Why Platformification is Key to The Next Banking Revolutionby Jan Reinmueller January 17, 2020
Driven by technological innovations and increased online connectivity, the world is going through a major economic revolution with the rise of the platform economy.
The platform economy refers to the current transition most companies are making from being product-centric to becoming customer-centric enabled by a platform strategy.
Such companies are following on the steps of successful businesses such as Google, Amazon and Alibaba, which have all used the platform business model to grow exponentially.
The platform business model
Platform businesses are typically online matchmakers or technology frameworks, and focus on helping to facilitate interactions across a large number of participants.
Such interactions can take the form of short-term transactions like connecting buyers and sellers, or can involve the formation of longer-term social relationships and collaborations to achieve a shared outcome.
These interactions, the principal assets of any platform, stimulate a growth effect referred to as the network effect which allows a platform to become more valuable to its users as it attracts more users through co-creation of value.
Relevant examples include of course Facebook, which counts more than one billion active users and accounts for nearly a quarter of all online advertising revenue in the US, the Apple App Store, which has shared a US$120 billion in sales with developers since 2008 and generated US$46.6 billion for Apple, and Amazon, which has built multiple types of effects into its business model originating from its review systems (users visit Amazon to read and write reviews), its marketplace (more merchants = more products = more users), and its recommendation system (the more consumers used the site, the more accurate the recommendations Amazon could provide them).
Our recent study in KPMG shows that digital platforms will continue to grow in importance in the digital age and the future of corporate competitiveness across industries will depend on the use of platforms.
If a business does not lead platform competition, then it will have to rely heavily on platform providers for its survival. Thus every organization needs to be designed or redesigned to be platform compatible.
Finance platform businesses in Asia
In the fintech world, one country that has emerged as a world leader in the platform business model is China. The country is home to some of the world’s biggest platform-based fintech companies, including Ant Financial, the most valuable fintech company in the world offering a wide range of financial services through ecosystems for insurance, credit, loans, credit scoring and wealth management, as well as Tencent, the owner and operator of WeChat, China’s top multi-purpose mobile app recording over one billion monthly active users.
Since being first released in 2011, WeChat has evolved from being a simple social media application used to chat and share photos to becoming a colossal platform offering everything from peer-to-peer payments and loans, to airplane tickets and ride-hailing.
Delving deeper into the platform-based approach, Tencent launched in 2017 the Mini Programs, which are essentially lightweight apps that run on the WeChat platform. The aim was to help users avoid downloading standalone apps from third-parties by allowing business owners to develop apps that are independent from Android or iOS but sit in the WeChat ecosystem.
The functionality has allowed Tencent to lock users in for even longer, and by November 2018, the WeChat ecosystem had over one million such Mini Programs.
Another key ecosystem provider and platform business from Asia is Japan-native LINE, which, much like WeChat, has grown from a messaging app into a lifestyle ecosystem with several financial features such as mobile payments, insurance, investment and personal finance management. LINE is the most popular messaging app in Japan, Thailand and Taiwan.
Digital platforms in banking
Taking a page off these businesses, banks are also increasingly adopting this platformification model.
By establishing a banking platform, banks can allow third-party fintech developers to build products and services on behalf of bank customers, creating a broad network of fintech applications for loans, payments, investing, wealth management and other services, while enabling financial institutions to deliver a unified banking experience.
Financial institutions including BBVA, Capital One, Citibank, Deutsche Bank, HSBC and Wells Fargo all provide some sort of developer hub, portal or exchange that allows third-party apps to access, integrate and/or extract data about the bank’s customer base.
BBVA’s Open Platform, for example, offers four API suites: Identity Verification, which gives third-party apps the ability to verify their customer’s identity in one; Move Money, which supports a range of payment types; Account Origination for creating and managing branded consumer and commercial deposit accounts; and Card Issuance, which allows for the design and management of branded customer debit cards.
BBVA became the first bank in the US to offer a full suite of banking-as-a-service (BaaS) products after its BBVA Open Platform program moved out of beta in October 2018.
How should banks respond?
In order to be competitive in 2020, the platform business model has become an imperative for banks and financial institutions alike. While these platform models have proven successful for Chinese fintech giants like Tencent and Ant Financial, simply imitating strategies without due consideration of your own unique circumstances may prove to be foolish, a subject that I wrote about extensively in my previous piece.
While there isn’t an inherently superior strategy out there for banks to derive return of investment from launching a platform model, there are some models that banks can consider.
Mirroring some of the big techs, a bank could potentially monetise access to these APIs, banks could come up with some sort of fee structure to grant fintech access to these APIs.
Alternatively, banks could also provide their customers with free access to an ecosystem of solutions and value-added services. Much like how Google would provide its end-users free services like Gmail, banks could, for example, create services to help SMEs better manage their cash flow, in turn with this new treasure trove of data could be used by banks to create a more seamless business loan application process.
We’re also observing Singaporean banks taking the approach of building their own marketplaces, DBS in 2017 launched its car marketplace in partnership with sgCarMart and Carro. Similarly, UOB launched its own travel marketplace just this month. Both these initiatives are a natural extension of the financial products their offer and in doing so they move up the customer lifecycle. Those who own a customer’s path to purchase gains full ownership of the customer.
Regardless of which approach any given bank will take, those who have yet to embark on such an initiative should strongly consider including this in part of their digital strategy or risk being left behind.