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.