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Gabriel Di Lelle

Vice President, Innovation and Digital Transformation, Grupo Bancolombia

If assembly line was the poster child of the producer economy, then ecosystems are the backbone of business in the platform economy. Today, four of the top five companies in the world by market cap are platform companies. And while market cap is a definite indicator of a company’s market value, success in the digital age is not a function of return on assets but a function of value exchanged in diverse ecosystems.

In banking, it is not only the digital natives such as Alibaba or WeChat that are transforming financial services with their agile platforms, but leading and progressive incumbent banks are also opening up to the idea of ecosystem-driven platform model.

C-level support and funding are essential to quickly pilot and test the models.

FinacleConnect presents an interview with Gabriel Di Lelle, Vice President of Innovation and Digital Transformation at Grupo Bancolombia. With 1070 branches, Bancolombia is not only the largest commercial bank in Colombia but also one of the biggest in Latin America. In this interview, we quiz Gabriel on the bank’s strategy, challenges in adopting the platform business model, key initiatives, and more!

In Conversation with Gabriel Di Lelle

FC: With presence in 4 key markets in Latin America, such as Colombia, Guatemala, Panama and El Salvador, Bancolombia is one of the leading banks in the region. We would like to understand how the developments around platform business model in banking are unfolding in the region.

Gabriel: The platform business model in banking is at an early stage in this part of the world. One of the key drivers for adopting the model is the emergence of new disruptive players that are able to offer high quality services at relatively low prices with radically different approaches. In the markets that we are present in, these players have just begun making a foray into financial services, as opposed to markets in other parts of the world that are burgeoning with these kind of players. We expect their growth to accelerate in the next couple of years. Incumbent banks must prepare themselves for new ways of doing business as these innovative companies gain critical mass and begin to dot the entire financial services value chain. The platform business model is a key strategy for banks to survive and thrive in the new world.

FC: Talking of incumbent banks having to embark on a platform business strategy, what do you think are the principal challenges before these banks as they take the plunge?

Gabriel: First and foremost, banks are regulated entities and have a lot more restrictions as compared to agile start-ups disrupting the space. The regulatory restrictions directly translate to a longer time to market since there is a process that banks have to abide by. Additionally, banks are burdened with associated regulatory over-costs that impact margins. New entrants get to circumvent these challenges as they have a lot more leeway. They can be faster, more agile, and also have leaner cost structures. As banks make the shift towards platforms, they must find a way to effectively partner with start-ups and FinTechs to take advantage of their agility.

The second biggest challenge I see is the cultural orientation of incumbent banks. Traditionally, banks have been rather reluctant to take risks. Now it is becoming inexcusably important for banks to discard the risk averse culture and adopt experimentation, collaboration and customer centricity as the new way of doing business. Banks have complex processes and systems that need to be simplified for ecosystem-led banking.

Having said that, I’d like to emphasize that major changes like these require endorsement right at the helm. C-level awareness is key. Building a culture that is conducive to experimentation requires the business to be involved in the innovation process, and educated about new business models. Once this is ensured, C-level support and funding are essential to quickly pilot and test the models.

FC: Does Bancolombia have an active platform business strategy? If yes, where does it figure in the bank’s mid-term to long-term strategy?

Gabriel: Yes, it is an integral part of our innovation and digital transformation strategy, since we believe that the industry is at a critical inflection point poised for game changing developments that will impact the very nature of banking. We believe that new business models, including platform-based business will be one of the major transformative forces.

Platform-led initiatives fall under our innovation & transformation strategy pillar called ‘reinvent the business’. It is also directly linked to a key strategic directive from our CEO, which is to renew the sources of revenue. Developing new business models is a critical capability for us at Bancolombia, especially since interest-based income is at stake globally.

Utilizing some of the bank’s traditional resources such as its sales force, data assets, a mature network of channels and the client base can be extremely powerful to accelerate the adoption of new business models.

We have several initiatives underway. A lot of these are in the SME space, and a few in retail. We believe it is best to start small, experiment, and learn from what’s happening elsewhere in the world. In the mid-term we are definitely looking to scale the platform-led business model, and will evaluate the ROI for these initiatives just like we do it for any regular initiative. At this point it is more about learning, experimentation and changing the organization for the future.

FC: We’d like to learn a little more about the initiatives underway. Can you share some details about the initiatives, the metrics you are using to measure the success of these initiatives, and the key learnings?

Gabriel: We are working on two new offerings under the platform model – one in the retail business, and one around monetization of data. We recently launched both in the market.

Key metrics at this point measure how quick our iterations are, and how efficiently we plough back the learnings. We expect to very quickly move towards measuring participation and growing the user base on both the sides – adoption by end-users and content creation by participating suppliers – to define our success.

Let me give you an overview of one of them – Plink. Plink as a platform is designed to work mainly with two major players: on one side the merchants who find in Plink access to a wealth of information on how their business is performing as compared to their competitors, who their customers are (demographic information), their profile, their buying behaviors – never providing individual information since we are obsessed about protecting individual privacy – and the possibility to “push” offers through Plink. Using machine learning algorithms Plink selects the most relevant offers for different consumers as per their history as a consumer. So consumers only receive offers that are more likely to be of interest to them and receive them at the most appropriate hour. For example, a restaurant offer arrives at 11 am, not at 3 pm or when, or when a customer is geographically in the vicinity of that restaurant. The monetization model is very simple: if the merchant is a Bancolombia customer they receive free access to the first tier of reports through the web platform. They pay only if they are interested in accessing a more advanced set of reports such as tier two reports that include analytical information, and a small “finder’s fees” when an end customer approaches them to redeem an offer. The end user will never have to pay for Plink.

In our experience, one of the key learnings has been setting up a separate entity, at least in the initial stages, which not only helps channel the right resources, but also prevents any bias towards traditional models from impeding the development process. We tend to create new business units or new companies for different categories of initiatives. At times, regulatory restrictions limit the activities a bank can perform, and a separate company is a good alternative.

We have also recognized immense synergies with our traditional business in some cases. Utilizing some of the bank’s traditional resources such as its sales force, data assets, a mature network of channels and the client base can be extremely powerful to accelerate the adoption of new business models.

Another key learning is to connect the new platform business with the core business of the bank. For us, even if a suggested platform business idea seems like a totally different business, it is worth a go if it reinforces a core competence such as analytics, or if it presents a way to tackle the new entrants in the industry. Our retail initiative, which is far from a pure financial services business is a case in point.

FC: What are the key parameters at Bancolombia for deciding which APIs to expose to corporate customers, FinTechs and developer ecosystems? And do the criteria differ for different user groups?

Gabriel: We have recently developed our API strategy. At Bancolombia, we see three categories of APIs: the internal APIs, where we look for efficiencies, flexibility and time to market; the open APIs to keep expanding our open innovation initiatives such as a recent survey we concluded with a local FinTech to identify which of our APIs they’d like to use; and the third for corporate and SMB clients to improve our products and services and provide new value-added services.

Our own FinTech Nequi, a neo bank, opened its API marketplace for developers a year ago to build new solutions. Developers integrate Nequi in their applications.

A parking lot has integrated Nequi as a payment method, and a logistics SME is using Nequi to disburse commissions to freelance drivers through Nequi APIs.

FC: With the shift towards platform banking, banking is set to become even more customer-centric. Banks will offer not just competing products but competing products from other financial institutions on their platforms.

Has Bancolombia made any strides towards forming a marketplace that sells solutions from other financial institutions?

Gabriel: Not yet. It is something that is being considered. The closest we have gotten to this is with our neo bank Nequi, which in a way competes with Bancolombia’s traditional accounts. We are looking at some interesting areas where Nequi is a greater fit than traditional banking products.

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Anuj Agrawal

Senior Research Manager, IDC Financial Insights

With Open Banking initiatives across the world, a new category of assets has made its way into a bank’s balance sheet – data and APIs. While most banks have begun tapping into these new assets for benefits of customercentric innovation and collaboration, their business strategy around APIs is still at an embryonic stage. As these initiatives mature, banks will need to look at their API strategies more holistically. This entails evaluating the business proposition around their APIs, the consumers of their APIs, the pricing strategy around them, and more. FinacleConnect chatted with Anuj Agrawal, Senior Research Manager at IDC Financial Insights to understand these developments and their implications for the open bank of the future. Anuj is the Lead Analyst for Open Banking at IDC Financial Insights, Asia / Pacific. Excerpts from our chat with Anuj follow.

FC: How do you see the open banking trend shaping up in the banking space in the next two years? Is regulation still the main driver for banks towards open banking APIs?

Anuj: With about 80% of banks are expected to progress with Open Banking by 2020, Open Banking is going to drive the digital transformation in banks for next 3 years. Furthermore, 36% of Tier-1 & Tier-2 banks have already adopted at least 5 external partner APIs in 2018 to improve operational efficiency, increase customer reach or enhance customer experience and this number is expected to increase to 50% by end of 2019.

Unarguably, the regulator’s position is one of the most important factors for the development of Open Banking as without strong regulatory clarity on Open Banking in the form of firm guidelines addressing various compliance and governance issues, Open Banking will remain an uncertain journey for even the most ambitious financial institutions. This has been evident in Europe and in some Asia/Pacific markets that have seen regulator-initiated framework accelerating various activities that banks can do in the spirit of Open Banking.

36% of Tier-1 & Tier-2 banks have already adopted at least 5 external partner APIs in 2018 to improve operational efficiency, increase customer reach or enhance customer experience

FC: The banking industry is undergoing a lot of disruption with raising customer expectations, new competition and emerging technologies. As such times, what are some of the benefits of adopting open banking APIs?

Anuj: Open Banking APIs will allow banks to innovate, differentiate, and expand their products and services offerings while working and collaborating with TPPs and fintechs, especially if banks can act swiftly to changing market challenges. Open Banking APIs create new forms of distribution channels and servicing capabilities, provide access to third-party application marketplaces, and comply with emerging regulatory norms through the standardization of APIs.

3 Key benefits of adopting Open Banking APIs are:

Expanding customer reach: It enables banks to build applications with advanced layers of functionality and that can be opened up to third parties. Banks increase reach through new channels and new ways to meet unserved and underserved customers.

Create new revenue: Being a big custodian of customer data, banks will be able to generate deeper consumer insights and come up with a value proposition that enhances their products and services offerings.

Continuous innovation: With the help of more agile external partners, banks are able to come up with innovations fast, and ensure that as market dynamics change, innovation projects keep on pace.

FC: What are some of the key concerns of banks as they start their journey towards open banking APIs and what are your recommendations for overcoming them?

Anuj: With more and more new channels for transaction opening up through Open Banking APIs, cyber threats will also multiply as security measures for these new channels will naturally be weaker. In this context, in recent IDC survey on Open Banking, about 4 of 5 banks raised their concern around data security with Open Banking. Other concern which banks have with Open Banking is loss of intellectual and technological advantages as the technological advancement outlook of a bank can begin to shift from being the “most customer-friendly bank” to the “most customer-secure bank,” wherein customers will not be individuals but TPPs who are interacting with banks through Open APIs. Loss of customer loyalty, brand value and customer insights are other few concerns with banks becoming more of an information and payment platform facilitator and ceding more activities to third party providers, customers could increasingly meet more banking and financial needs through third-party applications without meaningful engagements with the bank.

FC: Which are the top 5 public APIs you would recommend banks should offer in 2019?

Anuj: Essential APIs would be in the categories of financial information, loan-related, and transaction-related.

IDC has published a list of 30 most common APIs for 2019:

FC: What should incumbent banks focus on to monetize their APIs effectively? What are some of the other metrics that banks should track to show progress?

Anuj: As banks search for ways to generate new value from their data and APIs, they should start with looking at the basic foundations of data within their institution: the data infrastructure and the business processes that support how data is collected, stored, updated, managed, secured, analyzed, and used throughout the enterprise. Fundamental discussions on governance of APIs, especially in the collection, integration, and use of data and APIs across different business units and product siloes should begin. The more the organization ventures into new things via APIs, the greater the focus will be on the basis of APIs and related data.

Inevitably, the bank will have to consider who owns and controls the data exposed through APIs. A cursory look into recent regulatory guidelines in the Asia/Pacific is already making it clear that the customer has the ultimate ownership and control of his/her data. However, generating new value from data can and should proceed. Data-fueled intelligence is permeating all aspects of business, and other companies from other industries are generating new value from it. Financial services cannot be the hold-out from this. Several new principles on data utilization and API monetization may drive or hinder value generation, depending on how they are interpreted. These include privacy impact assessment, the right to be forgotten, consent and inference, and data portability.

In practice, however, APIs and data must be considered as a key resource to the business of banking. In a culture where APIs is widely accepted as an asset, the drive to get the maximum returns on such data begins.

Increasingly, APIs and data will be seen as an asset. For sure, some parties within the bank will claim the contrary, most likely citing how, in accounting terms, APIs and data is not an asset. In practice, however, APIs and data must be considered as a key resource to the business of banking. In a culture where APIs is widely accepted as an asset, the drive to get the maximum returns on such data begins.

The team leading the initiative to generate new value from APIs (or to monetize APIs) should look at their initiative not just as a theoretical exercise but as an actual build-a-business endeavor. This entails, therefore, decisions on who will benefit from APIs, the terms and rates of exchange of value, pricing models, distribution models – much like how a business creates the business. Many banks at this point are putting this endeavor under the care of their innovation teams or their fintech teams, but as the business scales, this should not be just an innovation project anymore. The bank has to promote this as a real business, in keeping with the new ways of doing business in this vastly different, data-driven marketplace.

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Changing Roles of Banks in the Platform World

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Sajit Vijayakumar

Chief Operating Officer, Infosys Finacle

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.

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.

The richer a platform or marketplace is in its data assets, the higher are its chances of getting it right.

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.

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The New Normal in Financial Services Goes Beyond Financial Services

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Arun Krishnan

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.

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Blockchain Building Block of the Future of Banking

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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.

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.

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:

1.Asset Registry

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.

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.

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.

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Abhishek Verma

Senior Director and Digital Evangelist, Infosys Finacle

Banking Turns Open and Collaborative

Three years is a long time in the global banking world. During 2015 to 2017, when the FinTech trend began to take root, incumbent banks viewed the new competition with a measure of apprehension. A chief concern was how their creaking legacy systems, some of which were more than 50 years old, would compete against the nimble, innovative models of FinTech upstarts.

Gradually there has been a perceptible change in attitude and approach. In the past year or so, both banks and FinTechs have realized that there is more advantage in joining their complementary strengths than pitting them against each other in the marketplace.

The realization couldn’t have come at a better time. In several parts of the world – Europe, Australia, India and elsewhere – open banking is either being mandated or encouraged by the government, leaving banks with no choice but to share their customer data and development environment through APIs with authorized third parties, such as FinTech companies, in their financial ecosystem. To their credit, banks are responding positively: in a recent global survey on payments, 87 percent of the respondent banks claimed to have a strategy for open APIs, significantly more than the 59 percent who said the same thing a year before.

Take that as a signal of banks’ acceptance of the new reality of banking – open, collaborative, and ecosystem-driven. In this reality, incumbents are shedding their universal model of linear value chain to gradually transform into platform-based financial marketplaces with a wide set of own and rival offerings to fulfill not just the financial needs of customers but also others, ranging from travel and leisure to shopping and education. The transition to a platform model is no surprise, given that in less than a decade, the leaderboard of companies by market capitalization in the United States has changed from Exxon, GE, AT&T, Microsoft and P&G to Apple, Alphabet, Microsoft, Amazon and Facebook, all of which have very substantial platform plays.

Bank-FinTech Partnerships

FinTech companies are essential for a thriving financial services marketplace and for a successful platform bank. FinTech-bank relationship in today’s open API environment come in a variety of forms. In the first one, the bank itself creates a digital subsidiary with FinTech flair for its digital operations: examples include a Goldman Sachs subsidiary called Marcus, digibank from DBS, and Greenhouse by Wells Fargo.

Another model is one where a FinTech firm with a niche offering evolves into a full-fledged, digital, challenger bank. Atom Bank and Monzo in the United Kingdom, and India’s Paytm exemplify this.

The third option is collaboration between an incumbent bank and a FinTech provider that is all about taking highly innovative products and services to market. Take the case of Portland, Oregon-based Simple, which has partnered with banks BBVA Compass and the Bancorp to offer FDIC-insured checking accounts built to help customers save money, and supports smart spending with inbuilt budgeting tools. The accounts are free, and Simple doesn’t charge fees to its customers. Or that of online small business lender OnDeck, which is offering its underwriting technology to JPMorgan Chase that the bank will use to quickly approve and disburse loans to its own small business customers. Then there’s Moven, which has licensed its money management app to Canada’s TD Bank, which claims a cut in spending of 4 to 8 percent among app users, and gives customers unique insight via “spending meter”. And let’s not forget SoFi, which announced in March this year that it was partnering with 6 banks to offer a checking account that would come not only with zero fee but also a debit card, bill payment and other facilities, and an interest rate of 0.92 percent that was several times the market average.

Innovation and Insight

By allowing FinTechs and third party developers access to open APIs at the experience layer, banks can leverage their innovation expertise to acquire applications of real value. Think of Ayden, which enables banks to receive customer payments from any channel, from mobile app to bank account to Facebook, to save them the cost and effort of setting up infrastructure for that purpose. Or China’s Xero, which offers low cost business accounting services to small businesses, and a new revenue stream to their banks.

Besides innovation, FinTechs also bring valuable insights to their bank partnerships. Banks can use these insights to improve and personalize products, services and experiences, reach customers on the right channels, and target promotions to the right audience at scale. For example, Ant Financial helps its partners make personalized, contextualized recommendations to more than 800 million customers at every stage of their journey.

Platforms and the Banking Ecosystem

An open API allows banks to easily onboard FinTech partners and their innovative solutions to increase revenue and more importantly, stay relevant in a rapidly changing landscape. It is also the most important tool for building a banking ecosystem.

Banking ecosystems, with their diverse bank and non-bank participants, have the potential to completely transform banking as we know it. New models of the platform bank, other than the marketplace model mentioned earlier, will come up in the future. Examples include specialist banks that offer only one or two products that they are really strong in, and distributor banks, which focus only on delivering products sourced from other providers on every possible channel.

Just as the most successful platform companies understood that they were in the business of connecting providers with consumers, banks too must figure out the real needs that they serve.

However, the big decision before banks is not which model to adopt, but rather, what must be the core proposition of their platform business. Just as the most successful platform companies understood that they were in the business of connecting providers of transportation and accommodation with consumers, rather than owning cars and hotels, banks too must figure out the real needs that they serve. One thing is clear – the days of transactional banking, of merely lending and borrowing money, are over. Today’s customers want their banks to enable their lifestyle through every stage of life – starting from when they enter college until the day they retire. Nothing is better suited to fulfill this expectation than the trifecta of Open Banking, FinTech, and the Platform Model.

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Ethan Wang

Product Manager, Infosys Finacle

Driven by ecosystem orchestration, reduction of marginal costs, and collaborative innovation, platform business is fast emerging as an important pillar for success in the digital world. A recent report from McKinsey says, “Platform is the preferred operating model for 7 of the world’s 12 largest corporations”. However, none of these organizations are financial institutions. Banks are lagging behind in adoption of the platform business model.

Banking executives are aware of the advantage of platform business – platforms can help banks retain their competitive edge in a world where customers are constantly resetting their expectations based on their experiences across sectors. But platform is a new business model for banks, and designing and building a platform is a new and sometimes confusing journey. Some important questions before a bank looking to build a platform business include: Shall a bank acquire a platform, or build it from scratch? Shall the platform run on the cloud? Can a bank develop its own API standard or wait for an open standard from regulators? Is an outside-in approach better than an inside-out one when designing platform interfaces? How to measure the success of platform business and how to monetize the platform?

Understanding the potential value of data is the foundation of a bank’s platform business model, as several chief architects concur by recommending a thorough data governance model as a key prerequisite. However, there are a variety of other considerations such as interface design, infrastructure and KPIs that banks must weigh in on.

This article talks about a five-step process for banks to review their platform strategy, and overcome any implementation challenges.

#1 Segmented Platform Strategy

Banks don’t need to “create a platform from scratch.”

Yes, platforms help consummate matches between suppliers and customers. But the role of a platform is more than being a modern middleman. It is about relevance, control, innovation, and monetization. Moreover, banks can use the platform to remain in control of their customer data and explore ways to monetize this data for additional revenue.

Banks do not need to create a new platform from scratch to be a matchmaker. To stay relevant to their customers’ digital journey they can partner with a digital firm’s ecosystem. To build innovative customer experience they can allow FinTechs to access their open APIs. Banks looking to gain from synergies with non-banking businesses can choose to acquire an e-commerce platform. Thus banks must zero in on their strategies according to their priorities.

Some important questions before a bank looking to build a platform business include: Shall a bank acquire a platform, or build it from scratch? How to measure the success of platform business and how to monetize the platform?

Strategies segmented by data ownership and accessibility

To help banks explore strategies for platform business, we have summarized six approaches relevant in banking (refer to the Finacle document – A strategy framework for platform banks). Based on the two dimensions of data ownership and data accessibility, our segmentation model can help banks align their platform strategies and deployment models more closely to the needs of the ecosystem. Banks can choose to embed, create, curate, participate or buy a platform business. For instance, creating an API gateway, building an online car marketplace, and exchanging Amazon loyalty points.

There is no one-size-fits-all strategy. Different platform approaches come with their own unique challenges. Participating in mega-size ecosystems of digital firms could be a time-to-market hack for banks transitioning to the platform model, but it also puts them at a risk of losing data ownership. A leading bank may choose to leverage its network to curate an ecosystem, this approach may not scale as much as the bank’s open APIs. Banks may choose to create marketplaces for financial products, but may find it challenging to get a large number of participants from other banks.

Whether it is creating banks’ API gateway, building an online car marketplace, or exchanging Amazon loyalty points, banks need a careful evaluation from two critical dimensions – the ownership of data, and the accessibility of data (refer to the Finacle document – A strategy framework for platform banks). Banks can then select their best-fit strategies in the context of their ecosystem requirements and their infrastructure constraints.

#2 Scalable Infrastructure

Start small

Bankers have traditionally been and to a large extent continue to be risk-averse. Given the lack of experience in platform business, banks often choose to start small with respect to budgets and resources. An international bank is known to have started its open banking initiatives with a team of just five engineers and analysts. Apart from mitigating risk, starting small also endows the bank with an agility to innovate. For instance, banks can get an open API marketplace up and running in a couple of months and enrich the functions later.

Plan big

“Start-small” often leads to cost-effective solutions, such as open source tools and simple out-of-box products. While there’s nothing wrong in adopting the open source approach, it must be ensured that the infrastructure – hardware, database, middleware, and traffic management – that fits a short-term solution in a start-small approach is scalable and manageable to meet the future demands. Platform business may grow at an unprecedented pace. A bold forecast estimates 80% of new transactions and services will initiate from platforms. Stepping back from estimates to the scenario today, Ant Financial is said to have sold over one hundred million insurance offers through Alibaba’s platform in its Single Day campaign. So, although starting small is advisable, planning small spells doom. Banks must “plan big” and ensure the scalability of their underlying infrastructure. They should explore a traffic management component for their infrastructure or run their platform on cloud.

#3 Ecosystem-centric Design

Easy plugin

Bank CIOs have a variety of options to build platform businesses: in-house, platform vendors, ecosystem partners, and open source tools. In taking their platform businesses off the ground, banks must reach out to vendors, regulators, and partners, with an unrelenting focus on the key requirements for a good platform design: light-weight, secure, time-to-market, scalable, and importantly, ecosystem-friendly interfaces. Many of these rules could be summarized in a single design principle: easy plugin.

Architects sometimes design platforms based on legacy architecture and interfaces so that existing core capabilities can easily integrate into new products. Nevertheless, a platform, as an orchestrator of ecosystems extending across sectors without borders, should be able to plug in third parties easily and quickly. Easy plugin is an outside-in rather than an inside-out approach for designing ecosystem-friendly interfaces.

Open standard

Business consortiums and regulators have become an important catalyst to many platform business initiatives, for instance, standards for open banking. The Association of Banks in Singapore published an API playbook in 2017, and HKMA launched a consultation on the new Hong Kong Open API Framework early this year. Needless to mention Open Banking in the UK and Australia, PSD2 in EU, and UDI in India, have already got banks transforming themselves for compliance.

All these frameworks and guidelines provide references to API security and catalogs. However, while harmonization of open banking interfaces is important, it may defeat the purpose of time-to-market, given that administering any kind of standardization in banking takes years to happen. If banks want to scale their platform business to thousands of partners and developers, it may be worth considering speaking with Fintechs, digital firms and IoT manufacturers who can help design APIs as the key consumers of banking APIs. Eventually, open banking is not just about banks opening up their data to each other for regulatory compliance, but also a key opportunity to grow their ecosystem business. Although the importance of regulatory standards can’t be emphasized less, bank executives should design open APIs not just based on exposed core banking interfaces or regulator’s API standard. What is required is an ecosystem-centric, domain-based and outside-in approach to make platform business effective, user-friendly and scalable.

#4 Driven by New KPIs

To successfully evaluate the performance of platform business initiatives, traditional value metrics of revenue, cost and risks are not sufficient. A new set of KPIs and metrics are needed to help banks measure and ascertain how well they fare on their platform strategies and API strategies. New dimensions such as traffic, conversion, and monetization are critical for effectively evaluating platform businesses.

Monetization matters but should not be a key priority at the beginning

Banking executives typically have a common question in mind before launching a platform initiative – how to monetize the platform business. Platform business is designed to reduce marginal costs so that consumers can get better products at a lower price. On the other side, monetization as a new revenue source adds extra cost for platform transactions. Experiences from other industries portend that monetization right at the start could potentially slow down the growth of platform business, and bank executives should focus on making connections and increasing traffic when starting out on their platform journey, rather than obsessing over ways to charge money from partners and third-party developers. However, banks should ensure that their infrastructure lends itself well to monetization, which might be key to the success of their platform at a later stage.

Focus on customer experience, traffic and context

Key questions that banks must answer to accurately assess the performance of a platform include – How many services and transactions pass through API gateways? How much purchasing is done by marketplace platforms?

New KPIs such as integrated customer experience, traffic, and conversion should be designed for benchmarking platform performance. Integrated customer experience gives a consolidated view of customer satisfaction. Most customer experience KPIs are measured in siloes. Measuring traffic is critical for evaluating the scalability and influence of banks’ platforms and their influence in their ecosystems. Apart from being a key indicator of monetization and innovation, conversion rate is an important metric to validate that banks offer the right services in the right digital context.

#5 Be Aggressive to Make Connections

Harvard Business Review says the success of a platform strategy is determined by three factors: connection, gravity, and flow. Connection is how easily others can plug into the platform to share and transact. Gravity is how well the platform attracts participants, both producers, and consumers. A good connection and gravity could be justified by how many connections the platform makes with partners and consumers to consummate the right matches. It requires banks to get the wheels in motion for a thorough plan to actively “sell” the platform to ecosystems.

Sell the value

A recent report from Mckinsey says “companies pursuing aggressive platform strategies yield a better payoff in both revenue and growth.” An elaborate API catalog and a flexible sandbox environment make a good first impression to partners and third-party developers. Meanwhile, banks also need to have a connection story ready, a story that tells how the matchmaker could create added value for third parties. To achieve that, a well conceptualized marketing and partnership plan needs to be in place to be able to actively sell the value of a platform, and make the right connections. Unfortunately, a platform working group is usually made of program managers, business analysts and architects. Banks should expand this composition to include marketing and sales specialists in the task force.

Bank executives should focus on making connections and increasing traffic when starting out on their platform journey, rather than obsessing over ways to charge money from partners and third-party developers.

Target user in a bigger ecosystem

Ecosystems comprise more than consumers and FinTechs. Customers live a digital life made possible through an ecosystem of telecom operators, digital firms, social apps and IoT device makers. To effectively promote partnerships and attract more traction and traffic on platforms, banks should understand who their target users and partners in the platform business are, and should reach out to them actively. As in all initiatives, the 80/20 rule applies to platform businesses too. In this context, typically 80% of traffic is brought in by 20% of the participants of a platform. A successful partnership with major digital firms thus bodes well for quickly bringing in massive traffic to open banking platform. The story of how Alibaba fetches a sales figure of about 100 million insurance products to Ant Financial is proof of the value a great targeted partnership brings to a platform venture.

Recommendation

In 2018, platform business sits firmly atop the strategic agenda for banks’ digital transformation. Be it creating, curating, participating or investing, banks should formulate a platform strategy that connects well and fits just write in their ecosystem. To truly realize the vision of platform business, bank executives should:

• Understand the potential value of data and assure the readiness of a data governance model
• Choose the right strategy based on the segmentation model articulated above, and the bank’s business context
• Design a secure, agile, scalable, and ecosystem-friendly open platform that supports monetization
• Be aggressive to make connections with developers, partners and consumers
• Develop a new set of KPIs such as traffic and conversion to benchmark platform business

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