In the last couple of years, discussion in the financial industry has included talk about the transformative power of the platform. Pundits have decried traditional banking as outdated, out of touch with today’s consumer, and inefficient. Many cite the rise of fintechs as evidence of the need for legacy financial institutions to change their strategic direction.
Even regulatory agencies have chipped in their opinions, with the Office of the Comptroller of Currency reportedly saying: “Making strategic moves to innovate with new technology-based banking involves assuming unfamiliar risks, but banks may face heightened risk if they do not innovate.”[i] There is a clear push in the industry for innovation and technology advancement, but the big question is whether that innovation should focus on the platform model.
What, exactly, is a platform?
Several definitions exist for what constitutes a platform. Many software and service providers actually refer to their offerings as “platforms”, but in the context of a strategic direction one of the most succinct definitions comes from Sangeet Paul Choudary:
A platform is a plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other and create and exchange value.[ii]
This is critical to understanding the disruptive nature of platforms: they are predicated on open structure that enables all participants to derive value. Successful platforms are more than a connection, though. Successful platforms attract the right customers because they provide the services those customers desire, and they make it easy for consumers to engage with producers.
Where is the value?
In the traditional financial model, the customer is receiving value from the bank in the form of products and services that are secure, protected and meeting a need that the individual has. In exchange, the bank receives value from the consumer in the form of interest income or fees associated with services.
But beyond that interest income or fee income, banks aren’t really positioned to bring in new revenue streams without a shift in strategy. That shift? Platform development.
In the platform model of banking, the key elements of “plug and play” and consumer/producer value exchange are the drivers of success. Banks that adopt the platform approach must provide an open environment where third party specialists can share their products/services with consumers.
The value for consumers lies in that uninhibited access to a network of solution providers. That access saves time and effort, and prevents redundant data entry requirements. Customers get superior experiences through the choice and flexibility of offerings on the platform, without having to manage numerous different relationships with different companies.
The value for the banks who develop and maintain the platform comes from consumer feedback and non-interest, non-fee based revenue streams. By opening platforms to those third-party producers, banks can create revenue-sharing agreements that are not reliant on the traditional models of interest and fees.
For producers on the platform, value comes from both sides. They get the value of a bank’s brand and reach, as well as potential customer acquisition with less risk and costs. From the consumer, they will get value in fees and tool/service utilization. They also get the value of consumer feedback, enabling producers to refine and iteratively enhance their product to meet the most pressing need(s) of their audience.
Who’s ready for platforms?
Consumers have enthusiastically adopted platforms in a number of industries. Telecommunications saw major platform disruption when Apple introduced the iPhone and its App ecosystem; retail saw the same shift as Amazon moved from an online bookseller to the premier one-stop-shopping destination for millions of consumers.[iii]
Is banking ready for the shift? Yes and no. There is certainly conversation around the platformification of the industry, but the realities of that strategic transition pose challenges for all FIs. In a recent whitepaper, Cornerstone Advisors identified some major challenges to the platform strategy, of which these three stand out:
- Becoming a platform is hard and time consuming.
- Few FIs have the resources to build a platform.
- The regulatory environment is not supportive.[iv]
There has been movement towards a platform approach, albeit slow. One notable example of a platform-esque approach has been in the mobile payments space by Zelle®. This mobile payment application is available through many major retail banks, and is meeting the high consumer demand for an on-demand, immediate mobile peer-to-peer (P2P) payment option.
Competitors in the space, like Venmo and Square Cash, were capitalizing on consumer demand. Zelle saw a market opportunity and accelerated the payment timeline by partnering directly with the FIs where consumers held their accounts, dropping payments processing times.
The partnership play for Zelle comes in through bank apps. The individual retail banks who are working with Zelle are making the payment app available as an integral part of their larger mobile offering. This reduces customer friction, increases adoption and improves experiences. Just like a platform is supposed to do.
Other examples of the shift to platform strategy include:
- BBVA’s API Market
- Citi Global API Developer Hub
- Capital One Developer Exchange[v]
From talk to action
The shift is slowly happening. Banks and other heavily regulated FIs have a responsibility to themselves, their customers and their shareholders to proceed with a measured pace, weighing the implications of platform development against the benefits and potential detriments of the shift.
But FIs also have a responsibility to continue innovation, and consumers have clearly shown they are willing to embrace platforms when it’s to their advantage to do so. Elements of the platform shift are already underway, and there are almost certainly more initiatives in development at leading FIs.
Strategic shifts, like the transition from traditional financial institution to platform provider, will take time, resources, energy, and a new mental paradigm. FIs that move forward and take action towards the financial platform of the future will be those who thrive in the new model.
[i] Shevlin, R. (2016, July 19). The Platformification of Banking [Web blog post]. The Financial Brand. Retrieved September 13, 2017, from https://thefinancialbrand.com/60019/the-platformification-of-banking/
[ii] Pipes to Platform. (n.d.). The Platform Stack: For Everyone Building a Platform… and For Everyone Else [Web blog post]. Retrieved September 13, 2017, from http://platformed.info/platform-stack/
[iii] Van Alstyne, M. W., Parker, G. G., & Choudary, S. P. (2016, April). Pipelines, Platforms, and the New Rules of Strategy. Harvard Business Review.
[iv] Cornerstone Advisors. (2017). The Platformification of Banking (p. 15, Rep.).
[v] Cornerstone Advisors. (2017). The Platformification of Banking (p. 10, Rep.).