Why Banks Should Reinvent Banking in the Era of Platform Economy - Part 1

“Why it's simply impassible!
Alice: Why, don't you mean impossible?
Door: No, I do mean impassible. (chuckles) Nothing's impossible!”

― Lewis Carroll, Alice's Adventures in Wonderland & Through the Looking-Glass

Six of the ten most valuable companies in the world are platform companies. None of the six is a bank. Admittedly, banks are late to the platform party.  Nonetheless, banks are set on -- what would have been considered impossible until a few years ago -- transforming themselves from impassable monoliths to nimbler organisations, open to new kinds of partnerships.

Regulations such as PSD2 and Open Banking that mandate banks open their data vaults to third parties play an important role in this transformation. Banks have started to build public APIs with the aim to create and nurture an ecosystem of external partners (service providers, technology companies and independent developers).

But as we would soon see, Banking-as-a-Service (BaaS) rather than Banking-as-a-Platform (BaaP) more aptly describes banks’ strategy of providing public APIs and development portals. Even though the distinction between BaaS and BaaP is not always clear with the terms often used interchangeably, the two key differences between BaaS and BaaP, according to me are –

1. The target end users and
2. Extent of integration with banks’ product stacks

In case of BaaS, the target audience is largely confined to third parties and independent developers with a good understanding of using technologies such as APIs to create new solutions. In that sense, the development environment provided by banks act as a Platform-as-a-Service (PaaS) layer to help third parties develop business applications which may or mayn’t be integrated into the banks’ product suites.

BaaP, on the other hand, is far more comprehensive in that it encompasses banks’ offerings for not just technology partners but also for banking customers. For instance, BBVA’s acquisitions of Simple, a digital-only US bank and Holvi, a Finnish online-only bank for small businesses and entrepreneurs, define BBVA’s attempt to reach customer groups not serviced well by traditional banks. BBVA, through these acquisitions, plans to derive synergies in areas such as customer experience, products and technology that its smaller additions excel in; synergies that’ll be complemented by access to a larger customer base, regulatory compliance and established brand name that the traditional bank possesses.

Nonetheless, for banks, to embark on a BaaS strategy is a precursor to a full-fledged BaaP strategy, in the long run.

Take Monzo, a UK based challenger bank, that clearly states its mission is to build the ‘best current account in the world’. But with a banking license it can sell many more products and services. In 2016, less than a year after its inception, Monzo started to provide APIs to third parties to build applications that can access Monzo’s customer data. Through APIs, Monzo plans to build a banking marketplace, where its customers will access, in addition to its specialised current account product, banking solutions from different providers -- all on Monzo’s platform. Similarly, Starling Bank, early this year, launched its app store along with a developer platform to give access to customer data to external participants to build products and solutions for its customers. 

No longer independently blue*

It’s not just the digital banks but even traditional banks that think banking of the future would be modular, where banks would provide only a subset of products and services, while the rest of the offerings would be from an assortment of ecosystem partners. The quest for modularity has also stemmed from constraints beyond regulations.

Not too long ago, mobile first strategy emerged as a dominant theme in banking. Applications were reimagined to be delivered through mobile, adapting to newer, smaller form factors. Mobile enabled banking on the go – hugely convenient for customers. But the backend infrastructure complexity remained, which meant business challenges, such as lack of personalized products, slower innovation, delayed go to market persisted? Could APIs be the solution?

APIs, upending industries such as retail, transportation, travel and technology, have gradually gained traction within the financial services industry. Considered an enabler of innovation, APIs are software programs that allow disparate applications to communicate and share information with one another. An API strategy could result in not just enhanced customer experience and competitiveness but also operational efficiency.

Leading banks such as BBVA, Capital One, HSBC, RBS, all have developer portals -- offering APIs, software development kits and support to external developers and tech firms to build new solutions. The API based middleware connecting banking assets and third-party applications has led to the rise of Banking-as-a-Service or BaaS.

To understand BaaS, let’s take a simple example – Bank B has a cumbersome paper-based mortgage process. Fintech F has just the solution – a fully digitised product spanning the entire mortgage process from application to approval, complete with a super easy to use interface. F needs customers – a banking license would be good but customers are essential. B’s API gives F access to B’s customer data. Soon, B’s customers have a hassle-free experience applying for mortgages and F has access to a well-established customer base. BaaS can often result in point solutions such as personal finance management tool, accounting software, interest calculators or ATM locators being developed by third parties. These solutions can be sold as standalone applications, be part of an app store, or integrated into a product suite, all of which may or may not be owned by the banks.

In contrast, Banking-as-a-Platform or BaaP is all encompassing. To understand why, we’ll first take a quick look at what defines a platform.

*The colour of the logos of most prominent financial brands such as RBS, Barclays, BBVA and Visa is blue.

Back to Basics: So, what exactly is a Platform?

A platform is a business that creates value by facilitating direct interactions between two or more distinct types of customers. Value creation is a persistent theme and together with interactions forms the basis for network effects, without which a platform is ineffective. Customer types can be further divided into value creators and value consumers. For instance, Facebook facilitates direct interactions between content generators (value creators) and users (value consumers). Facebook itself is a platform owner or facilitator providing the infrastructure for the interactions, among the different customer types, to originate and sustain.

Though the most commonly thought of platform businesses are Uber and AirBnB, I’ve deliberately omitted the two because the companies’ focus is largely confined to their respective industries, namely transportation and short-term rentals. To truly understand the potential of platforms, one must look at companies that have used a platform strategy to springboard into areas that might have traditionally been perceived as outside their areas of competency.

Some of the best-known examples of companies considered pioneers of platform strategy are Apple, Amazon, Facebook, Google and more recently, Tesla.

In 2006, Apple was a nonentity in the mobile phones industry, which was dominated by the likes of Nokia, Motorola, Samsung, Sony and LG which together controlled 90% of the market share. By 2015, Apple had turned the market share on its head, generating 92% of global profits while the former incumbents except for Samsung struggled to stay afloat. What did Apple do differently? Apple, known for being obsessive about owning its products stack across hardware and software, took a leap of faith when it decided to enter the mobile industry. It adopted a platform-as-a-service strategy, opening its operating system to external application developers. Application consumers formed the other side of Apple’s two-sided platform and together the two built the foundation for the success of Apple’s App Store, hugely responsible for Apple’s unforeseen growth in an industry it had no experience in.  Since then, Apple’s platform strategy has led to its growth as a formidable platform company. It has ventured into healthcare through wearables, financial services through mobile wallets, contextual commerce through AI-powered virtual assistants and even autonomous cars – industry adjacencies possible due to Apple’s platform strategy of partnering with external parties, be it developers or partners such as banks and retailers. The approach helped Apple not just reduce its time-to-market but iteratively improve products based on constant feedback, unlikely if the company had remained closed to external influences.

Over two decades ago, Amazon started life as an online book store. Today Amazon’s ecommerce site is a thriving marketplace where thousands of retailers can set up virtual shops and start transacting with customers. Had Amazon continued with its original narrow business model, focusing on the sourcing and selling of books, it would have offered limited options to its customers. In fact, Amazon’s story is largely about turning its limitations into new business models. But the going was hardly smooth. Amazon started to face scalability challenges when like any typical company, it faced delayed projects because project teams built custom infrastructure, costing a great deal of time and effort and resulting in duplicated infrastructure. To bring in standardisation and shorter project delivery time, Amazon decided to have common infrastructure services, which eventually took the shape of its next business idea – Amazon Web Services. Owning the front to back end infrastructure demonstrates Amazon’s need to be as self-sufficient as possible. Take its recent foray into drone technology and dedicated logistics infrastructure (it now owns cargo planes and has reduced dependence on transportation companies such as Blue Dart and DHL). This independence has resulted in ensuring quality of services such as free two-day shipping for Amazon Prime subscribers. Amazon’s shape shifting strategy becomes apparent in the way it has entered the entertainment industry through steaming media and video on demand, hardware manufacturing from tablets to smart speakers, to financial services - debuting with payments (Amazon Pay) and progressing to lending to SMB retailers (with Amazon Lending).

Amazon loves Customer Infidelity!

 “Our customers are loyal to us right up until the second somebody offers them a better service. And I love that. It’s super-motivating for us.”    Jeff Bezos, Amazon CEO

Tesla known for autonomous cars has launched its own ride sharing platform called Tesla Network. The inspiration behind the network is addressing a major customer pain point. On an average, car owners use their cars just 5-10% in a day which doesn’t justify their investment in terms of the large car loans they must repay. Tesla decided to capitalize on this issue of owning expensive assets which remain heavily underutilised. Creation and sharing of value with customers are what powers the network. Tesla car owners can monetise their cars by renting them out to other users on the network. What’s in it for Tesla? Through its platform strategy, Tesla gains exclusive control of continuously streaming customer data which it can then use to enhance its services.

With a robust platform strategy, each of these companies has expanded the breadth and depth of its reach. Had Amazon thought of itself as just an ecommerce provider, had Apple restricted itself to the business of selling mobile phones or had Tesla focused on producing and selling electric cars, none of them would’ve managed to be dominant forces in their industries.

Instead, Amazon thinks of itself in the business of selling and enabling sales – that explains its strategy behind embedding itself along the entire value chain from contextual commerce through smart speakers that lets users instinctively search, parse, and place orders from a wide products repository, to offering financial services to its merchants to easily do business using its online marketplace.  Even AWS is designed around minimising friction in customers’ end to end purchase journey. By controlling the customer journey, Amazon has continuous access to data generated by its customers, helping it constantly refine its value proposition.

Tesla likewise has focused on building an ecosystem around customers who buy its cars --- right from owning a car, having access to convenient charging docks to monetizing their cars through rentals --- customers can avail all these services, that are so conveniently provided on Tesla’s network. Like Amazon, Tesla is a one-stop destination. 

And that brings to the fore, certain characteristics shared by the platform leaders. In part 2, we'll see the characteristics of platform companies and why banks should consider platform strategy for banking.