Banking in a world of platforms

By Tony McLaughlin, Citi, and Anders Olofsson, Finastra

They say that software is eating the world but we believe it is more appropriate to say that platforms are eating the world.

McKinsey has estimated that some $80trn of economic activity will ultimately resolve into platforms. And we can see the shift to platforms happening all around us—whether we’re buying a birthday gift, crossing town or planning a vacation.

As platforms continue to eat the world, banks need to prepare and respond to keep up with this evolving trend.

That banks are distracted by other priorities is hardly surprising. Every day brings a bewildering array of news stories and developments to the financial services industry whether it be blockchain, AI, cryptocurrencies, machine intelligence, APIs, big data and more. And the high noise-to-signal ratio makes it hard to focus on what’s really important, and to differentiate the must-win battles from the nice-to-haves.

The result? A bank can have its own innovation lab, be researching the benefits of these latest technologies, partner with Fintechs, and have proof of concepts relating to every one of the new trends, but if that bank doesn’t focus on transitioning to the world of platforms, it faces a bleak future.

In the world of platforms, a good bank user interface (UI) is not where the action is. A bank could update its UI to appear more ‘on trend’ and design its branches to look like apple stores, however individuals and consumers will continue to transact through their favorite platforms. Therefore, the platforms themselves will provide the UI.

So, how can banks make the most of the platform revolution? All platforms intermediate between a supply side and a demand side. The supply side can be goods, drivers, rooms, freelancers or anything else people may want. The demand side will be individuals and businesses that want to consume these goods and services. So there are three sets of financial needs: a) the platform itself, b) the supply side, and c) the demand side.

For example, platforms need to be able to transact globally, and make and take payments in different currencies. The supply side might want to get paid in its preferred currency and borrow money against its order flow. The demand side will want to have a range of easy payment methods, be able to pay later through installments and benefit from insurance on the goods.

The financial needs of the platforms, supply side and demand side will be met within the platform. And those needs can only be served from one of three sources: a) banks, b) Fintechs and c) the platforms themselves.

Of these three options, only one is ‘bank-friendly’. Think of it as a race to provide the financial infrastructure to the emerging global digital economy.

By way of example, take a consumer who wants to buy a flat-screen TV online and spread the payments. Will this need be met by the consumer’s bank, an agile API-enabled Fintech, or the platform itself? The only method the bank has to provide balance sheet in support of the consumer’s purchase is the credit card: a 20th century instrument that provides lots of great features, but may not be the best tool for this particular job. It’s more likely that a smart Fintech or Big Tech platform will embed a finance offering into a slick customer journey.

The result will be the bank getting disintermediated from lending—which is the lifeblood of banking. And the more economic activity moves online, the greater that disintermediation becomes.

To stay in the race, banks must be able to deliver the APIs in retail and wholesale banking that are needed by all three participants: the platforms themselves, the supply side and the demand side. Banks need to ensure they are the financial layer of the API economy.

Early developments have been slow as Open Banking has been perceived by many as more of a compliance project, rather than focusing on the long-term benefits. There needs to be a drive to come together as an industry to agree on retail and wholesale banking APIs that are relevant for digital platforms.

We believe the message is clear, and that we as banks really need to focus on this must-win battle. And that battle is to make the banking system a platform for the growth of the global digital economy.

This is the first article in our EBAday 2019 market insights series.