Platform banking is revolutionizing finance
Traditional banking institutions continue to face fierce competition from the nimble fintech companies that have risen to challenge them in recent years. As such, these institutions have realized that they need to digitally transform to remain competitive.
Not surprisingly, COVID-19 has accelerated this process, as demand for digital banking solutions has increased during the pandemic. During this period, the European Banking Authority (EBA) identified a sharp acceleration in the digitization of front-end systems and back-office processes as organizations accelerated development. Its report on the use of digital platforms noted that financial institutions increasingly depend on digital platforms to market their services, as well as to enter into customer contracts for products and services.
Customer preferences are also changing, and young people in particular prefer easier access to digital services and a wider range of financial services. A YouGov poll released in July, commissioned by IBM, reported that 61% of 18-24 year olds want their bank to offer tailored support, while 54% approve of banks using artificial intelligence (AI) to provide this. The growth of digital platforms is expected to continue, in response to this demand, with traditional banks increasingly developing, or engaging with, third-party technologies to meet customers’ desire for convenience.
The bank at your service
The first manifestation of the digital banking revolution is Bank as a Service (Baath), which allows a bank to offer some or all of its capabilities to developers to iterate or integrate with other systems through application programming interfaces (APIs). It enables banks to support products and services designed and built by third parties, thereby expanding their opportunity to acquire customers or engage with their own customers in new ways.
A bank can also use a platform model – such as a marketplace – for other businesses to offer their products and services through them, thereby giving outside businesses the ability to sell directly to the bank’s customers. “Banks, for example, may not only want to provide loans, but also become matchmakers by helping customers buy home insurance, housekeeping services, or even furniture on the bank’s platform,” says Ali Merji, senior analyst director at Gartner, research engagement services.
“This is where third-party developers can create products and services for banking customers,” adds Nick Maynard, chief analyst at Juniper Research. “Essentially, the user’s bank account is used as a platform to provide a multitude of services. It is generating interest for a number of reasons – bank accounts are very common, which means there is a large addressable market. For banks, this means that they can expand the offer to their users, without having to develop their own complementary products.
The good, the bad and the ugly of platform banking
There are several advantages to using both BaaS and platform models, with 83% of respondents to the EBA report noting that it can support business growth and market diversification, for example. It’s also possible to reduce development time and costs, as Jacob Morgan, Forrester senior analyst, digital business strategy, points out. “Instead of having to create it all yourself, you can choose the services you want from the vendor ecosystem and weave them into a constellation of value for your customers,” he says.
According to Capgemini’s World Retail Banking Report 2020, platform-based companies can achieve up to double operating profits, higher market values and steady growth. Platform-based banks can also benefit from a two-way network effect, where incremental customer growth will attract more suppliers – and vice versa.
“Platform-based banks can thus increase by almost 1.7 times on average the ease of reaching viral strategic priorities such as upgrading customer journeys, offering personalized products, improving operational efficiency and compliance management, ”notes Sankar Krishnan, Executive Vice President. Chairman of Capgemini for banking and capital markets.
While these benefits make the move appealing, there are challenges in transforming into a platform-based bank. The EBA cites new forms of risk and regulatory and prudential challenges as key issues from a market perspective, while the Capgemini report notes that almost 70% of banking executives on average point out that budget constraints, lack of strategic roadmap and outdated systems all hamper the way to the “platform”.
And for those moving to the area, what if a partner removes a service or app? “It’s quite interesting,” Morgan says, “because like any ecosystem, it’s basically a connected network. So what happens when one of the players fails, is bought out by a rival, or disables a platform? As you start to see more and more intertwined abilities, you start to have more failure points.
The light at the end of the tunnel
Although it is currently an emerging market, traditional banks are waking up to the platform-based approach. “Leading banks such as UK-based Goldman Sachs (Marcus), Standard Chartered (Mox) and Israel-based Bank Leumi (Pepper) are launching digital-only businesses that use data and expertise from the parent bank while integrating the latest technologies and ecosystem players to foster the platform, ”says Krishnan. “We may see more banks joining the movement in the near term, as evidenced by the recent announcement of the launch of Chase by JP Morgan in the UK.”
Morgan of Forrester expects banks to march much more aggressively in this area over the next five years. Merji, meanwhile, predicts that over the same period, banks adopting platform business models will see up to 20% of their transaction streams initiated outside their own channels.
Looking at the longer-term horizon of three to five years, Krishnan thinks banks will look to other lines of business, including treasury, trade finance, payments and lending. Experts, however, all agree on one thing: we’ll see the industry gradually expand over the next five years.
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