How is platformization affecting banking?
The other week, a select group of some of the finest movers and shakers in the financial innovation space gathered together for Alloy’s inaugural API summit.
The rules were simple — you had to be a doer (not just a tweeter) and you had to abide by Chatham House rules (no names, no attributions, no tweeting). Space was tight, but over the next couple of hours speakers and attendees discussed the state of neobanking in the US and Europe, tackled the thorny problem of innovating around the core and other legacy banking technologies, and broached both the potential upside and the riskier downside of using more data.
However, the stand out theme from the day was a beast of a word: “platformization”.
Platformization is a trend appearing across the finance industry, which is looking to explore new economic models. This model involves offering up your existing assets (which might include regulatory approval or bank charter, audience reach, technology stack etc.) to other companies, turning your business into a B2B platform, and creating a marketplace of wider options for your end customer as a result.
During the event, we talked about three key layers within the financial services ecosystem that are exploring this:
1) Neobanks — a way to give the ultimate experience
Neobanks are all about customer experience. They often start by building a single key product or service that sets them apart from the traditional players, providing a stand-out experience that their customers love and can’t get anywhere else. On the basis of this brand love and advocacy, they are able to grow their user base super fast.
Neobanks have turned to the platform model as a way to offer their customers access to other fintech products and businesses who are equally delivering a fantastic customer experience.
This strengthens their value proposition and helps them to attract and retain more customers.
Platformization can also help solve another neobank problem: (lack of) revenue. The demands of customer growth often come at the cost of revenue growth. Technology startups frequently adhere to the freemium model mantra: offering free services to gain the users, then monetize them later. Offering a marketplace of other fintechs helps solve this challenge by providing revenue through affiliate-style relationships, and allows neobanks to continue to scale their business by giving their customers access to the services they need now before the neobank has time to build them.
2) Traditional banks — a way to innovate and compete
Because traditional banks have a harder time innovating, platformization is emerging as a way in which they can quickly offer their customers new services and experiences.
Banks have typically approached innovation by either building new products internally or acquiring startups and assimilating them into their overall brand. Both of these approaches are often hampered by established and deeply-entrenched internal processes and mindsets. Convincing departments that change is needed, that money should be spent on it, and that it needs to happen fast can be very challenging. This has resulted in fintechs rapidly gaining market share in certain areas of finance as they innovate faster and give the banks’ customers a different option.
Using a platform-based model allows banks to offer up their core functionality for fintechs to piggyback off of. By operating in this way, banks open up a new revenue stream, monetizing the investments they’ve made in their core functionality and compliance processes, not to mention their charters or licenses. Some banks, for example in Germany, see such potential in this method that they are even making it their primary revenue model.
Platformization gives banks a new way to compete in a changing competitive landscape.
3) Core providers — a way to help their customers scale
While the banks are looking to monetize their access to the core and other assets, the core banking providers themselves have been much slower to explore this new business model.
Core providers have typically been the bane of most of the financial innovation world: much of the resistance to innovation gets (often rightfully) blamed on either financial regulations or a lack of change by the core banking providers. When banks have tried to upgrade their core systems, there have been some spectacular failings which, fueled by heavy media coverage, have lead to a general fear from both banks and startups in attempting to innovate on the core systems directly. The cores themselves have also been unenthusiastic to innovate given the benefits that their business model affords them. With high setup fees and extremely difficult and risky processes to change providers, the cores receive a comfortable level of customer retention. So far only a handful of challenger “startup cores” have emerged to offer a new way, but as there are relatively few legacy providers to start with, there is again little incentive for the cores to change their ways. Instead, the cores, and many of their customers, prefer to rely on technology and processes that they are familiar with.
By embracing the platform model, however, the core providers could open up their services to new audiences and at the same time empower their existing customers with new offerings and services. With over 12,000+ banks and credit unions in the US alone, many of these smaller institutions lack the resources to compete with big banks when it comes to innovation. If cores were to become more open, through being API-enabled and developer-first, a new wave of fintechs could grow directly on the cores. These new fintechs would have a ready audience of smaller banks to target with innovative offerings that help them better serve their customers’ needs and stay competitive.
At least one core is looking at how to become more open and position themselves to be the backbone of the next wave of innovation. However, certainly there is a way to go for this to be fully explored by the cores.
In conclusion, platformization is a model which compounds the potential innovation available, creating a more open and competitive environment.
It is even the reason that neobanks exist in the US, given that since 2008 no new banking charters have been issued. It is also a model which offers greater choice and variety of services to the end customer, allowing them to control their own experience rather than having certain brands dictate the status quo.
It will likely be some time, however, before we see full adoption of platformization throughout the different layers within the finance industry given the breadth of legacy infrastructure and technologies (hello, COBOL!)