Before launching into the trends for business model transition towards the platform model, let us establish a common understanding of what a platform business model is.
The banking value chain can be broken down into three key identifiable layers. Manufacturing financial products and services forms the first level of value creation, consummating matches and identifying the most suitable product for a customer’s unique requirement the second, and delivering value through the distribution layer on a customer’s channel of choice the third.
The traditional vertically-integrated pipeline business model where banks manufacture and sell their own products is giving way to specialist roles aligned to these visible layers in the value chain. The evolution is playing out as follows:
For the longest time, it was only banks that designed and sold their own products. Then, they added complementary partner products, such as insurance, to their stable. The digital age brought in new nonbank players and partnerships, white labeling and co-creation. Now, as banks become open platform businesses, they are bringing non-financial offerings and competing financial products into their fold. Examples include the ICICI Bank-Paytm collaboration in lending; non-financial products ranging from movie tickets to cars; and even competing (and superior) products from third parties such as a high-interest deposit product.
Next, with open banking becoming a reality and bringing new transparency to the market, banks have no choice but to present the best product and service options to their customers on their own platform, regardless of ownership. Some banks will also look to go beyond banking and play a larger role in the life of their customers. This means banks will go from being monolithic institutions selling products designed inhouse and distributed through own channels, to acting as aggregators selling a host of financial and nonfinancial offerings in a single marketplace.
Thirdly, banks will bring third-party channels on par with their own. So in addition to distributing via their network of branches, mobile channels, agents, kiosks, wearables, and smart virtual assistants, they will use APIs to sell through third-party apps, FinTech companies, other partners, and even other banks.
In 2019, we predict progress at all the three layers, as banks move towards competing products, open marketplaces and the role of a distributor. However, each bank will present differently based on its current understanding and positioning of the platform model. So those without clarity will refine their vision; those with a clear vision will begin implementation; those that have executed will see early results; the ones who are ahead of them all will mature further. Here it is important to mention that no bank has mastered the platform model yet, and it will be years before they can make that claim. In 2019, many will take the first of many steps towards that goal.
The coming year will see banks evolve diverse approaches based on their unique vision and circumstances. Some will participate in ecosystems, others will curate their own, and yet others will buy.
In 2019, expect success stories from incumbent banks – and not only from Fintech or digital businesses – as the ecosystems of the likes of DBS, BBVA and Ping a mature.
Others will take inspiration from leaders such as Ping An, which has created no less than five ecosystems, one of which promotes good health to reduce the incidence of illness and hospitalization among insurance buyers.
There will be two-speed growth in platform banking. Countries that have mandated open banking by law will progress faster as the traditional pipeline model fast loses competitiveness, forcing banks to pursue alternatives with urgency. In other markets, where there is less pressure, the transition towards platform business model will be steady but relatively slow.
2019 will witness platform banks moving into adjacent businesses, just as adjacent businesses moved – and will continue to move – into financial services. An example is a large bank in Singapore, which plans to collaborate with a taxi service to popularize it within its own ecosystem, and in return gain access to the partner’s customers. In a reverse scenario, another taxi operator is encroaching the bank’s small business territory by offering loans and deposits to its own drivers and customer ecosystems. Other non-bank platforms, such as Alibaba, WeChat, Google, Apple, Amazon, which have been enabling select financial businesses for some years now, will continue on that path and will expand their portfolio. Together, these crossovers will create additional value for customers.
Business model transition from pipeline to platform in 2019 will be about making progress in a journey that has barely begun. Faced with the possibility of consolidation, banks that adopt the platform model early will end up on the winning side. While they may not have evolved their platform models fully since there are so many scenarios and avenues for value creation, early experimenters will have the advantage of time and learning over latecomers. We hope more banks seize the opportunity in the New Year.
“If banks can’t offer something more valuable than Amazon Prime, then we’re probably in the wrong business.” – Bradley Leimer, Co-Founder, Unconventional Ventures, Former Head of Innovation, Santander U.S.