Banking as a platform has never really taken off for various reasons. Traditional approaches and business models are easy as the banks had full control. Financial services industry incumbents created products, pushed them out and sold them to their customers. Value was produced upstream by the banks and consumed downstream by the customers.
Unlike traditional models, platforms do not just create and push products out. They allow 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 others to consume.
This is a massive shift from any form of financial services business that we have ever known. A platform play within financial services is different from traditional business thinking. 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 only end products. Instead, they simply serve as the underlying infrastructure that enables users to interact with each other. Most importantly, the business itself doesn’t create all of the value.
As we mentioned in our earlier article, “Exploring Bank as a Platform (BaaP) Model,” we believe that this is the future of financial services business models. So, how can banking make this happen?
7 Layers of Banking as a Platform (BaaP)
We recommend the book Platform Leadership by Annabelle Gawer and Michael A. Cusumanoto to those who want to explore further what platform strategies are. We borrowed from this book somewhat, especially from the authors’ four levers of platform leadership which we have expanded upon to create the “7 layers of BaaP”.
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
|Internal HR/Org Chart
||Company centric||Do not speak
the same language
What Would a Bank BaaP Look Like?
Across these platform layers, what could a bank BaaP be and how could it operate? We adjust our table to reflect a bank BaaP.
|Platform Layers||Core||With Platform Partners|
|Scope of Firm||Focused only on core activities. To be defined.||Define broad array of activities to be performed outside of firm by partners|
|Product||Own core product stack. To be defined.||Allow for partners to develop and offer ancillary products|
|Service||Own core service stack. To be defined||Allow for partners to develop and offer ancillary services|
|IP/Data||Sharing of information. To be defined||Define what to disclose to partners|
|Technology||Modular tech, open source and open standards use, API, interface openness||Interoperability between partner interfaces and firm’s interfaces is key|
|Decide where on the collaborative-competitive continuum will the company sit. How will relations/decisions and consensus be arrived at?||Collaboration with some partners.
Competition with other partners.
Different types of consensus mechanisms between firm and partners.
|Internal HR Organization
||Articulate HR between group that focuses on core and groups that focus on platform across Product, Service, IP/Data, Technology, relations w/Partners and c-suite of executives within firm||Develop ability to “speak” same language as partners|
Ultimately, there will be different platform answers for different banks or insurers given their direction and make up. What is clear though is that being a platform is different from partnering or merely becoming a “digital” incumbent.
6 Key Questions to Enable Banks for BaaP
1) What is the focus of your company? – If the core of your business used to be articulated around intermediating between deposit taking and extending credit, then what will the new core be around? Is this going to continue to be a store of money or will it be around something else? This something else could be identity or the data of customers, but if not identity and data then what else is of value?
Answering this first question will make it easier to choose a clear strategy for customer centered products based around it. In addition, answering this question may lead a bank or an insurance company to make an acquisition should the part of the core identified not currently reside within its skills set.
For example, we would venture to say that a bank may want to purchase an identity management platform – consensus computer based – and an insurer may want to purchase a cybersecurity consultancy or service provider.
2) How are you going to attract partners to your BaaP? – Once the core and product/service decisions have been made, what partners you choose, and how you plan to attract them to the platform, will be of paramount importance. We would characterize this decision across a continuum, from complementary collaborative to competitive partners, and as changing over time based on the needs and demands of the business.
Other industries who have seen success in these strategies have done so through very inclusive practices around the platform. Excluding competitive partners reduces the overarching capability that would be held in the platform and changes the dynamic of the BaaP owner responsibility.
3) How are you going to rethink your architecture to support this new direction? – The technology architecture needed to support a platform strategy is radically different than the current ones implemented into most banking organizations.
This may be the most difficult lever to re-engineer, given the level of legacy debt in play, but it is one of the most needed. A holistic technology architecture where silos are broken down, open source and open standards are used judiciously, and where APIs are used widely is a must. It is also important to include partners and interact with them, and to exchange or analyze the right information at the right time within the right situation.
Most stakeholders know this, but few have the right answer, including most incumbent software service providers. This will change though.
4) How are you going to protect your BaaP? – If you think cybersecurity was top of mind for FinServ incumbents, then it will be ever more crucial with Fintech incumbents and their platform businesses and partners. It is an implicit statement and a crucial one. The only platforms in the financial services industry, that is Visa or MasterCard and their eco-systems, warrant cybersecurity, fraud and data breaches daily.
5) Do you understand what new business architecture is required for your BaaP? – The business architecture is significantly more important to the long term success of any BaaP play than its technology equivalent.
Financial services industry incumbents will need to become governance nerds and fast. Will decisions taken between the incumbents in the platform eco-system be consensus-based, top down, a hybrid?
How will differences of opinion be reconciled, how will conflict be resolved? This will depend in part on the incumbent internal DNA as well as the types of partners chosen (i.e. collaborate or competitive ones).
6) Which resources are needed for the core and which for the platform? – Internal human resources will need to be rethought. The obvious rethink will develop along the lines of which resources are needed for the core and which for the platform. It will also develop along the lines of which disciplines will resources need to acquire and apply to their businesses.
By this we do not mean traditional intra-disciplinary business skills pairs such as marketing and financial engineering, business development and strategy, trading and sales. Rather, we mean legal and coding, trading and data analysis, strategy and information systems management where non-financial services skills are added to the traditional mix.
No Platform or Absolute Platform?
If we plot these paradigm shifts across these vectors, where the financial services industry incumbents will have to move the dial from left (current status) to right (absolute platform status), the decisions for each vector become clear. We view these as meta vectors that can apply to front end, middleware, backend processes, people, products and services alike.
|Vector||No Platform||Absolute Platform|
|Working Relationships||Exclusionary||Fully Collaborative|
|Governance and Management||Closed, inwards looking, opaque to the outside world, siloed||Transparent, community driven, multi-disciplinary|
|Network||Internally Focused||Delegation, sharing, edge and node driven, open|
|Design Philosophy||Standardized and proprietary||Customized, modular and granular|
|Planning and Decisioning Lifecycle||Long term plans, slower decisioning||Agile, fast responding, contextually grounded|
BaaP on the Horizon
Its clear from our research that BaaP in banks is possible but will take a huge amount of change to take place.
Examples of BaaP thinking are starting to emerge in Europe, particularly taking advantage of favorable regulatory frameworks and market opportunities.
FinLeap, the Berlin FinTech startup factory, has made an investment to create Solaris Bank – offering BaaP opportunities to fintech companies and enabling them to take their services to market via an organization that is fully licensed to do so as a digital bank.
Solaris Bank has been born out of the need of FinLeap to gain traction with some of their own startups who have failed to gain the umbrella of an organization with a license.
Solaris Bank is looking to offer a full range of transactional services, compliance, capital financing and loans through a range of fintech organizations. These are aggregated into one uniform service to the customer. It remains to be seen how their platform strategy will flesh out, which core services they will focus on, and which ones they will partner for.
The Open Payments Ecosystem
The purpose of OPE is twofold:
- To make it easier for developers to build payment apps for banks by embracing Open APIs in a pre and post PSDII world.
- To make it easier for banks to safely access new payment technologies by providing resources like curated app marketplaces.
The project features six “sub-systems,” each representing a different stage in the life cycle of payment services.
- A developer environment for payments app development and testing.
- A payments application store.
- A secure execution environment that prevents the original developer from accessing live customer data.
- A compliance system for the life cycle of the app.
- The ability to add additional service offerings for payment service providers
- A comprehensive data warehouse for business intelligence
While not fully a BaaP construct, the OPE programme will offer, within the confinds of payments, all of the needed attributes to change how payments services are constructed and how people within the platform are remunerated. In its current guise, the OPE programme is the closest to the iTunes development platform model within banking that we have.
While most know Mondo Bank for their Alpha and Beta programme, and selling out of a million pound of stock in 96 seconds, they also made no secret of their longer term intensions to become a marketplace. We would define a marketplace strategy as a sub-set of a platform strategy and are, similar with solarisBank, intrigued by how Mondo’s thinking will develop.
While their focus has been on creating a unique current account for the UK market, they see the integration with innovative financial services and technology providers is an obvious step to giving customers control over their money. Instead of thinking that they “own the customer,” as most banks globally do, Mondo intends to give users the power to choose, based on price, convenience and customer-service from a range of services and products that are not created by them.
Tandem is the second startup digital bank to have been granted a full license from UK regulators. Although more bank than marketplace, Tandem is focused on customer service as opposed to product offerings. As such, this approach forces them to partner with best of breed offerings – not part of their core offering – and integrate such offerings to their platform for their users’ benefit. Tandem does not give the power to choose, rather it curates best of breed offerings, and delivers a platform experience to its users.
It’s clear that there is a huge amount of benefit to be had for banks to become the platforms for banking in the future. Building a marketplace does not mean one has built a platform strategy. Ceding control of the old core (i.e. access to checking accounts) without developing a new strategic core will spell doom.
These new BaaP partners will not only be found within the scores of fintech startup disruptors, but also outside of the traditional financial services universe such as technology incumbents, social networks, e-commerce giants. Building a platform strategy without understanding that some control will be lost to or shared with partners will not be effective. Only looking within human resources will make it more difficult to prosecute a platform strategy.
Tech companies such as Amazon, Facebook or Alibaba are already executing from a mature and growing platform. They do not have the benefit – or for some the curse – of being regulated, licensed and able to handle money. Still, they are formidable competitors that want to “own” their customers in depth and breadth, and this means a customer’s money, not only a customer’s spending.
Banks who dither and miss the opportunity to reinvent oneself as a platform will find themselves on the wrong side of societal trends. Similarly, regulation and regulators will need to adapt and be educated in the intricacies of platform strategies.
Rather than view this as an impediment we believe this might be a great advantage. Financial services industry incumbents with aspirations to become truly digital players already have a strong and long-standing relationship with the regulators.
While Mondo, Solaris, Tandem and OPE have fantastic ambitions, who better than the existing banks with all of their investment, employees and existing customers to take the lead, educate and ease the transformation towards the future and BaaP?