Platform “ecosystems,” once the exclusive domain of key direct-to-consumer players like Amazon and Google, are set to have a significant impact on retail banking institutions.
Banks and credit unions need to create platforms in order to survive. There are two aspects to this necessity.
First, the portfolio of products that these financial institutions are currently providing is not being delivered with sufficient innovation to move into the future. These institutions are recognizing that effective platform strategies are essential to bringing forth strategic agility: the ability to open up new markets, grow, scale and reduce the risks of providing the products. The platform approach allows institutions to respond quickly (and at scale) to meet new consumer wants that may not even exist yet.
Taking the ecosystem approach enables institutions to build strong, multi-channel capabilities and marketplaces that allow institutions to center their attention on serving consumers instead of simply distributing products. This allows them to offer their own services and products, coupled with the ability to be a marketplace for additional products from partners and possibly even competitors.
The ecosystem approach allows financial institutions to leverage such technologies as digital platforms, rich customer data, personalization of user experience, cloud native approaches, open APIs and multi-channel partnerships to build open marketplaces and offer a “high tech, high touch” service to consumers.
Large Banks Are Already Moving Forward
Many financial institutions are already making progress with this approach. Major banks, for example, are working on building digital platforms to meet the expectations of both consumer and business customers’ expectations. Institutions already have access to much data on consumer and business customers’ finances. Among consumers, for example, they know about spending habits, credit card usage, mortgage borrowing, and car loans. Such data provides them with a holistic view of their customers.
Taking this approach comes with opportunities to do business with new and old customers alike to initiate banking interactions. Bank of America’s direct-to-consumer online portal accounted for 56% of direct auto loan originations, according to the bank’s fourth-quarter earnings. Direct auto loan volume has ramped up as the bank keeps making significant investments in its online platform.
The platform approach, including the building of digital services on the platform, has also led to tangible increases in efficiencies. Bank of America’s management team estimated they are reducing deposit costs in consumer banking by almost 160 basis points (from 3.1% in 2010 to 1.51% in Q4 2019). Platforms can help drive market-creating innovation when they lead to profit potential in areas of little or no competition.
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Key Lessons for Preparing for Platformification
Building platforms for financial institutions that work requires a strategic approach. In my experience, financial institutions doing this right tend to focus on six key factors:
1. Recruiting the right talent. Platform strategies require strong technical talent in-house, or strong talent partnerships with outsiders. When unveiling its platform strategy at an investor conference, Goldman Sachs emphasized how obtaining the right technology talent is key to generating growth with minimal additional costs.
2. Implementing agile development at scale. Breaking down siloes and bringing together functions handling the business, user experience, developers, testers and infrastructure is truly agility at scale. Wells Fargo has used agile methodology and trained its staff extensively to launch mobile apps on platforms for their customer.
3. Keeping customers at the center of platform thinking. Building a platform that serves real customer needs is key. Having the ability to get real-time customer feedback, and to test and learn with iterations of products and services, builds the platform around them, and not vice-versa.
4. Employing the right data. Big data is key, but the right data at the right time is more important. There needs to be an overall data governance and implementation strategy at the top to ensure that the right internal and external data can be tapped. Taking that approach to data can help prevent functions from becoming siloed.
5. Innovating at scale. There are already examples of artificial intelligence being applied in financial institutions, including robotic process automation and machine learning. To ensure that innovation is being applied proactively, instead of reactively, keeping consumers at the center — and innovating for them — helps. Innovation can also follow a fail fast model, but banks need a capability to scale innovation rapidly where value is determined.
6. Rethinking partnerships amid open platform development. Building partnerships with so-called competitors, leveraging skills of niche startups, and being open allows the platforms to attract third parties and add in new services and products. Visa’s acquisition of Plaid demonstrates how large, incumbent players are leveraging fintech acquisitions to add services, analytics and customer reach to their platforms.
Overall, financial institutions must consider a platform approach with strategic agility in order to succeed in the decade ahead. Compared to the 1920s — ten roaring years of economic growth and widespread prosperity, the 2020s will be a decade in which the divide between financial institutions, consumer services and retail blurs as “Platformification” continues across banking and other sectors all serving a customer segment of one.