Platform Banking Not Why, But How

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Rajashekara V. Maiya

Vice President, Business Consulting and Product Strategy, Infosys Finacle

In a sense, business has come full circle. When it started out, trade was rooted within a small community, from where it expanded over centuries to a state, a nation and finally, the globe. Today, business conducted on a digital platform is once again centered on the values of community (albeit a global one) and fellowship.

But many other things have changed. Whereas the fundamental premise of traditional business models was to produce goods and services where they were cheapest and sell them where they were most profitable, the driving principle of the platform business is to create shared value, even to the extent of binding competitors together in co-opetitive alliances. The linear manufacturing assembly line of yore has made way for a web-like network thriving on connectivity and collaboration. Also, unlike traditional organizations, which internalize innovation and are therefore restricted by the availability of in-house talent, platform companies externalize innovation, welcoming the contribution of the ecosystem at large, to break all boundaries of reach and scale. The story of Apple, which evolved from a “linear” phone manufacturer to the owner of an iconic ecosystem of apps, developers and users around the globe, is a great example of this change.

Today, the platform business model that was seeded by Apple and a few other firms a couple of decades ago, dominates the leaderboard of companies with the highest market capitalization: in 2017, almost 60 percent of global, billion-dollar unicorn businesses were based on the platform model; the situation was even more pronounced in Asia where 31 of 36 unicorns were platform businesses. What’s more, the platform model is spreading quickly from early adopters such as commerce, transportation, hospitality and telecommunication to other industries, including banking.

Typically, a platform enhances business in two ways – first it creates a certain value to attract customers and then leverages the same ecosystem to capture value for itself. Once again, Apple serves as a good example. After attracting millions of users by offering voice communication, Internet and data on the same device (iPhone) it capitalized on its software strength to augment value by building a platform and reaping the benefits of the ecosystem.

While it may sound counterintuitive, banks are well placed to adopt a platform business model. They are well past the first stage, with a long history of delivering value through a variety of financial products and services. Now they have an opportunity to capture immense new value by building an ecosystem where consumers fulfill their needs, vendors build their businesses and the banks themselves gain both loyal customers and additional revenue through advertising, subscription and transaction fees.

For banks planning to enter the platform business, there are currently seven avenues:

Product platform: In this model the platform company aggregates products from various sellers and offers them to buyers. Retailers such as Amazon, eBay and Alibaba follow this model. In banking, the DBS Marketplace for used cars is an example of a product platform.

Service platform: Airbnb and Uber are the first names that come to mind as examples of a service platform, which like the product platform, aggregates service offerings from different providers and presents them to customers looking for the same.

Typically, a platform business secures a valuation that is 2 to 3 times what a linear business would receive. Of 2017’s US$ 700 billion private equity financing, US$ 494 billion went to platform businesses.

Payments platform: Probably the first port of call for banks, the payments platform marks a revolution in the way payments are made, transported, received and incentivized. It is largely responsible for making payments cheap, real-time, fast, and simple enough to consummate on a mobile phone. While there are innumerable examples of payments platforms, no list is complete without PayPal, Square, and Apple Pay. In India, the Unified Payments Network is a standout example.

Investment platform: Another area of immediate interest for banks is the investment platform business, exemplified by the likes of Prosper, Lending Club, Funding Circle and Upstart, which connects borrowers (especially of small loans) to lenders. Banks intermediate the actual financial transactions for a fee.

Social platform: A necessary part of modern life, the social platform needs no introduction. Networks, such as Facebook, have now entered the banking space with peer-to- peer “social payments”. Conversely, one could perhaps cite HSBC Connections Hub as an example of a bank-sponsored social platform where business customers can connect, interact and do business with one another. Once social payments gain traction, more banks will likely set up social platforms of their own.

Communication platform: WhatsApp and WeChat are the frontrunners among communication platforms and both have enabled in-chat payments. This is an avenue for banks to be part of their ecosystems and facilitate both financial and non-financial transactions passing through. In India, ICICI Bank has pipped its rivals by becoming WhatsApp’s partner bank for the initial launch.

Social gaming platform: Several gaming networks, including Second Life, allow gamers to buy and sell stuff using virtual currency. While regulations may deter them for now, is it possible that someday banks will participate in such platforms, helping to both move and trade real and virtual money?

Which of the above platforms a bank chooses depends on its unique circumstances. Regardless of that choice, there is one thing that every bank must do to succeed in its platform business, and that is tie up an extensive ecosystem from end to end to offer frictionless, seamless customer experience. This is exactly what DBS – which prefers to be known as Digital Bank of Singapore – is doing so successfully by bringing key participants, from developers to Fintech to private equity firms, together.

Platform banking is inevitable, and huge benefits await those who get it right, not just reach, scale, efficiency and growth, but also unprecedented valuations: typically, a platform business secures a valuation that is 2 to 3 times what a linear business would receive. Of 2017’s US$ 700 billion private equity financing, US$ 494 billion went to platform businesses.

In return, platform banks can deliver immense value to investors, elevate the economy by fostering sharing and collaboration, and be part of one of the biggest business revolutions in recent memory.