Banking as a Platform- The Future is Now!

The era of platforms has dawned. This is not only evident in the meteoric rise of the usage of “platform” companies by customers; but also in their valuations. The platform providers have found foothold in almost all fields – be it healthcare, retail, technology, entertainment, transport, hospitality and of course finance.

In this blog, we will analyze the why, what and how of platform banking and more importantly delve more into the future of it from business perspective with due reference to technology as well.

These platforms are fundamentally changing the way business is being conducted, and the impact is felt very deeply. Competitive environment is being re-defined – established businesses are seeing competition from companies they had not anticipated at all. For example, with the advent of Uber, car ownership has seen a decline. Consumers no longer see the need to invest in a car, when they are able to use one when required for a small usage fee.

This impact is also being felt by financial providers - emerging in the form of the notoriously famous GAFA threat and FinTechs. Increasing interest is being shown by these technology players in banking and financial space. Banks have to compete with technology companies, who already have touched billions of lives and are technology pioneers, using technology to solve customer problems. In addition, a crop of FinTechs and technology based neo banks are coming up with innovative, easy solutions that bypass the complicated, time consuming processes of banks. For example, a typical neo bank onboarding is done online – within a few minutes vs. traditional banks where physical presence is required and the process is longer.

A key impetus in the case of banking that is leading to a stronger platform story is the evolution of open banking. Open banking is gaining momentum worldwide with India, EU, UK, Singapore, Australia, Hong Kong, Japan etc. all requiring banks to open their APIs for other third parties to use. The ultimate winner in the environment of open banking will be the players with strongest platforms and ecosystems. True winners will be providers of banking as a platform.

Evolution of BaaP:

The era of platformification in financial services began with aggregation of products. For example, one of the earliest entrants to this field was where various insurances being sold in a market place which would aggregate and provide a comparison of features, breaking the monopolistic nature of doing insurance business. We then saw an extension of the same to loans and P2P lending, but all of this probably stayed at the periphery and mostly acted as lead generators for the banks. Another variant was that of network of ATMs across banks (for e.g., Indicash by Tata Group in India (https://www.indicash.co.in/about-the-company ), but none of these went beyond the financial services domain.

However, in recent times (about 5-7 years back) we started seeing the evolution of payments aggregators which logically extended banking to lifestyle banking. But this again was largely done by 3rd parties and banks were happy to be consumers of their services and expand their online presence into customers’ lifestyle.

The future of platform banking (and we are not claiming to be tarot card readers!):

With the Baap story unfolding, we see some writings on the wall – in terms of how the evolution will take place.

No matter what type or size a platform offering may be, some of the following will be a must.

Embedded analytics which runs like an undercurrent and omnipresent will become a hygiene requirement to have and will also play a major role in revenue generation and profitability from the platform.

AI and ML will be key differentiators in enhancing user experience and operational efficiency too leading to monetary benefits.

BaaP’s DNA will be defined by how well is the API strategy of the bank and a complete agility in usage of APIs will be the new norm from the business teams. Scaling, multiple usage, Data privacy and cyber security compounded with regulatory guidelines will be quite crucial for the smooth and safe functioning of BaaP and these two aspects will be central to any decision making by banks.

It may sound little too audacious to talk about future of platform banking which is still in nascent stage.

But history always serves a great recipe to predict future (we are taking the data analytics route!). If we try to analyze the business trends that have emerged in last one or two decades which are in some or the other way influenced or led by technology, following could be the future of BaaP.

1. We are going to see some amount of consolidation taking place in the form of mergers and acquisitions.

Merger of complimenting businesses will take place to fight some of the larger entities and this may be quite beneficial to end consumers as well.

Acquisitions by well set players will be one of the key strategy for them to further expand their platform and also to curtail competition from some of the smaller niche players

    2. We will probably see someone already large and with deep pockets becoming even more omnipresent and powerful who will define rules of the game. Platform banking thrives on the real power of its ecosystem and thus bigger the ecosystem better it is to engage customers with wide range of offerings- one stop shop approach.

    3. In the same breath we can say, a very large ecosystem may not be what some customers prefer who value personalization more than generalization. This segment of customers will drive for platforms which will offer specific niche services/products but in a rounded manner- end to end , such that customers get value addition. This will require a well thought out strategy, design supported by professional service offering to specific segment of customers.

    4. What may also happen is a platform in a platform kind of offering. Platform in a platform will be offered by some of the larger players where they may do so for two reasons- a. from branding perspective where they may need to offer differentiated service within their existing platform from a market perspective, to be lot more agile etc., b. probably from a regulatory perspective to secure data, banks may be forced to have platform in a platform offering.

    5. The very nature of BaaP is to grow by ecosystem of complimenting service/solutions offering and hence we will see cross platform offering which could be by way of business complimentary services, tech asset sharing perspective too – hybrid model.

Banking embed in a non-banking platform: example of banking products being made part of Amazon (amazon pay with ICICI Bank in India), insurance products bundled through makemytrip ( a ticket booking aggregator from India) etc.,

Banks approach to BaaP, the future as we see:

Banking as a Platform has far reaching implications for banks – including ability to reach out to a larger customer base, be privy to innovations, open up new revenue streams to name a few. Hence, entry into this space will be a strategic call. Banks which plan to move or already have made investment in this direction will be wary of the means by which they will open-up themselves into a platform play, as this is very strategic and worth a lot of investment which can even threaten their existence in future.

At least to begin with, traditional banks with set customer base, seem to have advantage moving into the BaaP model as they will start with a considerable customer base and product offering.

Hence, the near future of BaaP as we would see it will be more of creating an ecosystem by these banks probably in following ways:

1. Playing to their natural strength: BaaP allows a bank to identify it’s traditional area of strength and augment ecosystem further around it. This approach will suit for someone who has built couple of specific asset base already and allows to provide further rounded service around it using the platform capability. This approach can be taken by some of the regional players too. For e.g.,

RBL in India has opened up its APIs for developers and businesses who can consume these APIs and come up with complementary products which will benefit RBL too ( more about it: https://developer.rblbank.com/about-us#page1 ).

2. Become a generalist- volume based: Banks can look at becoming a generic provider of most financial products under one roof and use the platform to connect that to lifestyle. The platform strategy here will be driven by increasing the volumes on the platform and probably is best suited for banks aspiring to play bigger roles spanning across regions/global player. For e.g.,

Paytm in India is quite a unique story where they started as an eCommerce platform and now into banking services ( more about it at: https://www.rediff.com/business/report/paytm-to-foray-into-financial-services-sector/20180313.htm )

3. Create market – new entrants: This segment probably will be the digital only disruptors who’s DNA is more of aggregation of products/services in innovative ways. This will probably suit those banks who have more focus on urban and millennial population. This segment also will appeal to large corporates who want to get lean and still be employee friendly. The aim would be to curate the best in class providers to enable exceptional customer experiences. For e.g.,

Liv by Emirates NBD (https://www.liv.me/en/ ) and https://www.86400.com.au/ .

4. Mutually exclusive platforms (app in an app):  Quite an unique development where a platform player who probably has a niche offering, ties up with another platform provider and each of them provide a seamless user experience from their mobile app for the end consumer. For e.g., we can look at Phone Pe – an app in India primarily specializing at the end of a buy cycle- payment, but has now features where multiple other platform apps can be accessed within the Phone Pe app like – accessing Uber, bookmyshow , Grofers (groceries aggregators) etc.,

 Will cross platform business model lead to emergence of a new business model of platforms aggregator service? , well, we will not be surprised if that happens!

 But all of this depends on how banks approach and their appetite for digitalization. Post 2008, banks have experienced a decade of growth, but the global macro-economic slowdown is likely to affect banks in the near future. The time is ripe for banks to consolidate and focus on business models that will help them in the existing business environment.