accounts payable and receivable records, etc.
Getting Insurance:
The next step is to get workers’ compensation and general liability insurance for your business. This will protect you in the event of a lawsuit related to injuries or other damages caused by employees at work.
Your funeral home doesn’t necessarily need to be located near residential areas, but it should not be too far away either. You can look into commercial real estate options, especially when starting out with limited capital resources.
Establish your brand:
Since we cannot talk much about the “Target Audience” here, we are skipping all the way to establishing your funeral services brand. First, you need to identify your unique position in this industry. There are tons of options when it comes to funeral services. Every other service claims to be better than their neighborhood service. But this is not possible in reality that all of them are the best. So, you will need to research how you can actually become the best or at least a good funeral services provider.
Funeral Services Business Financial Model:
Finally, you will need to create a financial model for your funeral services business. This is necessary because it will guide your budgeting and forecasting decisions throughout the life of this enterprise. A financial model for funeral service business must have the following essential sections:
– Projected Income Statement
– Balance Sheet
– Cash Flow Statement.
– Profit and Loss Statement
– Break Even Analysis .
– Working Capital Schedule.
All these sections will help you to understand the complete picture of your funeral services business. So, are you ready for the financial model? All you have to do is head straight to Oak Business Consultant because we have a specific services business financial model for your funeral service.
6. Legal Service | Services Business Financial Model
Legal services involve a wide variety of opportunities. For one, you can choose to specialize in criminal law or personal injuries as an attorney at law and try your luck for the best, just like other lawyers. You can also work as a paralegal, performing legal research and drafting documents on behalf of the senior attorneys before filing them with courts. Another option is opening up a small practice where you represent individuals who need specific legal assistance such as – incorporation laws or business contracts etc.
How To Start Guide:
There are several steps involved in starting any service industry, especially law-related ones. First, you need to get a law degree (LLB) and complete your internship before applying for bar council registration. Once you are registered, it is recommended that you build up experience by working with established lawyers or firms before starting out on your own.
You can decide on a niche when you want to provide legal services. These include criminal law, corporate litigation, property law etc. All of them have different requirements and earning potentials. But you have to find for yourself the one that matches and aligns with your interest, experience, and background. Also, you need to determine which part of the country or city you want to operate in.
The target audience for legal services includes individuals and businesses looking for counsel on a specific matter, such as contract negotiations, divorce proceedings, trademark disputes etc., people with pending cases who need representation before various courts and tribunals. Litigants who cannot afford expensive attorneys’ fees but have an active lawsuit and so on.
The target audience for this service is basically everyone who needs legal assistance – either as an individual or a business owner. These can be citizens of your country but also tourists visiting the area.
Competitor Research:
Several other lawyers must provide similar services throughout your area with their firms. You can choose one niche within this industry that matches your interest best to start instead of trying them all at once.
Requirements
You will need staff members, including administrative assistants and paralegals, who handle most of the clerical work involved in running a small firm effectively while you meet clients face to face. Other than that, you also need an office, computer systems for the office, business structure, business registration, insurance, marketing, networking, bank accounts, and financial model.
Setting up the Office:
The most important part of your office is a dedicated workstation for you to meet clients and consult with them. You will also need an area where paralegals can research and prepare documents on your behalf before filing them in the court or tribunal.
Finalizing the business structure:
Before you can start an organization, it is recommended that you get in touch with a lawyer to find the corporate structure which suits your needs and has legal recognition. This helps when filing documents later on, such as Annual Returns etc.,
Business Registration:
The business registration process is relatively simple, but you need to provide relevant information about your firm and incorporate it. Then, you can either register as a sole proprietor or create an LLC (limited liability company) with yourself as the managing director.
When setting up any service industry, insurance plays a vital role in protecting your assets against unforeseen events such as property damage etc. This needs to be done after incorporation of the organization when you meet legal experts for advice on which type suits best according to your legal services.
Marketing Plan:
You will need an effective marketing plan for your legal services. For that, you need first to identify your unique offerings and then present them to your target audience. Make sure to run full-fledged marketing campaigns instead of one-timer ads. Marketing campaigns have significant benefits over other types of marketing plans. When you offer legal services, no one who comes across your ad needs to come to you directly. Because not everyone is always in need of legal service, but having seen your campaign frequently, people must have you on their minds whenever they need the service. And that is what you want to achieve through effective marketing. The goal is to reinforce the unique offerings of your legal service business compared to others in the area. Highlighting those offerings will ensure that whenever a new customer comes in, they already have some sort of trust in your service.
Online Marketing:
The best way to attract new customers is through online marketing. You can use social media like Facebook and Twitter, but also create a website page that talks about your firm and the services it offers. Because most adults today spend a good enough time of their routines on the internet. When you place your ads online, you get a wider reach, and the information is more reliable.
Legal Services Business Financial Model:
Having set up the organization, you have to put together a financial model. This will help when starting your service business in budgeting and planning, among other things. The best way is to create an annual plan that can meet with investors or banks if required later on. The primary purpose of a financial model is to provide a clear picture of the business and its performance over time. A good financial model for legal services should include revenue and cost projections, capital requirements, financing alternatives, etc.
So, you don’t need to worry about this services business financial model at all. Because Oak Business Consultant has already prepared a stellar financial model , this model is specific to your legal services. You will find every relevant detail in it and all you need to start this service business like a professional.
7. Carpet Cleaning Service | Services Business Financial Model
Every year, people spend a part of their income on buying new carpets. And this is what makes carpet cleaning services business lucrative and profitable. With the number of people spending more than ever before to buy expensive rugs and floorings, you can be assured that there will always be customers available for your service offering.
Market Potential:
The industry has been growing exponentially over the past couple of years. And so is its customer base who prefer professional carpet cleaners as compared to that do-it-yourself method. Moreover, apart from homes with large rooms such as living rooms and dining areas. The carpet cleaning business is also in high demand for offices.
Competition In the Market:
Depending on where you live, there might be several competitors operating already in the area, which does not mean it will be challenging to make some sort of impact within these boundaries. But having analyzed their marketing strategies, you can use them as an example for gaining more traction without disturbing their customer base.
How to Start?
The steps for starting a carpet cleaning service business are following:
Carpet Cleaning Equipment:
It’s important to know what to buy to start a carpet cleaning service. You want to buy high-quality equipment that lasts. There are different types of upholstery and carpet cleaning machines that you can choose from.
Steam cleaners:
Steam cleaners use hot water and sometimes detergents to clean your carpets and upholstery. They remove all the dirt from your carpet and kill most of the germs, making them a good option for those who have allergies or asthma.
Pressure washers:
These are other types of upholstery cleaners that blast away everything from your rugs and carpets with the power of a high-pressure jet of water combined with a powerful soap solution, making them a good choice for those who have pets and small children at home.
Carpet cleaning detergents:
It’s essential to use proper detergent on your carpets because if it’s not strong enough, it can’t remove all the dirt, which means you won’t be able to make your carpet look new again. So choose a powerful one depending on how much traffic your rug usually gets.
Competitor’s Research:
You will need to know how your competitors are doing. You should first get on Google and type in “carpet cleaners near me” or “local carpet cleaners.” You will then see a list of local businesses that can be potential competitors.
Next, you want to go through the website of each of these businesses and read through their about page, what they offer, their services, and anything else that is relevant. For example, if they sell packages for different rooms or types of cleaning (upholstery, pet stains), make a note on whether or not they offer the service you are interested in.
If possible, look through their testimonials and reviews. It’s important to know what others think of the business, so you can use this information when marketing your own service in the future.
Next, if they have a Facebook page or Instagram account, go ahead and follow them so you will be able to see what kind of posts they share with their audience. This way, you will get an idea of how often they post something new on social media sites, indicating how much traffic they are getting overall. Finally, follow them on Twitter if it is available because there could be more opportunities to learn about what type of content attracts people online. Once again, take note of whether or not any one tweet has gotten above average attention from its audience.
-How to Market your Service
Once you have all the relevant information, it’s time for marketing strategies and promotion ideas. First, it’s essential to know your target audience. Because it is important that you focus on a specific group of people to make their service more affordable. For example, if someone were trying out carpet cleaning services they would want something special like deodorizing or stain removal (depending on what type of room does it belong) which means one option might not work for everyone so having several different packages with different types of chemicals could come in handy depending on how much traffic does each rug get. This way, you can stand out compared to other companies by offering unique options at an affordable price point.
-Insurance:
Carpet cleaners should be licensed and insured. Even if you’re just a one-man operation, it’s important to get yourself insured. It will protect your customers and protect you in case anything happens that results in damage to the property of others.
Your Services Business Financial Model:
A financial model that is useful for starting a carpet cleaning service is where you can provide a detailed breakdown of your costs and how much revenue they generate. In the case of carpets, this means calculating the amount of time per hour that it takes to do a job. If you want to be efficient, then it should take about 60-90 minutes to clean an average-sized room. The next step is to multiply this by your hourly rate, which gives you the number of hours it would take for one room. Then multiply this number by the cost per gallon that your carpet cleaning solution costs. You just need to determine how many gallons are needed for one room, so divide the total price by this to determine how much it costs per room. This number should be added to the hourly rate and then multiplied by how many rooms it takes for one job (if you’re charging them based on this).
But you can find all of this and more in a much better and more organized manner in Oak Business Consultant’s business financial model. A financial model that we have prepared for your carpet cleaning services. This financial model will give you a detailed breakdown of your costs and how much revenue they generate.
8. Errand Services | Services Business Financial Model in Excel
Errand services are another growing business opportunity that you can take advantage of. Things like picking up groceries, delivering dry cleaning or even taking your dog to the vet—these are all examples of errands that people need help with but don’t necessarily want to do themselves.
The best way to go about this is by creating a detailed list of all the things you think others might hire an errand service for and then searching online through Craigslist, Facebook Marketplace or Backpage if there’s any interest in someone doing these jobs locally.
There are immense earning opportunities in running an errand service business. In addition, because the tasks are usually simple and don’t require your full attention, it can be a great side hustle you start while still working at another job.
How to Start Guide:
Errand services is an opportunity that does not need much capital or equipment, making it one of the easiest businesses to get started with today. All you need is a phone and access to transportation.
You should market yourself to busy professionals who need help getting things done but simply lack the time because their schedules are too packed. This will increase the chances of them reaching out because even though anyone could use an errand service, this target audience has more disposable income to pay for this type of service.
Competitor Research:
Since errands are so simple, there is not much to research when it comes to competitors. All you need to do is look online through Craigslist or Facebook Marketplace and see what services are being offered in your area. If there seems like a demand, then start an errand service business!
Requirements:
Just about anyone can start their own errand service as long as they have access to transportation and enough time during the day that they could complete tasks given by clients on top of running their business. The only skills required would be good communication because most people hiring these types of services want someone who’s friendly and willing to help them out without any complaints.
Marketing Plan:
You can market your errand service by reaching out to people through Facebook and Craigslist-like platforms. If you’re a good communicator, then this shouldn’t be too difficult because most people need help with simple tasks like grocery shopping, picking up dry cleaning or dropping their pet at the vet’s office. And if you need a ready-made Business Plan for your Errand Services business , Oak Business Consultant has it for you.
Website for Errand Service:
Having an online presence is a must for running a successful errand service business. Therefore, you will need a website and a practical mobile application where people can simply search for what they need and contact you right away.
Your Services Business Financial Model:
A financial model will come in handy when starting an errand services business. This will help you understand your costs and how much revenue you can generate from the first month of operation up to a year or so. Furthermore, a services business financial model that is specific for your errand service should have the following:
– Costs for labor and transportation.
– Revenue from each job you complete to give a rough estimate of how much money your business will make every month.
– Operating costs such as insurance, equipment, etc., need to be covered out of the revenue generated by completing jobs/errands.
9. Beauty Subscription Box | Services Business Financial Model
A beauty subscription box service is a company that sends out boxes of curated and personalized beauty products to its clients. These companies aim to provide you with the best and most current collection of products on the market for your specific needs, wants, and desires. They also ensure that all items sent are sanitary, fresh, and authentic.
Who can start this business?
This would be perfect for someone who loves working with people, knows about great quality cosmetics brands but doesn’t want to work in retail or at a store. This type of business is perfect for organized people who have a lot of time on their hands to spend researching good products and spending it with the clients.
What are some requirements?
This type of service requires you to be highly detail-oriented. A simple reason is that each customer has specific needs. So, being professional in your approach will help gain their trust. Unfortunately, this means you’ll have to spend a lot of time researching products. The products that will be best for your clients and then spending even more time with them.
What should you expect?
This type of business is very rewarding because it provides the business owners with an opportunity to work mainly on their own terms and with the clients they want to work with. You can make your business as personal and tailored-made for what you like doing.
What does this type of business entail?
It involves a lot of hard work, research, time spent learning about beauty products. Also, you need to know about customer service skills to please your customers and find new ones. However, this type of business is also rewarding because you get to work on your own terms. At the same time, creating a life that allows flexibility and freedom.
How can I start this business?
To start one, research the industry thoroughly to learn about what products are out there. Then find out who are currently buying beauty boxes to make sure yours will be appealing enough for them to buy it. Then, once you understand all these things, begin researching suppliers or wholesalers. This is important because you’ll purchase your items at wholesale prices before putting together packages based on each customer’s needs.
What are good tips for success?
Make sure your website is easy to navigate and looks appealing. Also, make it user-friendly so customers can easily find what they need on their own without having to contact you every single time with specific questions about the products or their boxes.
Ensure that your research process involves finding out exactly which type of beauty box will be ideal for your market niche, at this point, as well as being able to figure out who would buy one from you specifically.
Offer a variety of services, including subscription-based packages, and allow clients to purchase individual items within the categories that interest them most. This way, people have options when purchasing from you instead of just subscribing monthly or bimonthly for an entire year.
Marketing Strategy:
-Create a website that is easy to navigate and looks professional
-Make sure your business has an active social media presence to attract more customers. Post regularly about new products, industry news and updates, and photos of your subscribers receiving their boxes for them to share with others. This will help you gain even more clientele because people love sharing excitement over product discovery.
-Use Facebook ads or Google Adwords advertising platforms where you can target specific keywords like “beauty box subscription”. This will allow only those who type it into the search engine to see what you have posted on there. The goal at first should be attracting attention from potential clients. Then converting them into sales later when they’ve already had a chance to become familiar with your business.
A beauty subscription box service business needs a financial model because they need to plan how they’re going to continue funding the company and grow it.
A financial model would allow them to see what their expenses are and how much revenue they’re generating.
The expenses could include things like the cost of the monthly subscriptions, warehousing and fulfillment costs, and supply costs. Revenue would cover customer acquisition, marketing efforts, and anything else that generates money for the company.
But you don’t need to worry about getting this financial model anymore. Oak Business Consultant has got your back. Our financial experts have already prepared a financial model template for a beauty subscription box service business.
Who is Oak Business Consultant?
Oak Business Consultant offers a variety of services to maximize the potential of your business. We have worked with a wide range of industries and companies, from small startups to Fortune 500 companies. In addition, we have a number of specialists that have been working in the field for years. We know what it takes to get you where you need to be.
Oak Business Consultant collaborates with clients in their business strategy development process. We do it by creating a customized plan that aligns with specific goals and objectives. This includes mapping out the vision, values, and purpose for their clients’ organizations. Oak Business Consultant focuses on where they want to go, how they will get there, and what needs to happen along the way in order for them to achieve their goals.
Some of the services that Oak Business Consultant offer include:
– Business Planning
– Financial Analysis
– Pitch Deck
– Financial Modeling
– Marketing and Sales Strategies
– Financial Planning
If you are looking for a business consultant who can help you achieve your goals, contact Oak Business Consultant today.
Oak Business Consultant has helped many Start-up and SME’s for the preparation of Business Plan, Financial Modelling, and Financial Consultancy.
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What is a business model?
- What product or service a company will sell.
- How it intends to market that product or service.
- What kind of expenses the company will face.
- How the company expects to turn a profit.
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1. retailer model, 2. manufacturer model, 3. fee-for-service model, 4. subscription model, 5. bundling model, 6. product-as-a-service model, 7. leasing model, 8. franchise model, 9. distribution model, 10. freemium model, 11. advertising or affiliate marketing model, 12. razor blades model, how to design a business model.
- How will you make money? Outline one or several revenue streams, which are the different ways your company plans to generate earnings.
- What are your key metrics? Having a profitable business is great, but it usually doesn’t happen right away. You’ll want to identify other ways your company will measure its success, like how much it costs to acquire a customer or how many repeat customers you'll have.
- Who’s your target customer? Your product or service should solve a specific problem for a specific group of consumers. Your business model should consider how big your potential customer base is.
- How will your product or service benefit those customers? Your business model should have a clear value proposition, which is what makes it uniquely attractive to customers. Ideally, your value proposition should be specialized enough that competitors can’t easily copy it.
- What expenses will you have? Make a list of the fixed and variable expenses your business requires to function, and then figure out what prices you need to charge so your revenue will exceed those costs. Keep in mind the costs associated with the physical, financial, and intellectual assets of your company.
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The shift to flexible consumption How to make an “as a service” business model work
The move toward flexible consumption models
The difference between traditional business models and fcms, enabling a services operating model, a call to action.
Many incumbent tech companies are adopting flexible consumption models (FCMs) to provide offerings “as a service.” But doing FCM “right” often requires transforming the operating model as well as the business model.
Over the last several years, the technology industry has seen a significant shift toward the adoption of flexible consumption business models. Flexible consumption models (FCMs), also known as “as-a-Service” or XaaS models, offer customers product delivery and payment options that allow them to purchase access to products as a service. FCMs provide compelling benefits to companies that effectively deliver them to the market: They enable predictable, renewable revenue streams, deliver greater value to the end customer by allowing them to pay for only what they consume, enable deeper insights into customer consumption patterns to help inform add-on sales, and lower operational costs by enabling a company to serve customers at scale through a common platform. According to the International Data Corporation (IDC), the market for FCM offerings will reach US$160 billion in 2018. 1
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In a move to capture these benefits, a number of traditional technology companies have attempted to implement FCMs for part or all of their business. Many, however, have met with limited success, with consequences including failed product launches, slower growth, higher costs, and greater operating complexity. Meanwhile, new entrants using FCMs have been gaining market share and are now challenging these traditional companies’ marketplace dominance.
Many attempts to transition to FCMs falter because of the scope and complexity of the necessary changes. First of all, FCMs are customer-centric models, whereas traditional business models are more product-centric; this difference places different demands on a company’s operating model. To effectively implement an FCM at a company that has always operated on a traditional, product-centric model, the company must radically transform its operating capabilities to support FCMs’ unique characteristics (such as recurring billing, revenue recognition, and so on). Equally important, depending on how a company sells and delivers its products, it may wish to support multiple FCM-based business models to preserve each offering’s value proposition. This becomes more complex if a company needs to support traditional business models in parallel with its FCM model(s).
Transforming operations to support FCMs, in fact, requires a systemic operational recalibration. Force-fitting legacy processes and practices to support an FCM model will only yield suboptimal outcomes. Thus, the key question facing traditional product companies is how to enable an operating model that can address these challenges.
One way to make the transformation to support FCMs’ unique characteristics is to adopt a “services operating model”—an approach that entails treating not only the company’s marketplace offerings, but also its enabling internal operations, as “services” (a self-contained, sub-organizational unit) that are delivered to internal or external stakeholders.
Changing customer expectations are forcing many traditional technology companies to reevaluate their business models
Technology customers today are increasingly favoring FCMs over traditional product purchases, as FCM offerings usually require less upfront cost, transfer risk of ownership away from the customer, and align payment to consumption, providing demonstrable and measurable business value. Responding to this market shift, many technology product companies have undertaken to adopt an FCM (figure 1). Broadly speaking, we have seen companies taking one of three different approaches, depending upon their market context, business objectives, and risk profile:
- Protect and grow . These companies aim to include complementary FCM products in their portfolio to protect and propel their legacy offerings forward. Companies can choose to either develop these products organically or obtain them through acquisitions to drive incremental revenue. SAP is one example.
- Straddle . These companies see value in giving customers a choice between FCM and non-FCM offerings, and want to transition to FCM with caution. They seek to maintain both FCM and legacy versions of the same product without attempting to influence customers’ migration to FCM offerings.
- Burn the boats. These companies have decided to focus exclusively on FCM offerings and have undertaken an enterprisewide transformation to enable the FCM business. They have converted their portfolio’s key strategic offerings to FCMs, and plan to develop all new products only using FCMs. Adobe is one example.
FCMs differ fundamentally from most traditional technology business models in that FCMs organize their activities around customer needs and opportunities rather than around the product life cycle. Most traditional, product-centric companies tend to operate in a sequential fashion, moving the customer between phases in the value chain with handoffs between independently operating teams (figure 2). In contrast, FCMs’ value chains are not sequential, but interconnected: The company may engage with customers at any stage at any time, which requires an operating model that can support multiple concurrent customer interactions. For example, for a FCM business to deliver an evaluation program to a potential customer, the sales organization needs to identify the initial opportunity, the supply chain needs to extend the offer, the customer support arm must monitor service levels, and the customer success team needs to review the entire effort to determine the likelihood of conversion and what actions to take once the trial period expires. All of these activities must occur in tandem, and they require careful coordination among the different teams involved. Hence, the operating model must provide a mechanism for teams to work together to deliver an end-to-end outcome to the customer.
Given the interconnected nature of executing an FCM, it becomes clear that an effective shift to FCMs requires fundamental changes to not only a traditional product company’s business model but also its operating model. Our experience suggests that more than 65 percent of a typical company’s operational capabilities are affected by shifting to an FCM. This is a key but, in our experience, often overlooked consideration: Many major tech players seeking to implement FCMs over-rely on legacy processes, systems, and personnel to build, run, operate, and scale their FCM businesses. Indeed, some companies have invested millions of dollars to extend their existing operating models to develop and introduce new FCM offerings. In doing so, they are force-fitting legacy operations to the new business model in a vain attempt to handle FCMs’ unique operating characteristics with their current people and processes.
Redesigning the legacy operating model as a services operating model can allow a traditional product company to create and manage a structure that enables it to effectively manage a FCM business either independently or in conjunction with its legacy business.
The basic idea behind a services operating model is that it is composed of a number of self-organizing, collaborative components—“services”—that together execute the sum total of a company’s business activities. Services are self-contained sub-organizational units, each of which can be managed independently or, in certain cases, outsourced from the parent organization. They differ from functions or capabilities in several important ways. Each service has one or more clearly defined customers, who may be internal (other services or teams within the organization) or external (for instance, suppliers or end customers). A service’s output is clearly identifiable by the customer, and must create business value for those who consume it. The service acts as an interface to the underlying capability that supports it, but its operation is completely transparent to the consumer. Finally, each service is headed by a “service owner” who is responsible for service delivery, measuring service consumption and enhancing performance over time.
A company with multiple business units (BUs) or offerings may choose to have a separate service for a particular BU for better agility or to preserve an offering’s value proposition, or it may have one service that caters to all BUs for greater cost efficiency.
We have identified five important steps in transitioning from a traditional operating model to a services operating model:
- Establish a transformation office with executive sponsorship
- Disaggregate the operating model into a set of services
- Determine the level of standardization within each service
- Operationalize each service
- Establish service life cycle management
Step 1: Establish a transformation office with executive sponsorship
It’s no surprise that some companies have struggled with transitioning to an FCM, given the many factors that can make it difficult. The complexity of establishing an FCM operating model, the frequent competition between the legacy and FCM businesses over investment priorities, and hesitation and delay in making the needed investments and mindset shift can all present obstacles. Thus, establishing a governance model that signals strong organizational commitment is imperative to success. Consider following these guiding principles:
- Drive the change from the top down. Identify a senior leader with direct access to the C-suite to head the transformation. This leader is responsible for ensuring that the company invests appropriately (both money and resources) in developing the services operating model, and that each service is designed and operationalized to meet its performance metrics. He or she should also be tasked with capitalizing on opportunities for organizational learning and recruiting from other teams the right talent needed to execute the transformation.
- Deploy dedicated resources. Create a dedicated group to carry out the transformation effort, supported by a cross-functional panel of subject-matter experts who understand the dependencies between, and the services operating model’s impact on, different areas of the company (such as engineering, sales, and supply chain).
- Define metrics to drive accountability. Establish metrics against predefined milestones to hold the leader and the group accountable for the transformation’s success.
Step 2: Disaggregate the operating model into a set of services
The next step is to decompose the company’s operating model into a set of services in a way that allows each service to be managed and tracked independently. By doing this, a company can give the operating model the flexibility it needs to support a variety of FCMs. The complete set of enabling services should be identified for each of the company’s traditional and FCM marketplace offerings.
Figure 3 shows an illustrative breakdown of an FCM operating model into services that can be used as a baseline reference for identifying what services may be needed to support an FCM offering. (Of course, the actual list of services for any given offering will depend on the company’s target business models and current organizational model.) Figure 3 also shows the typical areas where a traditional company may experience capability gaps in various services. For services such as identity or access management, many traditional companies may already have most of the capabilities in place to enable the service. On the other hand, for services such as billing and invoices, traditional companies may need to acquire or develop capabilities such as recurring billing and payment capabilities to be able to deliver the service effectively.
Step 3: Determine the level of standardization for each service
Once the full set of services is clearly defined for each offering, the next step is to determine how the organization can effectively support both the company’s traditional and FCM offerings in a way that enables operational efficiency while allowing for agility. Essentially, the company needs to determine which set of services can be leveraged across all offerings, which services need to be developed separately to support certain groups of offerings, and which services are unique to an offering and must be maintained independently.
Here, the temptation to take a blanket approach to standardization must be resisted. In an effort to simplify the decision, many companies aim to centralize and standardize the company’s so-called “back-end” capabilities while giving the individual business units more leeway in “customer-facing” capabilities to leverage their experience and relationships. However, FCM business models do not typically lend themselves to this superficially neat operational categorization, especially if the company also wants to continue to sell certain offerings under a traditional model. For one thing, FCM business models often require certain services to engage with their customers in a way that is significantly different from what would be required under a traditional business model. (For instance, a traditional business model would usually not require end customers to be billed on a frequently recurring basis.) Secondly, different FCM business models themselves may differ from each other, meaning that the capabilities required for a particular service can vary significantly among different FCM offerings. For example, configure-price-quote (CPQ) services for a digital subscription model (such as a monthly subscription to a streaming video service) are usually very low-touch, whereas a club-membership subscription model, where customers expect highly personalized and customized billing and invoicing, might require high-touch CPQ services.
Because of these factors, it is imperative to consider each service separately in the context of the offerings it supports when deciding on its level of standardization. As an example, one major media conglomerate had a number of business segments supporting several FCM offerings, such as annual passes, merchant subscriptions, and digital subscriptions. Each business segment had evolved its operating model independently to meet immediate individual needs, which resulted in fragmented capabilities and an inconsistent customer experience. Realizing this, the company set out to establish the correct level of standardization across key services such as billing and payments to enable a frictionless customer experience across different offerings. Doing this would also allow the company to more easily scale the FCM offerings in the future.
A business model assessment of the FCM offerings revealed that the company had some 15 different FCM offerings, but only five distinct business models among them. “Billing” had unique requirements for only one of these models, but “payments” could be handled consistently across all five models. Consequently, the company decided to consolidate billing services for the offerings belonging to the four “non-unique” business models, but not to integrate the billing platform for the offerings belonging to the remaining business model. Payment services, on the other hand, were consolidated at the enterprise for all five business models.
Step 4: Operationalize each service
After establishing what services are required to operate the FCM business model(s), the next step is to operationalize each service. This is done by establishing ownership of the service within the organization, by defining the service components—the constituent activities—that are needed to run, manage, and track the service; by understanding the service’s inputs, outputs, and resources needed to execute; and by establishing metrics.
We recommend that companies begin by appointing a service owner for each service to be operationalized. The service owner, who is responsible and accountable for overall performance and acts as the service’s general manager, has several key responsibilities including deciding and adhering to service-level agreements, obtaining the resources needed to maintain service performance, managing dependencies with other services, and continually evolving the service to meet business needs. Given the importance and criticality of the service owner role, the individual who holds it should be senior enough to effect meaningful organizational change. Incentives should be devised to motivate service owners to effectively manage the service’s performance without being tied to a specific business area.
Once a service owner is appointed, they will be required to work with the central transformation team to further operationalize the service that they lead:
- Identify the service components. The service components are the activities the service performs to produce the outcome for its service consumers.
- Identify the service consumer(s). Service consumers are the stakeholders—which may be other internal services or external parties, including end customers—that make use of the outcome(s) produced by a service. Understanding who the service consumers are will help the service owner determine critical success drivers and track service performance.
- Establish expected service outcome(s). A service outcome is the total business value delivered to each consumer of the service.
- Determine service performance metrics. Service performance metrics should be defined for each expected service outcome. These metrics should measure performance on two key dimensions: efficiency (how the service uses its resources) and effectiveness (the extent to which the service delivers its intended outcome).
- Define the inputs. Inputs to a service come from other services or external stakeholders; the service uses these to create and deliver the expected service outcome.
- Identify service requirements. Service requirements are the resource and technology capability requirements that a service needs to process its inputs and make appropriate investment decisions.
Step 5: Establish service life cycle management
The journey does not end here. While the transformation establishes the foundation, equally important is the ongoing services life cycle management. Once a service is established, the service owner should periodically review its metrics to evaluate its performance and drive continuous improvement. Furthermore, he or she should work with the service’s consumers to understand their new requirements, and identify and prioritize the development of any new needed capabilities. Similarly, capabilities that a service’s consumers no longer need can be eventually retired.
Generally, the service owner should determine where services should “sit” within the organization. Key decisions include whether the service should be placed within the legacy organization or housed within a separate structure specifically created to contain services supporting the FCM business(es). For this, at least three distinct organizational placement options exist: segregated, parallel, and integrated (figure 4).
Where a service should reside depends on the company’s organizational characteristics and business goals. A key consideration is that the service should be placed within the organization where it has, at a minimum, an equal standing with the legacy operations to ensure that it is not underinvested in due to the organization’s natural propensity for maintaining the status quo. As one example, an equipment manufacturer that was losing market share decided to empower its business entities to create and launch new FCM-based software solutions derived from its traditional offerings to meet market demand. The company had aggressive targets and wanted to capture marketplace leadership in the industrial Internet of Things (IoT). In adopting a services operating model to enable these software solutions, the company decided to offer services to its business entities through a separate organizational unit to enhance speed through increased visibility and accountability. Placing the services in a single segregated unit, as opposed to having them delivered by different teams sitting within different functions, helped to ensure their alignment with the business entities’ requirements and development needs.
In contrast, a leading ERP software company that faced growing competition from cloud-based ERP service providers took an integrated approach to its services operating model. The company wanted to keep a focus on its core business, but to switch its business model to FCM to meet evolving customer demands. The company acquired a cloud-based ERP provider to integrate cloud functionality with its legacy offering for quick product enhancement. To sustain focus on its core business and maintain organizational culture, the company fully integrated the acquired business within the relevant functions to develop the centralized services. The teams consolidated the capabilities at the corporate level to support both legacy and new offerings. In this case, the integrated approach to services helped the company drive scalability and efficiency and allowed it to target larger customers with its new offerings.
The transition from traditional hardware and software sales models to an FCM can be very challenging, but it offers great potential benefits. To capitalize on this opportunity, leaders should understand that organizing operations to support the delivery of FCM offerings is very different from the operational needs of a traditional business model. If the strategic decision is to go forward with an FCM, applying a services operating model can enable a company to execute the FCM(s) effectively in the marketplace.
Acknowledgments
The authors would like to thank Faruk Muratovic , Aishwarya Sharan , Jon Smyrl , and Varun Pulyani , all of Deloitte Consulting LLP for their contributions to this article.
Cover image by: Andrew Bannecker
Eileen Smith, Worldwide semiannual public cloud services spending guide , International Data Corporation, 2018, p. 3. View in article
Topics in this article
Flexible consumption services.
Flexible consumption business model transformation allows customers the flexibility to consume and pay-per-use, but transitioning is complicated and challenging. Companies exploring consumption-based business models should think through the implications of the complex and interrelated business decisions they will need to make as they transition.
Gopal Srinivasan
- Deloitte Consulting LLP
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Senior Manager | Monitor Deloitte
Abhi Arora is a strategy senior manager with Monitor Deloitte and focuses on helping technology clients with growth and go-to-market strategy, and business model transformation. His recent experience includes helping clients with their end-to-end FCM transformation journey, from identifying and addressing key strategy questions, to defining new operating model constructs and enabling capabilities. He is based in New York, NY.
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Principal | Deloitte Consulting LLP
Gopal is a Partner in Deloitte Consulting’s Monitor Deloitte practice, focused on the High-tech, Media and Telecommunications industries. He specializes in corporate strategy, organic and inorganic growth, product innovation, customer strategy, go-to-market and new business models in the high-tech sector. Gopal has over 15 years of experience serving senior executives in CEO, Strategy, BU, Product, Sales and Services roles on solving their most critical priorities. In recent years, Gopal has focused on high-tech business model evolution and assisted multiple clients in the hardware and software sectors build and scale new digital business models related to digital platforms, Cloud, SaaS / XaaS / flexible consumption, subscriptions, tech-driven services, cognitive, IoT, through business model definition, organic and inorganic investments, customer strategy, product and portfolio strategy, pricing and packaging, enterprise and commercial go-to-market models (direct, indirect, digital), adaptive operating models and building critical capabilities required for execution. Gopal is a co-founder and co-lead of Deloitte’s XaaS practice and is currently scaling Deloitte’s Customer Outcomes practice that is focused on serving the agenda of the Chief Customer Officer in sustaining and growing recurring revenue models.
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Isaac Khan is an alumnus of Deloitte Consulting, with 15+ years of experience in driving large-scale transformational change. He specializes in digital business operations, and post his stint at Deloitte, he has advised on, led, and executed enterprisewide digitization initiatives for large technology companies. Khan currently leverages his consulting experience on operational strategy development, business model evolution, and digital sales enablement for a multi-national technology conglomerate. He is based in San Jose, CA.
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Why Are Financial Models Important to Startups and Small Businesses?
No matter the condition of the economy, businesses face challenges or discover opportunities that weren't anticipated. A supplier might be having difficulties. Or the business might be located in a part of the country susceptible to weather-related disruptions. Your largest customers may move to a competing product, or they'll double their business with you. You may discover a new business model that takes off unexpectedly. By developing a financial model that lets you analyze the results of events like these, you can be better prepared to handle those and similar scenarios should they occur.
By constructing a model that considers the business impact of extraordinary events, you can work through how you'd handle them should they occur. Developing a model that helps you understand how you would react to predictable changes will give you a head start on dealing with an unanticipated challenge.
At its highest level, your business model should help you understand what you would do if:
- Revenue continues just as it has over the past year or so
- Demand significantly increases compared to the recent past
- Demand drops significantly
The top-line implications for cash flow and product demand in each of those scenarios will have an effect on each functional area of the company, from finance to marketing. The model helps you determine the steps you would take to keep customers happy while managing the spike or fall in demand.
You don't want to be counting life jackets while the boat is sinking. Likewise, you don't want to run out of staterooms if your cruise sees a sudden rise in popularity.
A business plan that accounts for likely changes in business conditions will not only leave you more prepared; it will also demonstrate to lenders, investors or acquirers that you've thought through what it takes for business to remain successful under adverse or unexpected conditions.
Building a financial model can be intimidating for small businesses, but it's absolutely necessary. In addition to preparing for potential future outcomes, startups can use a financial model to figure out how much to charge for products or services to make a profit. Financial modeling can also be key to establishing good financial discipline by tracking performance against plans.
What's more, if a company ever wants a loan or investment, startups and small businesses will need to build a financial model to create the financial projections lenders and investors require.
Types of Financial Models
Small businesses that have been around some time can combine historical financial data with information from industry and market reports to build data models. Startups, however, often run into the problem of trying to figure out what data to use for the foundation of their financial models since they have little to no sales history or metrics on customer satisfaction. They can look to industry and market research, like Standard and Poor's (S&P) or Dun & Bradstreet, to get national averages for businesses in adjacent markets. Figures can include standard costs of revenue in every industry, the percentage of revenue attributed to direct cost of sales or what percentage of revenue goes to overhead. The U.S. Small Business Administration provides some sample financial assumptions that could be a good place to start.
Three-Statement Model
The most important financial model, and the one on which every other financial model is based, is the three-statement model. The three-statement model links three core financial statements—income statement, balance sheet and cash flow statement—with assumptions and Excel-based formulas and creates a forecast for a given time period. It starts with revenue and can also calculate expenses, debtors, creditors, fixed assets and more.
An employee building a financial model in Excel will create tabs for the income statement (showing revenue and expenses), balance sheet (detailing assets and liabilities), cash flow statement (money in vs. money out), capital expenses and depreciation costs to establish a clear picture of its existing business. A finance professional can then use those historical numbers to develop key assumptions—which drive predicted results—and apply Excel-based formulas to see the projections. How will a shift in demand for your products affect revenue growth and cost of goods sold (COGS)?
On the income statement, assumptions can include revenue projections (average order value minus refunds/discounts), average order value, refunds as a percentage of revenue, discounts as a percentage of revenue, COGS as a percentage of revenue and operating expenses as a percentage of revenue.
Once the three-statement financial model is in place, other financial models can be applied to forecast the effects of various assumptions.
Sensitivity or "What-If" Analysis
This type of model shows the effects of changes in assumptions such as selling price, supply chain costs, fixed costs, forecasted sales, delivery costs and other variable numbers. Sensitivity analysis models generally change one variable at a time and then demonstrate the impact of that change. How does changing the price of packaging or the advertising budget affect the forecast? Can the company break even if it changes the average selling price?
For this reason, sensitivity analysis is also called "what-if" analysis. It challenges the person looking at the numbers to consider the reliability of the assumptions made. What happens if actual results turn out to be much different than expectations? Which factors have the biggest impact on the forecast?
Scenario Analysis
This financial model is closely related to sensitivity analysis but involves changing all or many variables at the same time. A scenario analysis looks at what happened in the past and what could happen in the future, including major changes that would have a lasting impact on the company. It typically includes a base-case, worst-case and best-case scenario. Scenario analysis could be used, for instance, to model the effects of the coronavirus pandemic, a natural disaster or the loss of a critical customer on a company's total sales.
Strategic Forecast Model
Businesses use a strategic forecast model to see how various initiatives it's considering would move the needle on long-term, strategic goals. Also called long-range forecasting, this model helps organizations evaluate the impact of corporate projects, treasury initiatives and marketing and analysis plans on its long-term strategy. For example, a company may use the strategic forecast model to project the costs and potential revenue of opening a second manufacturing plant, building stores in another country or launching a new product line. It can then determine whether it's in the business's best interest to pursue those projects.
Discounted Cash Flow Analysis
A dollar today is always worth more than a dollar two years from now. If you do nothing to your business and it makes a predictable amount of money each month, you know your cash flow. If you make an investment now that will produce new revenue streams in the future, that future money is not worth as much on a dollar per dollar basis than the money you're spending right now.
Instead of investing that money in your business—by opening a new office, purchasing new equipment or buying more inventory, for example—you could invest it and get a return. You could also bank it and earn interest. So to know the value of an investment now, you need to discount the money you expect to earn in the future, which is where discounted cash flow analysis comes in.
The tricky part is deciding what that discount rate should be. Let's say you have a customer who is ready to sign a five-year contract to purchase some quantity of product, and that's the basis for your new investment. As long as that customer has a strong business, you have a sure thing—you know the company will receive a certain amount of income for five years. You can invest and use the interest rate on some other sure thing (like a five-year Treasury Bill) to determine your discounted cash flow.
If your estimated return on investments has historically been 90% of what you initially expected, then your discount rate needs to reflect that. In that way, your discount rate reflects both what you could earn if you just invested the money, plus a measure of risk based on market trends, your own history or both. You'll use that discount rate to calculate the net present value of your investment, and if it's positive, you're making a good investment.
One reason capital investment dried up in many sectors during the COVID-19 pandemic is the risk factor associated with future business. In most cases, it's very difficult to estimate a proper discount rate because, at the time, no one knew how the pandemic would go and how much it would affect business and the economy long-term.
Calculating the net present value of investments is the best way to determine whether an investment is a good one or not. But the quality of calculation is highly dependent on your ability to set the right discount rate.
Foundational Financial Models for Small Businesses
These are the models that will help you understand your company's performance:
- Financial statements: A helpful financial model that includes a forecast of the financial statements is the best way to communicate company's financial performance across banks, investors, governments, auditors or any other party.
- Revenue: This tells you how business owners are going to get paid and when they're going to get paid. Those are the things that business owners need to understand to be able to figure out how to price it, how customers are going to pay for it and how often customers are going to buy it.
- Growth margin: Out of the money that you charge customers in the revenue, how much is going to go towards delivering on the product or service and what's left over. That's going to tell you if you have money to then support and expand the business and make profit.
- Operating expenses: What's the cost to actually operate the business? What does it take from support, marketing, administrative cost, to services, software etc.?
- Working capital: Many entrepreneurs and small business owners don't realize that it's going to take capital or money to start the business or even expand into a new line of business. Business owners need to understand how much revenue you need to generate from customers to eventually make enough money to support the business after paying out the operating and gross margin.
- Investment or capital expenditures: This is usually put together when small businesses need to raise money or talk to the bank for loans or increase credit lines. Business owners need to be able to support how quickly investors could get a return on their investment.
What Does a Financial Model Tell a Business?
Having a financial model not only tells investors or lenders about the health of the business—it can improve decision-making and ultimately facilitate better business management. For small businesses, financial models can answer some basic questions to ensure the revenue model is sound.
The three-statement financial model helps a small business budget and track actual spend against that budget. This makes it easier to see potential slowdowns in cash flow and to know if and when to cut costs. And financial models help businesses plan and estimate when and how much they will need to spend to hit certain milestones around revenue, total customers or other KPIs.
For instance, Slidebean, a company that provides software to help build presentations for startups, uses two assumptions for its financial model : the number of employees and the number of active users. When the number of active users increases by a set number, the model tells the company to hire another support agent.
A financial model also allows the business to make projections in financial statements and track KPIs such as revenue growth, gross margin, operating income, earnings before income and taxes (EBIT), profit margin and net profit margin.
Finance expert Eric Andrews says that most investors want to see a four-year plan for startups. For small businesses trying to secure a loan, some banks will ask to see projections five years out, with more detailed numbers for the first year. To build a financial model:
- Color code your model. Label assumptions blue (this is the industry standard to tell people that number can be changed). The numbers in black are linked to formulas.
- Start by generating the basic information needed for the revenue model. For a subscription-based business selling products, for example, on one Excel spreadsheet tab type in two core assumptions—advertising spend and paid customer acquisition costs. Then calculate the number of brand-new buyers. This is calculated by taking the ad spend/customer acquisition costs.
- On a separate tab, start building the assumptions needed to forecast the income statement. Begin with the assumptions about revenue/sales, COGS and operating expenses.
- To forecast sales, put in assumptions on the average order value (based on product price), refunds as a percentage of orders and discounts as a percentage of orders. Carry those out month-over-month or year-over-year across the row.
- To forecast COGS, input assumptions on product cost, fulfillment expenses, customer service and merchant fees and enter it all as a percentage of revenue.
- To forecast operating expenses, enter assumptions on headcount, salaries and benefits, as well as expenses like advertising, rent, etc.
- Above these assumptions, build the income statement. In the Excel spreadsheet, those assumptions will now be linked to formulas in the income statement to forecast revenue, net revenue, COGS, gross profit, operating expense, operating profit and net profit.
- By changing one or more assumptions, the business can see the effect of changes on key areas of the business.
Plan & Forecast More Accurately
Make Financial Modeling Easier With Software
Most small businesses and startups haven't automated their financial modeling. In fact, only 11% of small businesses surveyed by Robert Half said they have automated that process. Yet, a quarter said they will automate it at some point in the future.
There are clear advantages to automating financial modeling—it can handle more complex datasets and visualize projections to make them more digestible. Automation can increase accuracy and reduce the time it takes to complete the forecasts. It also allows for easy comparison of actual versus forecasted results.
But even without automated financial modeling, using technology to automate other parts of the accounting process required to create financial statements provides time and cost savings thanks to greater speed and accuracy. For instance, nearly 40% of companies with less than $499 million in revenue surveyed by Robert Half said that they have automated financial report generation. Finalizing those reports now takes 10 days, compared to 13 days in 2018.
Every startup and small business needs financial modeling. The U.S. Small Business Administration says that financial management includes bookkeeping, financial statements, projections and financing. All of these activities can offer business owners valuable guidance, enabling them to make decisions that will help their companies thrive and grow.
A study from the Federal Reserve Banks of Chicago and San Francisco found a direct correlation between financial management and the financial health of small businesses. And the better a business understands the numbers in its financial reports and the more frequently it reviews them, the more likely it is to succeed. The study found that the majority of financially healthy companies had strong financial knowledge, experience getting financing from a bank and a commitment to developing a budget compared to those with poor financial health.
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What is a financial model?
What is a financial model used for, what software is best for financial modeling, who builds financial models, how can you learn financial modeling, how much accounting knowledge is required for financial modeling, related articles, what is financial modeling.
The process of combining historical and projected financial information to make business decisions
Financial modeling is one of the most highly valued, but thinly understood, skills in financial analysis. The objective of financial modeling is to combine accounting, finance, and business metrics to create a forecast of a company’s future results.
A financial model is simply a spreadsheet which is usually built in Microsoft Excel, that forecasts a business’s financial performance into the future. The forecast is typically based on the company’s historical performance and assumptions about the future, and requires preparing an income statement, balance sheet, cash flow statement, and supporting schedules (known as a 3-statement model ). From there, more advanced types of models can be built such as discounted cash flow analysis ( DCF model ), leveraged buyout ( LBO ), mergers and acquisitions ( M&A ), and sensitivity analysis. Below is an example of financial modeling in Excel.
Image: CFI’s Financial Modeling Courses .
Key Highlights
- Financial modeling combines accounting, finance, and business metrics to create a forecast of a company’s future results.
- The main goal of financial modeling is to accurately project a company’s future financial performance.
- Modeling can be useful for valuing companies, determining whether a company should raise capital or grow the business organically or through acquisitions.
There are many types of financial models with a wide range of uses. The output of a financial model is used for decision-making and performing financial analysis, whether inside or outside of the company. Financial models are used to make decisions about:
- Raising capital (debt and/or equity)
- Making acquisitions (businesses and/or assets)
- Growing the business organically (e.g., opening new stores, entering new markets, etc.)
- Selling or divesting assets and business units
- Budgeting and forecasting (planning for the years ahead)
- Capital allocation (priority of which projects to invest in)
- Valuing a business
- Financial statement analysis/ratio analysis
- Management accounting
Forecasting a company’s operations into the future can be very complex. Each business is unique and requires a very specific set of assumptions and calculations. Excel is used because it is the most flexible and customizable spreadsheet tool available. Other software programs may be too rigid and specialized, whereas Excel knowledge is generally more universal.
There are many different types of professionals who build financial models. The most common types of career tracks are investment banking , equity research, corporate development, FP&A , and accounting (due diligence, transaction advisory, valuations, etc).
To learn more about jobs and careers that require building financial models, explore our interactive career map .
The best way to learn financial modeling is to practice. It takes years of experience to become an expert at building financial models , and you really have to learn by doing. Reading equity research reports can be helpful, as they give you something to compare your results to. One of the best ways to practice is to take a mature company’s historical financials, build a model into the future, calculate the net present value per share, and compare your projections to current share prices or the target prices in equity research reports.
Taking a professional financial modeling training course also offers a solid base understanding of the relevant concepts and skills. In the meantime, you may be interested in exploring CFI’s free Financial Modeling Guidelines or having a go at building your own financial models. Feel free to use our available templates to get a jump start before taking one of our courses.
In order to build a financial model, you need a solid understanding of accounting fundamentals . You have to know what all the various accounts mean, how to calculate them, and how they’re connected. We recommend having at least a few accounting courses under your belt. Since accounting is a prerequisite for financial modeling, we offer our accounting crash courses for free!
- All CFI Financial Modeling Courses
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Buy now, pay later: Five business models to compete
- Article"> Article (12 pages)
Point-of-sale (POS) financing services in the United States have grown significantly over the past 24 months, especially since the onset of COVID-19. Trends fueling growth include digitization, rising merchant adoption, increasing repeat usage among younger consumers, and an expanding set of players targeting lending at point of sale, a service also known as “buy now, pay later.”
About the authors
Thus far, fintechs have taken the lead, to the point of diverting $8 billion to $10 billion in annual revenues away from banks, according to McKinsey’s Consumer Lending Pools data. In our view, only a few banks are responding fast enough and boldly enough to compete. Banks that underestimate the threat may see continued loss in share and could lose out on participating in a growing value pool and gaining share among younger and new-to-credit customers, as banks in Australia and China did when facing a similar situation. To avoid that outcome, US banks need to understand the landscape for POS financing and choose from among the emerging models.
This article seeks to give POS financing players as well as merchants the necessary insights to refine their strategies in the POS-financing arena. It provides an overview of the market, details key trends and factors influencing growth, and offers ideas for market entry for banks and partnerships for merchants. The insights are based on McKinsey research, including McKinsey Consumer Lending Pools (a proprietary database covering granular market size and growth trends), the McKinsey POS Financing Consumer Survey and POS Financing Merchant Survey, and our recent experience with banks and merchants.
POS financing’s expanding role in unsecured lending
Credit originated at point of sale is projected to continue its growth from 7 percent of US unsecured lending balances in 2019 to about 13 to 15 percent of balances by 2023, according to data from McKinsey’s Consumer Lending Pools (Exhibit 1). This is the only unsecured-lending asset class that has experienced high-double-digit growth through the COVID-19 crisis. The growth is underpinned by increased consumer and merchant awareness and adoption of point-of-sale financing solutions.
Our annual POS Financing Survey shows that US consumers are getting used to seeking merchant-subsidized credit at point of sale: about 60 percent of consumers say they are likely to use POS financing over the next six to 12 months. Additionally, merchants are seeing value in these solutions, as most enhance cart conversion, increase average order value, and attract new, younger consumers to the merchants’ platforms. However, the incremental impact of such solutions varies by merchant size and category.
About 60 percent of consumers say they are likely to use POS financing over the next six to 12 months.
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Fintechs are capturing almost all the value being created in POS financing because banks have been slow to respond. Consequently, banks have lost about $8 billion to $10 billion in annual revenues to fintechs. Far worse for banks, they are losing access to an acquisition channel with potential to serve highly engaged younger consumers.
Adoption of POS financing isn’t limited to consumers with relatively low credit scores. Adoption across higher-credit customers is increasing as the credit mix is influenced by more premium merchants starting to offer financing at checkout. Around 65 percent of total receivables originated by point-of-sale lenders are with consumers having credit scores higher than 700. As an example, Affirm is originating upward of $1 billion in loans at the exercise equipment company Peloton annually, with the portfolio’s average credit score at about 740. In the lower-ticket “Pay in 4” model, which allows consumers to split payments into four interest-free installments (for example, Klarna, Afterpay), usage is driven by consumers with lower credit scores, but even here, the low scores result from thinner credit files, not poor credit usage.
Five distinct offerings with integration across the purchase journey
The growth in POS financing for consumers involves five distinct sets of providers and models, each with varying strategies and value propositions (Exhibit 2). 1 1. POS financing for small and medium-size enterprises is ripe for growth, but we do not cover the opportunity in this article. Understanding these models gives a sense of the segments they target, the merchant and consumer needs they address, and business models banks and traditional lenders are competing with.
Integrated shopping apps
The most prevalent misconception across banks and traditional players is that shopping apps offering “buy now, pay later” (BNPL) solutions are pure financing offerings. While that may be true for the smaller players, the leading Pay in 4 providers are building integrated shopping platforms that engage consumers through the entire purchase journey, from prepurchase to post-purchase.
The largest players are steadily building scale and engagement with an aspiration to become a “super app,” similar to large China-based players such as TMall or Ant Group, that offer shopping, payments, financing, and banking products in a single platform. These large providers already monetize consumer engagement through offerings other than financing (for example, affiliate marketing, cross-selling of credit cards and banking products). As long as traditional competitors fail to acknowledge this and unless they build solutions that drive engagement through the entire journey, they will find it tough to compete with these players (Exhibit 3).
The core Pay in 4 model still focuses on financing smaller-ticket purchases (typically less than $250) with installments that consumers pay down in six weeks. Providers like Klarna and Afterpay have seen exponential growth during the COVID-19 pandemic, amplified by rising merchant adoption and repeat consumer usage. Even the largest merchants that have shied away from these products, in part to limit cannibalization of their private-label credit card portfolios, are now integrating these offerings at checkout.
Roughly 80 to 90 percent of these transactions happen on debit cards, with average ticket sizes of between $100 and $110. 2 2. Jared Beilby, “6 need-to-know buy now, pay later statistics for small businesses,” Merchant Maverick, August 12, 2020, merchantmaverick.com. And a survey in July 2020 found that nearly 56 percent of American consumers have used a BNPL service—compared with 38 percent the year prior. 3 3. Maurie Backman, “Study: Buy now, pay later services continue to explode,” Ascent, March 22, 2021, fool.com. Unlike with other POS installment loans, consumers have a very high affinity and engagement, resulting in significant repeat usage. More mature consumer cohorts are using these financing products about 15 to 20 times a year and logging into these apps ten to 15 times a month to browse or shop. While the average credit score of consumers using these solutions is under 700, this has less to do with bad credit history and more to do with relatively thin credit files.
The already fast growth of Pay in 4 accelerated during the COVID-19 crisis, increasing at 300 to 400 percent in 2020 and accounting for about $15 billion in originations. McKinsey projects that Pay in 4 players are likely to originate about $90 billion annually by 2023 and to generate around $4 billion to $6 billion in revenues, not including revenues from other products they will cross-sell. Most of the originations are from higher-margin, discretionary-spend categories, such as apparel and footwear, fitness, accessories, and beauty. However, the largest players are also starting to integrate with newer categories, as in the cases of Klarna with Etsy.com and Afterpay with Houzz.com.
Given the shorter duration of financing in this model, receivables turn over about eight to ten times a year, resulting in return on assets (ROA) between 30 and 35 percent. Loss rates for more mature portfolios are comparable to those of credit cards (6 to 8 percent). 4 4. Review of company reporting.
Regulatory actions outside the United States
Regulators across geographies are looking at enhancing regulatory overview of some POS financing models like Pay in 4. With this in mind, industry players in some countries are trying to self-regulate to address potential regulatory concerns proactively. 1 1. Ranina Sanglap, “Australian buy-now-pay-later industry may need regulation to inspire confidence,” S&P Global Market Intelligence, March 9, 2021, spglobal.com.
Regulators outside of the United States, in markets including Australia and the United Kingdom, have raised concerns regarding the share of late fees charged by the Pay in 4 players. Another concern, referred to as “stacking” risks, involves consumers using too many Pay in 4 providers and getting overburdened by debt.
In Australia, the largest industry players have come together to self-regulate and issue a code of conduct intended to protect consumers. The industry leaders’ commitments include affordability checks, greater transparency on fees, and financial-hardship assistance.
In the United Kingdom, the Treasury announced that Pay in 4 players will come under the purview of the Financial Conduct Authority (FCA), which regulates financial-services firms. Pay in 4 players will be required to conduct affordability checks before lending to customers, and customers will be allowed to escalate complaints to the UK financial ombudsman.
In markets like Australia, POS financing is significantly more mature and widespread and Pay in 4 products have been around longer than in the United States; in Australia, roughly 30 percent of the adult population had an account with a Pay in 4 provider as of June 2019, 5 5. Buy now, pay later: An industry update - Report 672 , Australian Securities & Investments Commission, November 16, 2020, asic.gov.au. and the value of BNPL transactions grew by around 55 percent in 2020, 6 6. Chay Fisher, Cara Holland, and Tim West, “Developments in the buy now, pay later market,” Bulletin , Reserve Bank of Australia, March 18, 2021, rba.gov.au. in contrast to the continued decrease in credit cards in circulation. These markets are experiencing increased regulatory activity associated with POS financing (see sidebar “Regulatory actions outside the United States”). This model has a set of competitive advantages that are increasingly difficult for traditional banks and large incumbents to replicate. Key differentiators of the Pay in 4 model include the following:
- Solutions to engage throughout the purchase journey. The largest providers are transforming into shopping apps; consumers are starting their journeys within the Pay in 4 providers’ apps, not just using Pay in 4 at merchants’ checkouts. As an example, Afterpay reports that about 17 percent of their consumers initiated one or more transactions from within their shopping app in February 2021. 7 7. “Afterpay reports record sales of $10B in first half 2021,” PR Newswire, February 25, 2021, prnewswire.com. Shopping from within the app allows consumers to use the Pay in 4 feature even at merchants where these solutions are not integrated at checkout. For example, consumers shopping from within the Klarna app can use Klarna at Amazon, even though Klarna is not available at Amazon’s checkout.
Given the race to sign up the largest merchants over the next 18 to 24 months, Pay in 4 providers are competing heavily on price and on marketing support promised to retailers. However, they are offsetting this price compression by offering merchants affiliate marketing services: merchants pay 4 to 12 percent of the transacted amount if the customer landed at the merchant website from within the provider’s app or website. McKinsey’s semiannual POS Financing Merchant Survey of more than 200 large and midsize merchants has repeatedly shown that acquiring new consumers is more important for merchants than increased cart conversion and increased average order value across categories. This heavily influences merchants’ willingness to pay more for affiliate marketing than for financing.
As these players continue to acquire consumers at a low cost through merchant checkout (getting access to a large, low-cost feeder channel) and leverage their engagement through cross-selling, they are well positioned to become the financial-services provider of choice for new-to-banking consumers
- Advanced technological capabilities, including distinctive merchant underwriting and consumer-fraud models, deep integrations into shopping carts, and sophisticated consumer-service tools. Competing in the Pay in 4 installment market requires highly sophisticated fraud tools, because identifying the consumer’s intent to defraud at the time of the application is a lot more important than assessing ability to repay, especially given the six-week tenure of the loan. In that short time, the ability to repay is unlikely to change dramatically. Advanced underwriting requires integrations into merchants’ order management systems that enable lenders to access and leverage SKU-level data. Additionally, dispute mitigation is significant, given the high rate of returns in many of the target categories, including apparel and footwear. Managing billings in real time is crucial for mitigating disputes, because it materially reduces customer complaints for wrongful billing and payments.
- Brand and positioning. Pay in 4 players have invested heavily in building a brand image that appeals to the segments they target. Klarna leverages celebrities to further enhance its brand and distinguish itself from legacy banking providers. Merchants in fashion and similar categories value this strong brand positioning and see these providers as brand adjacent. This brand positioning has also changed the way merchants perceive these players relative to banks. Merchants look at banks as private-label credit card partners and hence will seek profit sharing from them, but the same merchants look at Pay in 4 players as partners in commerce enablement and co-marketing.
Banks and larger incumbents that are building solutions to compete with Pay in 4 players will need to address each of these differentiators to build a compelling and scalable business model. Most banks and traditional players are thinking about this only as a financing solution at checkout and have not considered how they need to cover the entire purchase journey. Additionally, banks are not effectively leveraging their existing scale to highlight their ability to drive incremental traffic to merchants. This is a missed opportunity. Integrations with shopping carts, an engaging consumer-facing app, and self-serve functionality to limit call volumes also are critical to win. The higher bar on regulation, credit reporting, and compliance also affects a bank’s ability to design seamless application experiences at checkout.
Despite these hurdles, banks will need to assess ways in which they can present themselves within purchase journeys and ideally at point of sale. The shift in volumes to credit originated at point of sale is accelerating. Neobanks that have built significant scale with a younger audience also have the potential to compete more directly in this model.
Off-card financing solutions
Typically, off-card financing solutions, such as Affirm and Uplift, offer financing on midsize purchases (between $250 and $3,000) and require payment in monthly installments. The average ticket sizes are close to $800, and the average tenure of the loans is about eight or nine months. Typical verticals include electronics, furniture and home goods, sports and home fitness equipment, and travel. Unlike Pay in 4 solutions, which are entirely merchant subsidized (0 percent annual percentage rate for consumers), off-card financing models also have originations where consumers are paying an APR—at times partially subsidized by the merchant—in the case of lower-margin verticals, such as travel.
Of the consumers who take these loans, about 80 percent already have a credit card with enough credit availability to fund the purchase. These consumers choose to take a financing product because it offers cheaper credit or easier payment terms.
Most merchants that integrate such solutions are in categories with higher-ticket, lower-frequency purchases where cart conversions are critical, given abandonment rates—which can be as high as 80 or 90 percent—and costs. According to results from McKinsey’s semiannual POS Financing Merchant Survey, the willingness to pay for POS financing is greater among merchant categories with higher costs of acquisition and higher gross margins (Exhibit 4).
Digital has been a primary driver of growth for these solutions, though in-store financing is starting to catch up: about 25 to 30 percent of originations in 2021 are expected to be in-store, using applications submitted through smart tablets. Additionally, increasing adoption across customers with higher credit scores—especially in higher-ticket financing categories—is further fueling growth. Roughly 65 percent of originated volume is prime or higher. As a result, this model has cannibalized volume from credit card issuers.
Consumers using these financing solutions tend to be less engaged with these solutions than are consumers using the integrated Pay in 4 shopping apps. Active consumers in mature cohorts, even best-in-class off-card financing players, have a repeat usage of two or three times a year, versus more than 20 times for integrated Pay in 4 shopping apps. This will be a critical metric for these players to address, given the risk of commoditization at point of sale.
Additionally, as credit-card-linked installments start becoming more readily available at point of sale, these models will see volumes move back to cards, especially in originations from higher-prime customers. Offering card-linked installments at point of sale will also enable the issuers to deliver a much more frictionless financing process and to match the 0 percent APR financing from the off-card financing providers.
Some off-card financing players are starting to make investments that can help offset this potential threat from card-linked installments by integrating across the shopping journey from prepurchase to returns (for example, Affirm’s acquisition of Returnly). Legacy financing providers are either modernizing their platforms or licensing the technology platforms from new software-as-a-service-based players to compete more effectively; an example is TD Bank with Amount at NordicTrack.
Virtual rent-to-own models
The virtual rent-to-own (VRTO) players, including AcceptanceNow and Progressive Leasing, are primarily targeting the subprime consumer base and have very high implied APRs. Most (95 percent) of the consumers have a credit score below 700; about 70 percent have a score below 600. A difference from most other models is that merchants are not heavily subsidizing APRs. On the contrary, larger merchants now receive rebates from VRTO providers on originated volumes.
Categories are typically limited to goods that can, in theory, be repossessed, but VRTO players are branching into other categories. More than three-quarters (78 percent) of all originations are across two categories: mattresses/furniture and electronics/appliances.
Most of these players are integrating digitally and in-store as second- or third-look financing providers; examples include Progressive Leasing at Best Buy and Katapult at Wayfair. For larger lenders and issuers, there is an opportunity to partner with one of these players to enhance the breadth of the credit box and make the proposition more compelling for merchants. Subprime issuers have an opportunity to address this need through their existing card solutions.
Card-linked installment offerings
Card-linked installments are the prevalent form of financing at point of sale across Asia and Latin America. In contrast, US card issuers have launched post-purchase installment functionality (for example, American Express Plan It and Citi Flex Pay), but the adoption rates have stayed low. In the United States, these post-purchase installments cannot compete with the 0 percent APR solutions offered at purchase.
However, card-linked at-purchase installments do have the potential to materially gain scale, as they can enable merchant-subsidized offers. Another highly underserved opportunity is in prepurchase journeys: before buying, issuers can enable consumers to select merchant transactions they want converted into installments. This can be done by using the existing offer portals that most issuers have—examples include Amex Offers for You, BankAmeriDeals, and Capital One’s Capital One Shopping asset. This is a significant opportunity to address merchant needs met by the integrated Pay in 4 shopping apps.
Currently, card-linked installments at purchase are offered in the United States through fintechs like SplitIt; network-offered solutions in pilot stages, like Visa Installments; or cobranded or narrowly targeted merchant partnerships, such as the ones Chase and Citi have with Amazon. Average ticket sizes are around $1,000, and adoption is greater in higher credit bands.
Card-linked installments will be a table-stakes capability in the coming years, but the players who can integrate this across the purchase journey and effectively monetize prepurchase offerings are likely to be able to differentiate.
Vertical-focused larger-ticket plays
A model very similar to the way sales financing has worked historically is vertical-focused larger-ticket plays. This model usually has category specialists; examples include CareCredit in healthcare and GreenSky in home improvement.
Average ticket sizes for healthcare can range between $2,000 and $10,000, with elective healthcare categories like dental, dermatology, and veterinary accounting for a majority of the originations. Nonelective healthcare is still underserved.
In home improvement, average ticket sizes can vary between $5,000 and $50,000, depending on subcategories. The larger categories are heating, ventilation, and air conditioning (HVAC); windows and doors; roofing and siding; and remodeling. Players tend to achieve scale through partnerships with original equipment manufacturers (OEMs). Solar financing, while growing, is a more complex vertical, given larger loan tenures and tax credit implications. Home improvement financing has been cannibalizing volumes for home equity lines of credit and personal loans, so traditional lenders need to assess how to compete in this model.
As this space gets increasingly competitive, there is growing margin pressure and a greater need for experience. Players trying to scale in this space will have to assess which subcategories to focus on, whether they want access to the end-consumer relationship, and which go-to-market approach to pursue. Banks can target this space to acquire high-credit customers and to cross-sell mortgage refinancing and other banking services.
How traditional players and other fintechs can compete
The traditional players should treat the variety and growth of POS financing as a signal to rethink the lending landscape. To achieve long-term growth, lenders of all kinds will need to address three core changes in consumer experience related to borrowing:
- Product-agnostic delivery of credit. The lines across traditional credit products are already blurring, as banks offer loans against open credit card lines and fintechs offer installment-based credit cards or debit cards with Pay in 4 features. Underwriting therefore needs to be agnostic of the product through which credit is being delivered—say, personal loans or credit cards. Banks that do this early and well while managing economics and risk will benefit significantly.
- Integration and engagement across the entire purchase journey. A big differentiator for banks will be integrating across the entire purchase journey, leveraging affiliate marketing to subsidize both credit and rewards costs, and delivering greater control and value to the end consumer. These integrations not only contribute to scale and engagement but also help banks get much better access to and visibility into younger consumers and their credit behavior. Integration at checkout alone will not be enough, as the providers not offering incremental value to the merchant in prepurchase journeys will get commoditized.
- Habituation to subsidized credit and enhanced value. As consumers get habituated to merchant-subsidized credit, banks need to rethink their risk and economic models and even the underlying value propositions. US banks might imitate Australian banks that have launched interest-free credit cards to address the expectations set by Pay in 4 providers across the younger consumer base that credit can be accessed at 0 percent APR. Merchant partnerships of some form will be critical to enable this, and merchant acquirers can play a big role in being the intermediaries to scale this model.
Traditional issuers and lenders, merchant acquirers, and neobanks each have a mix of assets that gives them a right to play in this space. But competing will require players to assess which is the right business model to focus on, which verticals to prioritize, and how to go to market. Players can choose from a mix of go-to-market models to access this space (Exhibit 5).
The go-to-market models vary in their expected return on assets, technology requirements, size of investment, and speed to market. In fact, these are just a few of the relevant considerations. Banks also need to make decisions across each step based on implications on required capabilities, compliance and risk, consumer experience, vertical focus, competitiveness of offering, and other factors.
Growth in point-of-sale financing is a secular trend, and regardless of whether the existing players survive, the underlying consumer needs addressed by POS financing will affect consumer choice over the long run. Moving fast to have a clear strategy and some path to enter and play in this market will be critical. While this evolution of POS financing may seem slow to scale for now, it is likely to accelerate. Starting to make investments to address this trend should be on every banking player’s strategic road map.
About the author(s)
Puneet Dikshit is a partner in McKinsey’s New York office, where Diana Goldshtein is a knowledge expert, Udai Kaura is an associate partner, and Felicia Tan is a consultant; Blazej Karwowski is an associate partner in the London office.
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Financial Services Business Plan
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Green Investments
Strategy and implementation summary.
Green Investments will leverage its sustainable competitive edge of independent environmental research based on a custom set of criteria based markers for an objective measure of a company’s dedication to environmentalism. The competitive edge will be marketed by using the mantra of “think globally, act locally.” This marketing slogan will encourage people to do their part in regards to helping the environment through responsible investing. The sales campaign will rely on metrics that indicate environmental investments can and do outperform the S&P 500 Index.
5.1 Competitive Edge
Green Investments’ competitive edge is the environmental marker criteria that when applied indicates which economic performing companies with solid environmental commitments. The markers are effective for extremely valuable for several reasons:
- Meaningful: They are based on extensive research, providing a streamlined overview of the environmental performance of the companies.
- Context-based: Allows a high degree of comparability with similar businesses.
- Convenient: Far easier to use than large scale internal audits.
The key here is the fact that an objective, easy to apply, and accurate measurement system has been developed to provide environmental analysis for any company that has the markers applied to them. No one else offers this type of service as an information source for the decision making process of stock investments.
5.2 Marketing Strategy
“Think globally, act locally.” This well known and concise mantra simply suggests everyone should do their part. Green Investments services allows people to make investments based on their conscience. So many people want to do good but are unsure how to. Green Investments’ services allows people to do the right thing, with no real cost relative to the other options. Green Investments’ returns are better than the S&P 500 Index.
The marketing effort will concentrate on Green Investments’ ability to empower people to make a substantial difference in this world while getting a great return on their money. Green Investments will use magazine advertisements and community based marketing (networking, sponsorship and participation in seminars) to increase visibility for Green Investments and the services offered. The advertisements will be a steady way that people will become aware of the investment options as well as some visibility for the company itself. The community involvement implicitly accepts the premise that good business relies on networking (inter relationships, both business and personal) to be a significant source of business and good will. Green Investments will participate in numerous on-topic events and seminars that will display them as experts as well as give them a podium to describe the different services.
5.3 Sales Strategy
The sales strategy will rely on using quantitative evidence the recommended companies outperform the S&P 500 Index. In 1999-2001, Green Investments’ chosen companies outperformed the index by 2.4%. This is a significant amount. The sales strategy will concentrate on that by making smart green investments, you can achieve better then average returns on your money. A sales packet will be assembled and distributed to prospective customers that shows the better than average historic returns that Green Investments recommended companies enjoy.
5.3.1 Sales Forecast
The sales forecast is being done in a conservative fashion to avoid any inflated expectations that might not be able to be obtained. The first several months will be slow. Green Investments has projected steady, incremental growth in sales. This can be explained as a function of the increased proficiency in terms of sales for Green Investments as well as an increased awareness of Green Investments by the target customers. Please review the following table and chart for numerical and graphical representations of the future year’s sales forecasts.
5.4 Milestones
Green Investments has identified several milestones which will act as ambitious yet achievable goals for the organization. By establishing the goals, the need to reach them will develop an implicit incentive for all organizational members to work hard to achieve the milestones.
- Business plan completion: The business plan is the roadmap for the organization. There is value in the process of the writing of the business plan, forcing the writers to analyze a multitude of issues.
- First account of over $1 million invested: This would be a significant amount of money for an individual account and the organization will strive to achieve many of these customers.
- Profitability: An eventual necessity.
- Revenue of $250,000: With the achievement of this milestone and the previous one, there will be a clear reaffirmation that the business model is successful.
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The Next Financial Services Business Model
by Outthinker | Jun 27, 2017 | Innovation , People , Strategic thinking | 0 comments
My wife knows credit cards. She has a couple, of course, but she is also the general counsel of one the world’s leading credit card companies. So, it’s enigmatic that were she old enough in the early 1970s to apply for a credit card herself, her bank would have refused to issue her one. Before 1974, most banks deemed women too high a risk unless they were married and their husbands co-signed for the card.
The pattern of corporate evolution is predictable: a change makes something new possible, corporations take a long time to adapt, a few pioneering firms (“Outthinkers”) embrace the new reality, and others fall behind until eventually the entire industry evolves.
We are today experiencing such a leap in evolution across most sectors, including financial services. Advances in areas of finance-related technology, such as blockchain, mobile payments and next generation security, are opening up new possibilities for how financial service firms operate their business models.
The reaction of successful Outthinkers to what technology makes possible is evolving the eight elements of the business model: positioning, placement/distribution, processes, product, physical experience, promotion/sales/marketing, pricing and people. (View our white paper on this topic to read more about each one.)
Positioning
Strong business models begin with a unique, clear positioning. Traditionally, financial service firms have differentiated their brands by functional attributes such as interest rates, fees, and customer service. But increasingly we see winners positioning themselves around deeper emotional attributes.
Consider Simple Bank , founded in 2009 to deliver basic banking products like checking accounts through mobile and web. By focusing on attributes such as simplicity, dreams, ease, and beauty, the bank grew rapidly. The team launched their beta in 2012 and by the end of 2013 the bank was processing around 13 debit transactions per minute on average with an overall customer balance of $64 million.
In February of 2014, BBVA acquired Simple Bank for $117 million. The bank continues to grow and operate with reasonable freedom.
Placement describes how you get your value proposition to your stakeholder. Financial businesses are fundamentally different than other industries in that they must engage not only front-end customers but back-end. Banks, for example, cannot only attract customers; they must also attract borrowers so they can put deposits to use.
Consider CommonBond , a financial services company which was founded in 2012 to connect college students in need of a school loan with alumni willing to invest. The company quickly attracted the attention of intuitional investors. Today they have over $1 billion in loans outstanding.
Process refers to the internal processes you follow to create and deliver value. The most significant process advancement in financial services is arguably the distributed ledger (also referred to as blockchain), which helps identify and reduce fraud by maintaining a distributed network of records rather than keeping them all under one central authority.
Countless Outthinkers are applying this approach to the recording of events, tracking of medical records, and transaction processing.
In the financial services world, Alibaba is using this approach to reinvent small business lending in China. Their platform, a sort of eBay-meets-Amazon, offers nearly a billion products and is one of the 20 most visited websites in the world. The merchants who sell on the platform sometimes need funding to grow and fulfill orders. Since Alibaba has transaction data about merchants who sell on their platform, they can use that data to make loan decisions quickly and efficiently.
When we think about product, we tend to think about features such as a computer’s speed and hard-drive capacity or a desk’s color and design. But taking a more user-centered approach often reveals unseen opportunities.
Consider TransferWise , a financial services company founded by two friends who put a lot of thought into what attributes people cared about that they could deliver. In doing so, they came up with a process that allows people in different countries to transfer money directly into each other’s accounts rather than having to deal with banks’ complicated processes and ever-changing fees. Launched in 2011, the company now has over one million customers sending more than $1 billion per month.
Physical experience
Your customers only know you and your offer through their senses. They must, at a fundamental level, see, smell, hear, taste, or touch it. Companies that understand this often create innovations their competitors overlook.
In the financial services sector, Biocatch uses a portfolio of patents to help financial institutions reduce fraud by not only authenticating customers but continually monitoring them as they interact. Their platform collects and analyzes more than 500 behaviors during a customer’s digital sessions, sensing for malware, bot activity, and other suspicious behavior.
Promotion points to how you communicate your value proposition to prospects and customers. Forward-looking financial services companies are using “customer-centric design thinking” to deepen and lengthen their customer relationships.
For instance, through its acquisition of fintech start-up eMoney , Fidelity is using a top financial-planning software that significantly enhances communication between financial planners and their clients. Instead of sitting down with pens and forms, planners can share interactive charts, updated with the latest stock and fund performance data. This offers the ability to narrowly target customers, deliver customized messages, do deep personalization and shift the capabilities that will define success.
Pricing here is less about the absolute price you charge but rather about the basis of your pricing. Software has long evolved from selling licenses to selling access. Retailers are exploring a shift from selling per unit to selling per month. As financial institutions begin positioning themselves along more innovative dimensions and become more akin to lifestyle brands, there exists an opportunity to rethink pricing.
Consider Stockpile , a company that, via gift cards you can find at your local grocery store, enables you to buy incremental shares of stock in companies like Facebook, Activision, Apple, Amazon.com, and Berkshire Hathaway. They have disaggregated the price of stock.
People has to do with how you attract, retain, organize and incentivize workers. Here again, we see a shift in thinking. The small-team, agile structures that tech firms like Google and Zappos have embraced are making their way through the IT departments of major financial institutions into the business.
ING , the Dutch banking group, is perhaps the leader of this movement in the financial services world. In 2015 the company broke its standard hierarchical groups into about 350 nine-person “squads,” and then grouped these into 13 “tribes.” Such “agile” approaches to organization have enabled ING to accelerate time to market, increase employee engagement, and improve productivity.
Rethink your financial services business model
Now is the time to stop and rethink your business model:
- Positioning: What unique core customer can you attract through a positioning that competitors would avoid copying?
- Placement: What new paths to customers and investors are newly available?
- Process: When was the last time you thought through your core processes? What can you reimagine?
- Product: If you stopped thinking in terms of product categories and instead in terms of attributes your core customer needs, how would you design from scratch a compelling “product”?
- Physical experience: How is the physical experience of your brand and company unique? How can you rethink the experience?
- Promotion: By taking a customer-centric perspective, what new possibilities are available to differentiate how you interact with customers and prospects?
- Pricing: On what basis is your competition charging? How can you change the basis of pricing?
- People: Are your people policies aligned with the future of financial services? How can you change who you hire, how you organize them, how you incentivize them, and your culture?
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Shared Services Model
Transform the shared services model to deliver business value.
Shared Services Leadership Vision
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Shared services model: frequently asked questions, what is a shared services model.
Many business, finance and shared services leaders seek a common or consistent shared services model definition. A shared services model delivers services to internal customers by consolidating, standardizing and automating processes in low-cost locations. Services are delivered to many different divisions, departments and groups within an organization, and may include: accounts payable and receivable, travel and entertainment (T&E) reimbursement, payroll, general ledger and cost accounting. Any process that can be centralized and would benefit from increased customer focus is a candidate for a shared services model. Internal customers include anyone within the organization who would benefit from increased focus on value-add activities. The purpose of a shared services model is to run, grow or transform the business. Effective shared services models are defined by an unrelenting focus on customer value and satisfaction, being competitive and continuous improvement.
What are examples of shared services models?
When establishing a new shared services model or expanding on an existing one, business, finance and shared services leaders may seek shared services model examples. Some examples show work retained in-house because they require direct customer or investor interaction, specific business or product knowledge, or have the potential to put sensitive information at risk. In-house work may include legal, investor relations, tax, treasury, and planning and analysis. Other shared services model examples show work outsourced because the work is process-driven, routine and easy to teach. Outsourced work may include accounts payable, T&E reimbursement and payroll. Before adapting your approach from shared services model examples, it’s important to evaluate your current processes for their level of complexity and their degree of commonality across multiple business units. Key questions you should ask yourself are: How well-understood and documented are the management and operational activities associated with each process? How mature is each process and how much will the organization benefit from process improvements? Is there any resistance from business units and local IT?
What are the benefits of shared services models?
The shared services model and centralized services both promise significant process standardization and economies of scale, making them popular among business leaders needing low-cost and reliable services. However, shared services model benefits are distinct from the benefits generated from centralized services: better expectation setting with the business, greater motivation to reduce costs and increased responsiveness to changing business needs. Because the shared services model has a strong focus on transparency, continuous improvement and customer centricity, shared services model benefits include equipping the business to deliver sustained impact in the face of constantly evolving needs.
How do you price services in a shared services model?
Shared services model price plays an important role in defining the degree of control over customer behavior. Organizations need to balance efficiency when pricing and charging out costs against effectiveness in influencing customer behavior. Since there isn’t a “one size fits all” shared services model price, shared services leaders should understand the pros and cons of various mechanisms for pricing or charging out the cost of shared services and determine which shared services model price approach is most suitable to support their services. Shared services leaders developing or revising shared services model price should determine the level of transparency and flexibility in pricing by assessing business unit customers’ needs and objectives.
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The Pacific Financial Group Lowers Fees on 36 SDBA Model Strategies
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Feb 28, 2023, 06:00 ET
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BELLEVUE, Wash. , Feb. 28, 2023 /PRNewswire/ -- The Pacific Financial Group (TPFG), an SEC Registered Investment Advisory firm and early pioneer in Self-Directed Brokerage Account Management (SDBA), has lowered fees as an example of our commitment to improve investor outcomes by passing along our economies of scale directly to their retirement plan accounts.
Doing the Right Thing.
For over three decades, TPFG has been a leader in 401k , 403b , and 457 Self-Directed Brokerage Account Management, and is now the only multi-manager, multi-strategy turnkey asset management platform (TAMP) designed specifically for retirement plan participants. The fee reduction aligns with our commitment to continual product innovation and superior service. "Our goal has always been to make top-tier investment management available and affordable to every retirement saver, regardless of account size." says Co-CEO Megan Meade . "Passing down cost savings feels like we're giving back directly to their individual accounts."
Adds President Matt Hamilton , "We're proud any time we can demonstrate our passion for retirement plan investors. Easing the burden of fees is just the right thing to do."
The TPFG mission is crystal clear: Improve investment outcomes for today's retirement plan participant to help them achieve financial independence and a worry-free retirement. We open the door to in-plan advice from a professional financial advisor, while providing a full array of co-branded strategies from several of the industry's largest, and most respected asset management firms. These strategies are available to advisors inside our award-nominated Strategy PLUS Model Portfolio program and incorporates a range of investment options from Active to Passive and Strategic to Tactical.
Investors Want Advice from a Financial Professional.
As part of the continual evaluation of our Strategy PLUS program alongside due diligence partner Wilshire Associates, we also felt the time was right to revisit how we help advisors help more clients achieve their retirement goals. We steadfastly believe in the value the participant investor receives from their financial advisor on their retirement assets NOW, while they are still working and contributing to their workplace retirement accounts. Our lower fee structure expands access and fuels growth for thousands more advisors around the country.
Founded in 1984, The Pacific Financial Group, Inc. (TPFG) provides financial advisors with a complete suite of programs dedicated to building, managing, and preserving wealth for every investor. For more, visit www.tpfg.com .
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Here is a list of the ten most common types of financial models: Three-Statement Model Discounted Cash Flow (DCF) Model Merger Model (M&A) Initial Public Offering (IPO) Model Leveraged Buyout (LBO) Model Sum of the Parts Model Consolidation Model Budget Model Forecasting Model Option Pricing Model Key Highlights
Start your own financial services business plan Green Investments Executive Summary Green Investments (GI) is a financial service company that focuses on stocks of environmentally responsible companies. The Washington-based L.L.C. is lead by Sarah Lewis and Steve Burke.
The banks' business model - between function and transformation | Let's talk financial services - Mazars Subscribe to this blog Search Perspectives Interviews Our experts Contact us Let's talk financial services Heike Hartenberger Detailed profile Related posts This website uses cookies.
Financial Services are the economic services provided by the finance industry, which includes a broad range of businesses that manage money. Business in financial services like the firms engaged in activities such as investing, lending, insurance, securities trading, and securities issuance. Usually, their target market are individuals ...
A business model is a company's core strategy for profitably doing business. Models generally include information like products or services the business plans to sell, target markets, and...
Financial services involve selling and business development, some portfolio performance oversight, and interaction by the partner or a high-level staff person. The only part of financial services that is scalable is investment management, which is discussed separately below.
Your Services Business Financial Model - The Most Effective Use of Funds Now that you know all the crucial aspects of your business, the next step is to come up with a detailed financial model. Make sure you include at least one year of income and expenditure details in this model.
Disclaimer: NerdWallet strives to keep its information accurate and up to date. This information may be different than what you see when you visit a financial institution, service provider or ...
The basic idea behind a services operating model is that it is composed of a number of self-organizing, collaborative components—"services"—that together execute the sum total of a company's business activities.
A Guide to Financial Modeling for Startups and Small Businesses. Economic uncertainty was already a major concern for small businesses surveyed by the NFIB, and those results reflect pre-pandemic conditions. That uncertainty is a big reason why finance leaders want to better understand how and where their money is spent, and building financial ...
Financial models are used to make decisions about: Raising capital (debt and/or equity) Making acquisitions (businesses and/or assets) Growing the business organically (e.g., opening new stores, entering new markets, etc.) Selling or divesting assets and business units Budgeting and forecasting (planning for the years ahead)
Neal Baumann. Global Financial Services Industry Leader. [email protected] +1 212 618 4105.
A model very similar to the way sales financing has worked historically is vertical-focused larger-ticket plays. This model usually has category specialists; examples include CareCredit in healthcare and GreenSky in home improvement.
Business plan completion: The business plan is the roadmap for the organization. There is value in the process of the writing of the business plan, forcing the writers to analyze a multitude of issues. First account of over $1 million invested: This would be a significant amount of money for an individual account and the organization will ...
Strong business models begin with a unique, clear positioning. Traditionally, financial service firms have differentiated their brands by functional attributes such as interest rates, fees, and customer service. But increasingly we see winners positioning themselves around deeper emotional attributes.
Download our eBook to explore the key actions for heads of shared services heading into 2022: Identify common need patterns to demonstrate value to influence the business. Create visibility into team capacity to accommodate overburdened employees. Discover issues through process mining to improve the end-to-end process.
SAMPLE FINANCIAL SERVICE BUSINESS PLANS: Hedge fund business plan. Money lending business plan. Energy brokerage business plan. Check to cash business plan. Bureau de change a business plan. Fundraising business plan. Venture capital business plan. Tax preparation business plan.
Feb 28, 2023, 06:00 ET. BELLEVUE, Wash., Feb. 28, 2023 /PRNewswire/ -- The Pacific Financial Group (TPFG), an SEC Registered Investment Advisory firm and early pioneer in Self-Directed Brokerage ...