Platform for Banking and Beyond

In conversation with Sangeet Paul Choudary

Sangeet Paul Choudary

C-level Executive Advisor and International Best-Selling Author

Today, almost all industries have seen the disruption caused by new or incumbent players that have leveraged the platform business model to redefine how value is created and delivered to the consumer. In doing so, many of these companies have blurred existing industry borders and expanded the scope of the markets they serve. While many banks are looking to adopt this strategy to redefine the value proposition to their customers, they are faced with questions. What are the key principles to build a successful platform in banking? What happens to the assets that banks have considered as strengths till now? How should they measure success in the new economy and how should they make money?

To answer some of these questions, we chatted with Sangeet Paul Choudary, one of the sought-after experts on platform businesses. A C-level executive advisor and an international best-selling author, Sangeet is the co-author of Platform Revolution and the author of Platform Scale. He has been selected as a Young Global Leader by the World Economic Forum and is ranked among the top 30 emerging thinkers globally in 2016 by Thinkers50 Radar, a global ranking of top business thinkers.

In conversation with Sangeet Paul Choudary

FC: In your book you have elaborated on how any industry where information is an important ingredient, is a candidate for platform revolution and how this translates to practically all industries. How do you see banking as a candidate for such a platform revolution and how do you see the platform model evolving currently in this industry?

Sangeet: The banking model that we are familiar with is what I call the integrated bank model where the supply of loans, insurance and other banking products is combined with the demand side, and where the bank serves its customers through a channel with various processes such as anti-money laundering (AML) and know your customer (KYC). We are beginning to see that because of deregulation in recent times, this structure is coming under pressure, and the banking industry is moving to a platform economy. What this means is that all the key components of banking, namely, products, operations and customer relationships, are getting impacted. For instance, products such as loans are converting into APIs
(Application Programming Interface) because regulations in Europe, the United States, Australia and the United Kingdom are favoring open banking. Even India is seeing a similar trend. When products become APIs, they become easily distributable to third parties, and this creates the opportunity to build platforms.

On the demand side, earlier the bank used to own the customer relationship, but now the customer may have a relationship with Facebook, Amazon, FinTech firms and other third parties, which means that the bank’s products must be served in that context.

So these two changes show how supply and demand, which used to be connected internally within a bank, can now originate anywhere. And this is where platforms become important. Banks have to figure out what kind of demand-side platforms they must create; on the supply side they must think of where to take their products.

What’s important is that a lot of banks do not understand this strategic view; they only understand the infrastructural or technological aspect – for example that they must convert a loan distribution or KYC process into an API, but they do not understand where the new business model is. And so banks must figure out when they start converting their traditional products into APIs, and what are the new ways in which they can engage customers and understand their data to take control of customer relationships.

This is where I would like to make one more point which is that banks have always been information rich, but the information is secondary data, such as loan eligibility, insurance coverage, or payments made, and not primary data, such as the type of car or house a customer is interested in, his driving pattern, or food choices, etc. The party that owns primary data owns the customer relationship. So the two things that banks must think about when moving in the direction of platforms is to take ownership of the customer relationship and shift secondary data thinking to primary data thinking.

Earlier the bank used to own the customer relationship, but now the customer may have a relationship with Facebook, Amazon, FinTech firms and other third parties.

FC: You have studied in-depth the principles for designing a successful platform. What are some of the recent examples of successful platforms that you are seeing in banking or other industries – how do you see these principles being integrated into business?

Sangeet: The following are the three most important principles or success factors for incumbent organizations.

When an industry moves to a platform economy, very soon you start to see aggregation and polarization towards certain players. And this happens only when a player holds some kind of critical asset.

First, as an incumbent, you need to understand the customer in a way that allows you to deliver value. Simply having data is not enough. A platform is most valuable when it has data that is most relevant to the customer.

Thus far banks collected data to be able to sell better but didn’t collect data about the actual needs of customers. They need to rethink this strategy. Capital One is a good example here. They have an auto-search platform in which they leverage data from the car search process and provide loans to consumers. Commonwealth Bank of Australia and Danske Bank are doing similar things in the housing space. So these are some cases of banks moving from secondary to primary data thinking.

Outside of banking, Philips Healthcare is moving beyond supplying medical equipment to also capturing data about patients to create a platform around that. From gathering secondary data through its medical equipment, the company is now capturing primary patient data by creating relevant applications and integrating different data sources.

The second principle is you must figure out that when everybody in your business moves to the platform model, what is the asset that you will uniquely control because of which others will come to you.

When an industry moves to a platform economy, very soon you start to see aggregation and polarization
towards certain players. And this happens only when a player holds some kind of critical asset. Some examples here are: media companies aggregate around Facebook because it controls user data and engagement – critical assets media companies need but do not have. In the telecom industry, handset manufacturers flock to Google because it has the best mapping technology in the world. This is because a smartphone is not valuable unless the mapping data is accurate.

So ask yourself what is that unique asset you possess which no other player has in the ecosystem. This is the most important factor for success.

The third thing you must understand is what will become a commodity and what will become a scarcity in a platform economy. An example here comes from Europe where the PSD2 regulation requires banks to open up their payments information, which used to be a scarcity, to third parties, thereby turning it into a commodity. So understand where the new scarcities are, and take ownership of those things.

These are the three success factors important from the perspective of an incumbent in the middle of a
transforming industry, with existing assets and legacy.

FC: The banking industry is in a state of flux where incumbent banks and new players are adopting different approaches to digitization to gain a competitive edge. There are partnerships evolving too. What are the inherent advantages that incumbent organizations and the new start-ups respectively have for being successful in the platform economy?

Sangeet: That is an important question because one of the biggest mistakes companies make is thinking that the platform model is about not owning any assets. No doubt they have been influenced by a highly misleading statement that is going around, which says that the world’s largest media company owns no content, and that the world’s largest taxi operator owns no cars. If you look at the platform economy, it is not only about scaling very rapidly on the demand side, but also about controlling the most profitable portions of the supply side. Amazon is a good example of this and teaches incumbents the importance of asset ownership. It is because of its ownership of warehousing and logistics, and not only data, that Amazon is so powerful.

In the banking context, one of the most important things banks have is balance sheet pricing power. Nobody else can price products without that kind of balance sheet. So, banks have to figure out how to use this power.

The second thing banks have, which Fintech companies and other new players don’t, is capabilities to comply with regulatory requirements in areas such as KYC, AML, fraud management and so on. What banks need to do is think about how they can convert these capabilities into services that others can start using. Let’s say a real estate agency wants to enter into a contract. Can it use a bank’s KYC for this purpose? Can third parties start leveraging banking capabilities? Banks must think about how to modularize their capabilities and offer them to third parties. This is exactly what Amazon did by taking its technology and offering it to third parties as Amazon Web Services. So banks should also think of the capabilities they can offer to third parties and thereby embed themselves into the platform economy.

Banks’ balance sheet management capabilities also offer them an opportunity to run banking back-end operations for a third party. This is happening already in China where ICBC has a financial cloud offering regulatory and operational capabilities needed by small players to start a bank. So now, the small player need not build everything from scratch; it can simply leverage the financial cloud and run its balance sheet on top of that.

Coming to the new players, well of course they have their own advantages. They have challenged the way banking has been done for years, but mainly on the customer experience side. Soon the impact will also be seen on banking processes. For example, banks don’t use much biometrics in the KYC process, but Fintech companies do, and it is only a matter of time before banks follow suit. It is important for banks also to learn from small players – things such as using machine learning and new data sources in their processes, how to transform operations, etc.

FC: We have many incumbent banks that are rolling out platform based businesses. They do realize that the traditional metrics for evaluating business success will not work in the context of a platform. What according to you are the metrics that these organizations should track?

Banks will increasingly have to think about running two parts of their business – the regulated part and the part which is not regulated. Because increasingly, banks will deal not only with money but also with decisions and experiences that money feeds into.

Sangeet: The most important thing is to define what data is important and then start tracking the acquisition of this data. A lot of banks that have data don’t know what to do with it. The problem is that this is usually the wrong data.

So once you define the data, start tracking and measuring the way you are collecting it. In order to do that, make one part of the bank responsible for collecting the data and another for monetizing it. It is therefore important for the organization to be structured in a way that not every business is in the process of making money. This is the case with Amazon, Facebook, etc. So that’s something banks need to think about.

Another important thing about metrics is that banks must think of ways to own the customer relationship beyond disbursement of banking products. A classic example is the housing loan business. Before a customer decides which house to buy, he or she is chased by a number of providers. Once the decision is made and the loan is approved, the only relationship that remains is with the bank. Unfortunately, the bank does nothing with this relationship other than collect payments. To be relevant banks must think of ways in which this relationship can create greater value. For that it must measure not only payment inflows but also evaluate other kinds of data that can be gathered and repurposed using analytics to benefit the user or third parties, or connect users to other third parties, etc. Again, going back to the earlier housing loan example, what if the bank could help customers not only manage the home loan, but also the entire buying process by connecting them to different providers? So, the metrics will be defined by the definition of the end ecosystem. If the ecosystem is just built around serving the loan, then the metrics may not change much. However, if the end ecosystem tries to capture the relationship in a deeper way then the metrics will change in a big way.

FC: Monetization is a big challenge in platforms and you have talked about how businesses should monetize by charging for the value that the platform creates without inhibiting the growth of network effects. Can you guide our audience on how to choose the right monetization models and the pitfalls they should avoid?

Sangeet: Let’s talk of some of the least controversial monetization models, which are about taking your
existing assets and capabilities, modularizing them and providing them to third parties. Take the example of identity management, which is a core capability of banks. A bank could, for example, use its knowledge of SME customers and their financial status to provide an identity management service enabling small businesses to enter into contracts with each other. It could charge for such services.

The second way in which banks could think of making money is to go beyond existing sources of data to
determine creditworthiness and improve their existing banking model using much better data.

Yet another way is to go beyond merely disbursing a loan to participating in the automotive or housing ecosystem. Or going beyond selling insurance to creating value such that insurance is not needed in the first place. So instead of just providing health insurance, the bank could get into the fitness ecosystem with the aim of making people so fit that they do not need so much health insurance. If banks can solve that, there are monetization opportunities in the primary data ecosystem as well.

Banks will increasingly have to think about running two parts of their business – the regulated part and the part which is not regulated. Because increasingly, banks will deal not only with money but also with decisions and experiences that money feeds into. Whether that decision is about buying a house or the experience is about eating at a particular restaurant, banks will have to think about how to participate in these adjacent decisions and experiences, which are not regulated. So, I think banks would need to think about monetizing both the traditional parts of their business, and the emerging ones.

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