Changing Roles of Banks in the Platform World
Chief Operating Officer, Infosys Finacle
One of the most tangible outcomes of the digital economy has been the democratization of trade and services. An idle resource is only a click away from finding a potential consumer – a house owner’s spare room can become a revenue generating asset in a jiffy, a cab driver can maximize profit by accepting passenger requests for suitable routes – thanks to the empowering intermediate layer of the “platform”. So while the customer indisputably benefits from lower costs, better service, more options, and convenience, the service providers have a greater chance of making profits too.
These experiences are resetting the expectations of consumers, and the participants of trade at large. In financial services, FinTechs have been rather quick to recognize the market opportunity on the consumption side. Innovative offerings from FinTechs dot the banking value-chain and have witnessed considerable uptake given the clear advantages of speed and agility. Banks, the large incumbent institutions that operate around the full service concept of the pipeline model cannot match the agility and flexibility of digital natives, in part due to regulatory barriers and in part because of their complex legacy structures and IT-estates built for the traditional banking model. As a result, they have not only been losing their interest income to digital challengers, but also the ownership of relationship with their customers. In response, banks are slowly warming up to the idea of the platform business model by cultivating ecosystems that allow them to offer a diverse range of products and services to their customers. Drawing upon their strengths of scale, customer reach and understanding of regulations, platform banks can effectively manage the supply side of the equation and earn fee-based revenue.
In the traditional full service concept of the pipeline model, banks play three key roles – that of a manufacturer, an advisor, and a distributor of products and services. The radical shift in the banking business model is changing each of these roles.
1. The Manufacturer
Technology has empowered banks to get closer to their customer. What this means is that a bank can now get involved in a customer’s buying process much earlier than it could traditionally. Consider the example of a customer looking to buy a car. This customer‘s journey begins with assessing the requirement and the budget, followed by exploring the features and performance factors such as mileage, and then on to the payment schemes or plans available to finance the car. What’s more, the last bit is weighed down by reams of paperwork the customer needs to get in order, before getting to drive the car home. Now traditionally, a customer’s bank comes into play only after the customer is more than half-way through the process. But a platform bank can assist its customer every step of the way, right from helping the customer find the right car through to the financial requirements and process. Thus, a platform bank’s product is not just the loan required to buy a car.
DBS, a leading financial services group in Singapore has launched the country’s largest direct buyer-to-seller platform that guides buyers and sellers seamlessly throughout their purchase or sales journey. The bank has partnered with sgCarMart and Carro to expand reach, and sellers can list their cars on both these automotive marketplaces. Buyers get assistance in selecting the car that best meets their budget, in estimating the loan amount they are eligible for, and even in scheduling a test drive. Both the parties are also guided through all the paperwork along with free services for car ownership transfers.
Banks are essentially looking to do more and be more to their customers. They are forming partnerships that can help them embed banking in the lives of their customers by offering lifestyle products such as movie tickets, restaurants and hotel bookings, etc. Emirates NBD’s retail platform, Skyshopper, allows its debit and credit card users to buy flight tickets, hotel reservations, electronics, fashion items, groceries, etc. using one check-out.
So, one thing that is definitely changing for platform banks is the product portfolio. They are no longer sticking to manufacturing and distributing their own products and services, but are expanding their portfolio to include complementary offerings from insurance partners, products from FinTechs, and non-banking products such as movie tickets and cars.
Another way the products a platform bank offers will change, is through the emergence of specialist roles. In the case of retail platforms, a supplier with manufacturing excellence can get a product out to a significantly large number of buyers. The most profitable seller on the Indian ecommerce site, Myntra, makes INR 25 billion in sales, even as the ecommerce player has never recorded any profit. Similarly, a bank that specializes in a product line, say lending or deposit products, and offers a unique and differentiated product with an attractive price point can get every distributor to offer the product on their platform. This approach of product leadership can help a bank earn revenue even though it doesn’t directly approach the customers.
2. The Advisor
The oft repeated modern day adage ‘Data is the new fuel’ is especially relevant in the context of marketplace banking.
In a marketplace approach banks do not design and own all the products they offer, but form partnerships that allow them to offer the best products. This requires a change in mindset, and banks adopting the marketplace approach must understand that their job is to match their customer’s needs to the best products in the portfolio, which could be their own or third parties’ or even a competitor’s. The key to a successful marketplace is a deep understanding of customer requirements. And it’s common knowledge that the richer a platform or marketplace is in its data assets, the higher are its chances of getting it right. Amazon, that earns nearly 40% of its business today through recommendations, is a classic example of this. The uptake of the platform resulting in massive data assets, and its exceptional recommendation engine and algorithms are the key factors behind the platform’s phenomenal success. Similarly, a financial services marketplace must be powered by recommendation engines that feed off huge volumes and variety of data. Accurate recommendations are an important element in the uptake of a platform, i.e. for customers to adopt as well as retain it as their marketplace of choice.
3. The Distributor
In the future, there will be banks that focus only on the last mile in the value chain. These banks will have business metrics built around high availability omni-channel presence, faster access and user friendly distribution service.
There are two key ways in which digital banks can do this – by being a distributor bank and by being a reseller bank. While both the distributor and the reseller banks focus on the top layer of distribution and do not manufacture products, in the reseller model the bank provides value added service on top of a product from a specialist bank or simply distributes the product by white labelling it.
The disintermediation of the value-chain has created specialist roles, and banks are no more the only provider of financial services. But by combining their strengths of experience and regulatory understanding with a holistic platform strategy, both large and small banks can thrive in the new platform world. As large banks increase their sources of revenue, small and mid-size banks stand to benefit from the enhanced reach. Large banks may play more than one of the roles described above, by manufacturing compelling products, creating a marketplace, and also owning a wide distribution network of own and third party channels. Small and mid-size banks will build their strategy around one or two of these roles.
The New Normal in Financial Services
Senior Vice President, Product Development, Infosys Finacle
In a conspicuous break with the past, winning customer trust is no longer only a function of ensuring that a customer’s funds are secure. It is increasingly about knowing a customer well enough to be a partner at every step of her investment journey. To this end, progressive banks are turning to digital technologies to reimagine banking for their customers.
But as if in a balancing act, on one hand these digital enablers have increased the ability to understand and serve the customer better, and on the other they have amped up the customer’s expectations. Customers’ exposure to myriad digital services in their everyday life has reset their expectation from banking services. What’s more, these expectations are not unrealistic. After reinventing hospitality, retail and transport industries, digital technologies and business models powered by these technologies are set to revolutionize other industries. Consider Philips Healthcare, the medical device maker, who is enhancing patient care using digital technologies with its Healthsuite platform that can scale up to millions of patients and help harness patient insights. The platform also augments revenue streams for the provider by offering solutions throughout the healthcare value-chain. Similarly, agile start-ups and FinTechs that have mushroomed across the banking valuechain are making unprecedented service levels possible. Mobile-only banks and several FinTechs such as CANDI by Canara Bank can open an account for a customer within minutes. MoneyTap, an Indian FinTech provides instant loan on-demand with zero collateral and incredibly low interest rates. Similarly, ICICI Bank has partnered with PayTM for instant short-term credit approval.
Clearly, banks are not the only providers of financial services any more. Digital upstarts have made a dent in the financial services space, and evidently in the books of the most trusted financial service providers, the banks. Studies suggest that about 73 percent of bank deposits, and about 7 to 9 percent of global banking profitability is projected to be at risk by 2020.
This along with regulatory challenges and environmental factors has put banks in a Darwinian race for survival. With their backs against the wall, banks are left with little choice but to innovate in order to offset the business lost to digital entrants. They are embracing a greatly expanded definition of banking, one that goes beyond providing financial services to integrating banking ever more closely with a customer’s lifestyle and making it ever more contextual to their individual life stage.
Some of these new business models and initiatives include:
1. Partnerships beyond banking
In an attempt to win back lost customer ownership, banks are diversifying into adjacent markets to not just be a financial advisor to their customers but to also guide them throughout the purchase process of an asset. They are forming commercial partnerships with non-banking players. An example of this is the DBS car marketplace. The marketplace is a one-stop solution for car buyers and sellers that allows sellers to list their cars, creates the right buyer-seller matches, schedules test drives, and assists with all the paper work for ownership transfer, in addition to the vanilla banking service of providing loans. Buyers also benefit from attractive interest rate on their car loan.
2. Marketplace banking
Taking the concept of marketplace a step further, banks are setting up marketplaces for a host of non-banking products to integrate banking in the lifestyle of their customers. India’s PayTM is a case in point. The leading payment service started with peer-to-peer payments and bill payments for a limited set of services such as utility payments. The e-commerce wallet now has more than 250 Mn registered users, and allows users to perform all kinds of payments – from fund transfers to flight tickets and hotel reservations to retail purchases. Revenue sources for the e-wallet include advertising, and commission or fee revenue from registered businesses. The e-commerce giant plans to expand its services by also offering loans by the year 2020.
3. Group synergies
Diversification is bringing about a convergence of industries at group companies or conglomerates that are capitalizing on synergies among all the businesses under their ambit. Emirates NBD provides its debit and credit card customers attractive offers on Emirates airlines and Emirates Holidays. Not just this, the bank has tied up with over 25 non-banking players to form an online marketplace called SkyShopper for its debit and credit card customers. Through the platform, the bank’s customers can pay for items including flights, hotels, electronics, fashion items, entertainment, groceries, etc. in a single checkout.
4. Renewed focus on business customers to address their larger challenges
With the decline in income from lending, banks are looking to gain a competitive edge in corporate business by tapping into their network of customers. HSBC has launched a Connections Hub for its corporate and SME business customers. It connects suppliers and buyers in various markets. Corporate and SME customers save the cost of due-diligence of potential customers and suppliers since these are the bank’s customers duly verified through KYC checks. The Hub is a social media platform where buyers and suppliers can connect with each other, make announcements, add opportunities, and more.
5. Investments in adjacent industries
Banks are investing in service providers in other industries to launch new innovative offerings and in some cases to increase the customer base and expand their reach. In markets such as Kenya with mobile penetration rates as high as 80%, and high uptake of mobile banking services, leading banks such as Equity Bank are investing in MVNOs to launch banking services and reach a greater population. Equity Bank is utilizing Airtel’s excess capacity to deliver MVNO services for financial inclusion and affordable banking.
Here we have touched upon just a few alternative models. With open banking and the exposure of APIs to third parties and ecosystems, the simple lines of code that have powered communication between applications for years are now opening the floodgates of innovation in banking. Progressive banks are introducing innovative business models to monetize their APIs and fuel innovation within banking ecosystems.
These alternative models not only provide new sources of fee revenue to offset the shrinking core business of banks, but also help banks serve their customers more innovatively and efficiently. While digitization has endowed businesses with the tools for unprecedented personalization and contextualization, it is critical that banks design the right customer journeys to serve requirements of customers at different life stages and also individual requirements of customers at the same life stage. Furthermore, with the increase in the number of digital channels, banks must ensure that data across customer journeys is analyzed and harnessed for enhanced customer experiences.
New business models, new experiences and new channels of engagement – in these evolving times, the “new normal” in banking is also perennially evolving.
Rajashekara V. Maiya
Vice President, Business Consulting and Product Strategy, Infosys Finacle
The World Economic Forum in a 2015 report predicted blockchain to reach a tipping point in the year 2027. 73.1% of the respondents to the Technological Tipping Points survey believed that taxes would be collected using the technology by 2025, and 57.9% expected about 10% of the global gross domestic product (GDP) to be stored on a blockchain by this time.
Come 2017, and the government of China has already announced its plans of launching social taxation and electronic invoice issuance on blockchain. The Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority (HKMA) are setting up a cross border platform on blockchain for trade finance. The European Commission as part of EU’s research programs FP7 and Horizon 2020, plans to fund projects worth €340 million by 2020. The commission has also launched the EU blockchain observatory and forum with the support of the EU parliament. In the U.K., the Bank of England is examining the distributed ledger technology for secure RTGS transactions. Banks and financial institutions across the globe are discovering new use cases for blockchain, and the willingness of governments and central bodies is further helping move the needle on its adoption.
Against this backdrop, the WEF estimate seems rather conservative.
Blockchain is finding application in powerful real-world use cases such as digital identity, digital vault, and more! Imagine the convenience and security of having all your data and information such as education certificates, employment proof, health records, etc. encrypted and validated in the form of a personal digital vault. You control read, write, modify or delete permissions to this information or a subset of this information. For example, being able to share your health records only with your physician. Or think of the autonomy a smart contract can bring by eliminating the element of mistrust. You can convert your insurance, mutual funds or bonds into a smart contract and even transact on the bourses using the technology. Lost the physical documentation? Not a problem, the digital authority is legally binding! It’s encrypted, decentralized, immutable, and safe.
The above possibilities are just a glimpse of the potential of the technology. Applications of blockchain range from supply chain management, intellectual property, or just about anything that requires a trustworthy record. Here we look at the key attributes of blockchain and explore how blockchain stands to revolutionize and transform the financial services industry.
1. Transparency – Blockchain is being peddled as the new standard for transparency. Instead of a central authority, blockchain passes on the power to the endpoints in a transaction. Each record or transaction requires a sign-off from all the members of the chain. The biggest worry for any regulator today is the absence of a single source of truth to ensure visibility to all of a customer’s relationships with different banks. Central banks have for years strived to devise a way to bind all the relationships of a single customer into one unique identifier. In blockchain they have found the answer to this, plus a way to access all the transactions taking place in a network. Regulators also benefit from access to the required view of transactions and customers to ensure authenticity of transactions, enhance their reporting, and utilize the information for applications such as tax collection.
2. Network effects – No conversation about digitization is complete without the mention of Uber, Facebook, Alibaba, WeChat, et. al. who have all embraced the platform business model and harnessed the network effects to take their respective industries by storm. While banking has largely been a laggard in adopting the model, the industry is finally catching up. With blockchain, a technology that cannot operate in isolation, banks can reap the benefits of network effects as they form diverse ecosystems within banking and beyond.
3. Security – Banking has traditionally been prone to fraud and phishing activities. With digitization, digital identity hacking and related frauds have also become rampant. A secure system like blockchain can help banks combat and potentially put an end to these threats. Blockchain doesn’t only offer the advantages of immutability and transparency but can make records and transactions even more secure with digital certificates issued using public key infrastructure.
4. Encryption – The sophisticated cryptographic encryption techniques of SHA-256 and above make blockchain extremely robust and resistant to attacks.
5. Flexibility – Contrary to popular belief, blockchain is not all public like Bitcoin. Bitcoin is essentially a public blockchain where a member doesn’t require permission to become a node, to add a block or to mine the network. There are other ways of building a blockchain that require members to attain permission to read the information and transact or add to the chain. Thus, based on the capabilities a bank needs, it can build a private or permissioned distributed ledger.
6. Cost efficiency – Most European and U.S. banks are struggling with falling ROE levels, reducing interest income, eroding margins and profits. With the advances in technology, the cost of transactions has consistently come down from the days of branch-only transactions to transactions at ATMs to online and then mobile. With the advantages of speed, security, and transparency, the total cost of carrying out transactions on a blockchain will potentially be the lowest ever.
No single technology in the past has held the promise of all of the above.
With blockchain, for the first time regulators and central banks have a chance at not only effectively containing financial fraud but also ensuring authenticity of transactions. A block-chain extended to cross-border networks can lend itself for authentication and validation of transactions transcending geographies. Thus customers who have relationships with financial institutions outside their country of residence or domicile for reasons including but not limited to low tax regime, can also be brought under the radar of regulators and central banks.
The technology is gaining acceptance from all quarters – industry reports, analyst commentaries, regulators and bankers. Even skeptics such as the RBI in India, a body that has nearly banned Bitcoin transactions given the volatility and uncertainty surrounding the cryptocurrency, has ascertained its confidence in blockchain. The regulator has implemented a blockchain solution for trade receivable discounting systems.
So while it is abundantly clear that the industry believes that blockchain is a transformative technology, how can banks unlock its full potential. Let’s explore some use cases:
That certain customers pledge the same asset as collateral or security at different banks to secure loans is not new. There are cases aplenty of such a fraud in the history of banking. Now, if a bank provides a loan to a customer against an asset and insists on putting a record of the asset on blockchain, it can prevent the same asset from being pledged as collateral for a loan at any other bank. Banks can thus reduce non-performing assets, not with a remedy such as faster recovery but by preventing them from making their way into the system in the first place.
2. Corporate Bonds
Corporate bond, a popular trading instrument is also subject to considerable cases of fraud. If a bond issued by a corporate is put on a blockchain and is provided a unique verifiable ID, it can be traded across the globe without having to go through any intermediary such as a stock exchange or a brokerage house. Combined with digital identity where both the transacting parties have proper KYC check or equivalent in place, these crossborder transactions can be made completely transparent with unique immutable records on the blockchain.
3. Cross Border Remittance Transactions
The global remittance space is potentially the biggest beneficiary of blockchain. A standard remittance transaction involves fees, charges and loss due to currency conversions, which can be eliminated with the use of blockchain. The transaction can also be made quick since blockchain saves the time spent in approvals in a typical traditional remittance. When ICICI and Emirates NBD put their international remittances on a blockchain network, they reduced the transaction time from a couple of days to just 36 seconds.
4. Trade Finance
Trade finance transactions, typically plagued by process inefficiencies, trade regulation inconsistencies across geographies, payment and delivery delays, and absence of information on shipment can be significantly improved using blockchain. Cryptographic security of blockchain ensures immutable records that can only be accessed by permissioned participants of trade. Since the transacting parties have a single source of truth that is updated real-time with network consensus, the delay and need for reconciliation of payments can be greatly reduced and the risk of fraud mitigated. What’s more, with smart contracts banks can easily execute contractual terms of trade.
5. Trade Invoice Financing
If purchase request, purchase order, payment, and all the stages of a transaction take place on a blockchain, banks can reduce the risk of fraudulent invoicing. This way, the invoice has a unique hash number which cannot be broken or decoded to derive the contents of the invoice, or be used for lending anywhere else.
6. Retail Lending
In retail, the number of mortgage related frauds can be brought down by putting all land records, land registries, and mortgage documents on a blockchain. This reduces the risk of litigation, as an asset has a single owner and the blockchain is the single source of truth. Regardless of who has the physical documents, the transaction record on the blockchain stays legally binding. Governments in countries such as Honduras, Sweden and Norway are already making it a national practice to store land registries on blockchain.
We have thus far in this article amply established how blockchain can rid banks of frauds and inefficiencies. But is there merit in blockchain use cases for winning business? We reckon yes. Banks have been losing their peer-to-peer lending and payments business to agile startups and fintechs for some time now. With blockchain, a trusted entity such as a bank in a classic platform fashion can bring the lender and the seeker together and orchestrate a secure transaction. The key reason this model augurs well for all participants involved is because checks such as KYC conducted by banks can authenticate the transacting parties, banks can conveniently build a credit rating mechanism for lenders to make lending decisions, and lastly because banks have the advantage of trust built over the years to be the body that puts the transactions on blockchain and controls permissions to accessibiity of information in this arrangement.
As the industry leading digital banking suite, Finacle’s blockchain based solutions are powering transformations at leading banks across the globe.
In an industry first, a consortium of 11 banks partnered with Infosys Finacle to pilot a blockchain based trade finance network in 2016. Finacle announced the global availability of Finacle Trade Connect, a blockchain based trade finance solution for banks that help digitize the trade finance business process, including validation of ownership, certifying documents and making payments, while working on a distributed, trusted and shared network. The solution is available for a range of functions, including Bill Collection, Letters of Credit, Open Account for Trade, C2C Transactions for Trade, B2C transactions for Trade, PO Financing and Invoice financing.
In the truly digital world of banking, we believe this is just the beginning of the most transformative things to come. The confluence of blockchain, artificial intelligence, deep machine learning, analytics and the new generation of technologies can unlock possibilities that have been only figments of sci-fi imagination so far.