Faced with increasing competition from financial technology companies and a profound change in the way consumers want to manage their money, banks are rethinking the way they do business. In order to stay relevant in this new environment, they have to embrace the benefits that technology has to offer, including working in partnership with their fintech competition. In the best of worlds, this collaboration should lead to platformification, a perfect marriage of strengths.
What is platformification and why should banks be interested?
Platformification is not a new concept but is has never been applied to the banking industry before. In essence, a platform is a place where producers and consumers meet to conduct some form of exchange such as they did in the markets of yore.
Just like markets, platforms are not solely about the exchange of goods, they’re also about the contact between sellers and buyers, which include all of those things that make it interesting such as gossip, tips, and reviews that add value and facilitate connections between producers and consumers but also among consumers.
But in today’s world, exchanges happen less and less face-to-face and platforms are a way to recreate the marketplace online. According to the Harvard Business Review, to be considered successful, a platform must meet three criteria: 1. It must be easy to plug into; 2. It must attract both producers and consumers; and 3. It must facilitate the exchange and creation of value.
Currently, banks are good at attracting consumers and at creating value from the exchange. They’ve also started working towards providing better plug-and-play options for their customers. That said there’s a lot of room for improvement, as banks remain very closed systems out of touch with the needs of modern consumers.
“Banking’s traditional business model is eroding,” explains Ron Shevlin, Director of Research at Cornerstone Advisors. “Interest rates are at a historical low, lending opportunities are being attacked by newcomers, the ability to raise interest rates on credit cards has been regulated away, fewer consumers revolve their card balances anyway, and making money through overdraft fees is hardly a long-term strategy. In short, banks must explore new business models.”
Many banks have already started exploring collaboration opportunities with fintech companies, recognising their advantage in offering high quality customer experiences that allow them to collect precious data. Platformification is the logical next step in this process.
Putting a new face on solid foundations
Retail giant Amazon is often cited as a prime example of what can be done when adopting a platform business model. While it started as an online bookseller, the company has consistently added features to its website to turn a simple ecommerce address into an intelligent ecosystem. Their review system, for example, opens up the door to the creation of value by consumers, and becomes increasingly valuable as it collects more and more reviews and uses them to facilitate better matchmaking between customers and products.
According to Phil Simon, author of The Age of the Platform, the most successful companies today “are operating under an entirely different business model-one predicated on collaboration, emerging technologies, externally driven innovation, different types of partnerships, and vibrant ecosystems.” Can banks embrace this model despite being subjected to different rules than retail shops?
Up until now, banks mainly followed a pipeline business model that is they create and optimise services that add value and then offer them to their customers via traditional face-to-face interactions and secure service websites. In order to graduate to a platform model, one that is more in line with the expectations of today’s consumers, banks need to rethink how they create and offer their services.
According to the Harvard Business Review, in order to move from a pipeline to a platform model, businesses first have to shift their thinking from controlling resources to orchestrating them. This means attributing value to networks of customers and the unique things they create rather than simply traditional assets. Businesses also have to move from internal optimization to external interaction. “The emphasis shifts from dictating processes to persuading participants, and ecosystem governance becomes an essential skill.” Finally, value must be given to the entire ecosystem, rather than just the customers, as they are only one gear that makes the wheel turn.
Banks will remain at the core of financial services for the foreseeable future because they’ve worked hard to gain and retain the trust of consumers. While there are thousands of innovative startups creating tools and apps that would be very useful to consumers looking to streamline their banking, most are unknown quantities. “Consumers don’t want to have to work to find out which companies do what, if they’re any good, and if they’re safe to do business with,” says Shevlin. “They want someone or something to make it all easy for them.”
By partnering with fintechs, banks can gradually transform themselves into financial services platforms generating new types of revenues in the process. But to be truly successful, they will have to give up some control because one of the pillars of platform thinking is to attract producers and consumers to create value on your platform.
“By building a digital platform, other businesses can easily connect their business with yours, build products and services on top of it, and co-create value,” explain Mark Bonchek and Sangeet Paul Choudary, of the Harvard Business Review. This will be a great challenge considering the traditional mindset in the banking industry.
While it may take years for banks to go from caterpillar to butterfly, those who want to embrace the future will no doubt also end up embracing platformification. The platform business model, adapted to the financial industry, enables both old and new players to merge their existing strengths to offer consumers the experience they crave for. It won’t be easy for banks to transcend their traditionally conservative outlook but the gauntlet has been thrown.
By Enrique Garland, senior strategy manager at cxLoyalty