The integration and delivery of financial services is changing as new channels, products and partnerships are being explored. Banking as a Platform (BaaP) is one of the alternatives.
In 2015, it became almost the expected cliché slide at any self respecting financial technology conference that someone would stand up and reference the interesting infographic highlighting the success of new ‘sharing economy’ players. The references, first discussed by Tom Goodwin on TechCrunch, illustrates how the middle men get cut out and how companies that take over the customer interface are the ones to gain.
If the presenter had an updated slide, they may have referenced Deliveroo, the biggest restaurant delivery service that makes no food.
These companies have grown exponentially in both popularity and success in the last 4 years. They have scaled their business models and platforms to cover more geographies and locations than even the largest global banks. But while platform strategies have taken the world by storm in many other industries, platform strategies haven’t worked out in banking or insurance.
The only exceptions in the banking sector may be found with Visa and MasterCard who, as networks, had to develop a platform strategy where issuers, acquirers, startups, various payments service providers and merchants are symbiotically linked. In that sense, most banks are part of Visa or MasterCard’s platform strategy, but do not have a platform strategy of their own. In insurance, developing a network of agents, brokers and master general agents does not really qualify as a platform as it is limited to a distribution channel.
Why Didn’t Financial Services Organize As Platforms?
There are three main reasons why financial services industry incumbent did not organize as platforms:
1. Current Business Models – Banking and insurance company business models do not currently lend themselves to network effects. They do benefit from economies of scale – although this may be hotly debated – but not network effects. Without the benefit of network effects, it makes more sense to own one’s stack entirely and not share it. Why create a platform with partners when the benefits will be linear at best?
2. We’re Number One, So Why Change? – Up until recently, banks and insurers were the perfect intermediaries. They were the best positioned to make credit or underwriting decisions. Why create a platform with partners when no one else knows how to lend or insure better than the current players?
3. We ‘own’ the customer – Up until now, how individuals or corporations interacted with one another and between themselves lent itself to a top down organization for the selling of financial services. If the industry owns the narrative of how a financial product gets pushed to an end user, why create a platform with partners?
These conditions have been unique and protected the financial services industry incumbent players from the reality faced into by many other industries and individual organizations. Today, though, we live in a world where computers and algorithms are proving to be very adept at pricing credit and underwriting risk. And where in the past data that was not readily available, it is very abundant and available in real-time today.
Technological innovations, coupled with significant regulation changes, have lowered the barriers of entry into these markets to a staggeringly low level. Completely new organizations like Mondo Bank in the UK, Simple and Moven in the US, and some of the largest technology firms, like Apple and Google, now move freely into these markets at will.
As this occurs, banks and insurers run the risk of losing their dominant position as primary intermediaries for customer interaction and engagement.
Network Effects Have Changed The World
Network effects impact us all on a daily basis, via social networks and other marketplaces. These same social networks and marketplaces, after having gotten us used to interacting with one another in a different way, are now encroaching on financial services, with payments and lending initially being their target.
Smartphones, broadband internet, the 24/7 availability of commerce and data, and social networks have made us organize ourselves very differently than in the past. The Millennial generation, weaned on this new paradigm, now have completely different expectations than their parents or grand parents of communication and commerce.
There are other reasons why financial services industry incumbents need to shift to a platform strategy. For example, financial services startups, competing against these incumbents, is one narrative brandied about. Frankly, the startup competition is a by-product of the root causes rather than a driver.
Without fintech competition, financial services industry incumbents would still need to think about platform strategies, as the root causes are much more fundamental than that. Financial services industry incumbents need to transform into “fintech incumbents,” with a complementary platform business model to better compete.
We recommend the book Platform Leadership by Annabelle Gawer and Michael A. Cusumanoto to those who want to explore further what platform strategies are. In the book, the authors’ outline four sets of strategic choices that are part of platform leadership:
- Determine the scope of the firm: Is it better to create product complements internally or let someone else do it? How far into the technology value chain should a firm extend?
- Design the product with strategic intent: What degree of modularity is appropriate? Should product interfaces be open or closed? What information should be disclosed to other companies?
- Shape relationships with external complementors: How can the company balance competition and collaboration with outside players? What’s the best way to create and sustain relationships with complementary product providers?
- Optimize internal organizational structures: What processes and systems will allow the company to manage internal and external conflicts of interest most effectively? What’s the right way to resolve the tensions between industry players?
7 Levels of FinTech Platforms
For a bank or an insurance company to become a platform for financial services, profound transformations need to happen. Becoming a “digital bank”, if taken in the strictest sense of the term (i.e. bringing distribution channels to the digital realm) is not enough.
A platform architecture implies transformational changes across the business/technology stack as well as fundamental choices that dictate how product, service, technology and HR resources are articulated between, 1) What is delivered internally by the core; and 2) What is delivered externally by partners active on the platform.
The distinction is important as it defines the company and the core differentiator in the market. What do we have to be awesome at? What can we let other people do? How do we exceed consumer expectations?
Below is a potential view of a financial services industry incumbent platform state. For the purposes of the analysis, we dissected the levers into 7 components (vs. the four in the Platform Leadership book).
|Platform Levers||Core||With Platform Partners|
|Scope of Firm||Firm does everything||N/A|
of product stack
|Limited to select distribution
of product stack
|Limited to select distribution
|IP/Data||No sharing||Restricted sharing,
limited to basic consumer
information to distribution
not open source,
not open standards,
|Data sharing is limited
and very difficult to enact
||Company centric||Do not speak
the same language
Because of current legacy mindsets and structures, a platform play would be very difficult to implement for the vast majority of organizations.
Making a Platform Play in Banking Possible
It is clear that any success in developing a platform strategy for banking (BaaP) will be largely dependent on wholesale cultural and technology mindset changes. Traditional business models are far easier since banks are in full control. Financial services industry incumbents created products and sold them to their customers. Value was produced upstream by the banks and consumed downstream by the consumer.
Unlike traditional models, a Banking as a Platform structure does not just create and push products. The BaaP structure allows users to create and consume value. At the technology layer, external developers can extend platform functionality using APIs. At the business layer, users (producers) can create value on the platform for other to consume.
This is a massive shift from any form of financial services model that exists today. Creation of network effects is more important than simply bringing in users or charging all users to make money.
In this model for financial services, software and technology are not the end product. Instead, they simply serve as the underlying infrastructure that enable users to interact with each other. Most importantly, the business itself doesn’t create all the value.