A Mckinsey study states that ‘manufacturing’, the primary industry for a bank’s financing and lending business now generates about 53% of industry revenues and 35% of profits with an ROE of 4.4%. On the contrary, ‘distribution’ produces 47% of revenues and 65% of profits with an ROE of 20%. This changing nature of banking balance sheets is a reflection of a clear shift in the banking business model. The traditional interest-based income of banks from lending and deposits is under pressure, and banks are looking to augment their revenue with new fee-based models.
Like every other industry digitization has led to a disruption in banking, making it possible for agile new entrants to offer innovative services at a lower cost to the customer. The disaggregation of the banking value chain, thanks to the agile and innovative solutions by disruptive entrants, is distancing banks from their customers as they lose the complete ownership of customer relationship. Thus many banks are looking to transform themselves into a platform of services to play a larger role in the lives of their customers. While the traditional pipeline model in banking creates value with owned assets and own products distributed through a bank’s own channels, a platform bank relies on a diverse ecosystem to aggregate complementary and even competing products on bank’s own and third-party channels. Here the bank looks to create value for the customer building a marketplace of financial and non-financial offerings.
As banks increasingly realize the importance of embracing the platform model, the question before them is how one goes about building a platform business. As explained in Infosys Finacle’s Point of View on Banking as a Platform, a bank can take two approaches to building a platform business– become a platform provider that curates or participates in a wider ecosystem, or become a service provider that delivers value from the ecosystem to the end consumer. Let’s first look at the key strategies for a platform provider.
1. Embed banking in the customer’s application or form factor of choice
Given the nature of transactions with their banks, large corporate customers seek an efficient way to transact and communicate with their banks. With APIs, banks can offer their corporate customers the choice of availing services as needed by embedding their services in their clients’ applications.
Besides corporate customers, digital businesses, such as Fintech firms and ecommerce companies, are also a good target because they are always looking for APIs on which they can build new, better experiences.
Progressive banks are setting up API stores and are exposing their APIs for these clients to use. BBVA has built an API marketplace with over 1500 developers and businesses, with 8 commercially available APIs.
2. Participate in an ecosystem
With PSD2 and Open Banking, this is not an option but a mandate for banks. As part of ecosystems, banks look to monetize their APIs through revenue sharing, higher customer acquisition rates and lower cost of operations.
3. Curate an ecosystem
Leading banks are curating ecosystems to match producers and consumers, and increase customer loyalty by providing greater value. An example is the HSBC Connections Hub, a social network for business customers where they can connect with buyers and sellers worldwide. Businesses upload their profiles, view others’ profiles, and review buyers and sellers recommended by the platform. Since the businesses are customers of HSBC, companies save time and effort in doing due diligence on potential customers and suppliers on the platform and benefit from a reduction in customer acquisition cost.
4. Buy out or invest in an ecosystem player
Instead of spending resources in growing a new ecosystem, some banks are investing in existing players to gain quick access to their ecosystems. E.g. Alibaba has invested in India’s popular payments and ecommerce platform, Paytm.
5. Offer banking as a service
This is a classic example of collaboration between banks and fintechs to deliver banking services. Moneytap, an Indian FinTech, consumes banking as a service from RBL bank to offer quick short-term loans to customers. The company finds and enrolls customers, gathers all the necessary information for underwriting, provides underwriting tools and services, and acts as an intermediary between the borrower and the lending bank.
6. Offer services to other traditional banks
A superset of the Banking-as-a-service model, here a bank offers services to other banks too. E.g. China’s WeBank offers its payment services to smaller banks that cannot afford to build a real-time payment service. Thus the consumer bank is able to retain customers in the payment space without having to own a product of that kind.
Instead of being a platform provider, some banks may choose to build their platform business as a service provider. In this model, banks operate a financial services marketplace. They offer their own services and products, products and services from partners or created jointly with partners, or even those procured from competitors. For example, a bank can offer its own home loans, insurance services from an insurance provider, a high interest deposit product from a competitor, and non-financial products such as holiday packages.
Banks are feeling the ground beneath moving. They need to act fast to leverage their position of trust as the primary provider of financial services and retain customer relationships by offering their customers the best that there is. The approaches shared above help banks convert the threat of digitization into opportunities by unlocking the value of ecosystems powered by digitization.