Future of Banking – The Platform takes over

Uber is arguably the most disruptive eight-year old in history. It has also inspired a breed of precocious companies that have uberized everything from hospitality to professional services. In financial services, glimpses of the same can be seen in the form marketplace lending and open banking initiatives. But total uberization? In my view, banking-as-a-platform in its evolved form is still some years away.
In fact, as of today, there isn’t even a common understanding of banking as a platform. The authors of “Pipelines, Platforms, and the new rules of Strategy” describe platform as – “A platform provides the infrastructure and rules for a marketplace that brings together producers and consumers. The players in the ecosystem fill four main roles but may shift rapidly from one role to another.” The roles defined in the book are: “Owners” of the platform that take care of the governance and IP; “Providers”, who make it possible for the producers and users to interact via a common interface; and finally “Producers” that have the offerings for “Consumers” who use these offerings. Basically, the platform acts as the matchmaker that provides the right environment for the providers, producers, and consumers to interact seamlessly.
Clearly, the platform concept has been around for quite some time – think of your neighborhood convenience store that gave local community counter space to advertise their wares. Or the classifieds of yore that provided a platform for buyers and sellers to connect and advertise their wares. What has changed is that a number of powerful forces have come together to give platform businesses reach, agility and feasibility that they could only have dreamt of in the pre-digital days.
The first of these is plain economics. In the current interest rate environment, banks’ core source of revenue has shrunk, particularly in the developed markets of the United States and Europe. Highly competitive offerings from non-banking players have driven down banks’ income further. Hence the proposition of a digital platform model, which runs on a really low operating cost and distributes risk among several parties, is hugely appealing to providers.
Secondly, consumers are flocking not to a particular bank, but to a particular value. Again thanks to technology shifting banks and opening new relationships have never been so easier. Today, customers will go to that provider who offers them the best, most relevant service and experience. Unlike the brick and mortar bank, which could only be personally attentive to a few, select customers, the platform bank with access to data and insights can personalize at scale.
Thirdly, a highly efficient platform bank can, at least in theory, reach any customer anywhere in the world over its digital channels. It can scale up at speed. And thanks to the ecosystem and open banking, it can also engage the customers of other banks in a servicing relationship, or by selling third party products. If the example of other platform businesses has taught us anything it is that eventually, couple of innovative players will rule the business. Every bank (and non-bank) wants to be the winning platform that takes all.
But it will take some doing to get there. To start with, banks have to transform their ownership mindset (I will serve my customers with my products) with the clear realization that the only thing that matters is to give customers what’s best for them, and if that means serving up a rival product, then so be it. They will also have to expose their APIs to allow developers to create the right offerings on their platform. Banks also need to shift their business focus from earning interest income to monetizing insights from data. For example, if the insight says that a customer should be offered a third party product, then the bank must charge a fee from that party for generating this lead.
These are massive changes, yet they are feasible and perhaps inevitable also. A bank that makes the crossover safely will be able to differentiate itself from other banks purely on the strength of its quality of experience.
That being said, not all banks are cut out to make this shift. A platform mindset requires a certain kind of leadership and culture, which most banks will struggle to provide. Some of them might choose to become product manufacturing specialists, and distribute their offerings through platform banks.
We believe that the “platformization” of banking has already begun. The examples like Deutsche Bank hub for SMEs or LendingClub, and WeChat are the early reflections on the new model emerging in the industry. And will there ever be an Uber-size platform among banks? With the industry being as regulated as it is and the rules for systemic risk around large banks, it looks rather difficult. Still, that is what the ambitious, progressive banks will aspire to. But Uber-sized or not, banks that succeed in their platform play will pull far ahead of their rivals. And those that don’t might be relegated to the role of a backend utility. If they survive, that is.

IoT in Banking – Enabling Banks’ Digital Future

IoT has the potential to impact traditional business processes in banking such as KYC, lending, collateral management, trade finance, payments, PFM, and insurance. Coupled with other emerging technologies, such as digital identity and smart contacts, IoT can create new P2P business models that have the potential to disrupt banking in a few areas. Listed below are few use cases that may be adopted in banking in a time span ranging from near-term to long-term.

  • Account Management on Things
    As more devices acquire digital interfaces, the term “mobile” or “digital” banking will acquire new meaning and customers will be able to access their bank accounts from practically any “thing” that has a digital interface – for instance, from entertainment systems in autonomous cars or planes.
    Banks will be aware of the context of the channel and can provide appropriate contextualized service or advice enriching the interaction experience. Biometrics – voice or touch – can simplify account access in these new “anywhere” digital channels. Processes requiring physical signatures could use “Wet Ink” technology, i.e. The customer can remotely sign through any touch screen device and the signature can be cloned onto physical paper with “Wet Ink”. This will eliminate barriers associated with in-person, paper-based transactions and enable clients to conduct business even when they cannot be physically present.
  • Leasing Finance Automation
    Real-time monitoring of wear and tear of assets as well as metrics like asset usage and idle time could provide important data points for pricing of leased assets. This could lead to introduction of a new daily leasing model for a wide variety of digitally enabled assets – effectively turning even traditional products into services. Terms of leasing could be simplified and automated as the bank wields greater control over the leased asset. For instance, in case of contract termination or default, the leased asset could be locked or disabled remotely by the bank.
  • Smart Collaterals
    IoT technology can enable banks to have better control over a customer’s mortgaged assets, such as cars, and also monitor their health. In such a scenario, a retail or SME customer could possibly raise short-term small finance by offering manufacturing machinery, cars, or expensive home appliances as collateral. The request for financing as well as the transfer of ownership could be automatic and completely digital. Enabled by digital identity for people as well as things, the transfer of ownership of an asset can be achieved in a matter of seconds. The bank can then issue the loan immediately, and monitor the collateral status in real-time without the need to take physical custody of the asset. The bank can remotely disable or enable the machine/motor anytime based on defined business rules. For instance, in case loan EMIs are not paid, the engine could be disabled. The quality of the collateral can also be monitored in near real-time.
    IoT has the potential to reimagine banking as we know it completely. And it is more important than ever for banks to look at providing services and products on the channels that their customers prefer. In 2017 and beyond we will see progressive banks take it a step further and provide “banking on things” – which can be anything from a smart car, to smart walls.

Click here to read my article on ‘IoT in Banking – Enabling Banks’ Digital Future’ for the complete list of 12 use cases that may be adopted in banking in a time span ranging from near-term to long-term.