Banks and fintech on platform economies 14 December 2021
Paolo Sironi is the Global Research Leader for Banking and Financial Markets at IBM Consulting, the Institute for Business Value. He spoke with Boris Plantier about how the growth of platform-based models is transforming our economies and enterprises.
The word platformization has become very trendy among bankers. How would you define platformization and how the platform theory was born?
The advent of “platform economies” is a tsunami for the traditional business culture, especially for bankers. Sustainable business performance is no longer based on linear relationships between manufacturers, distributors, and consumers with the logic of incremental production of costs and value. Instead, the main economic levers lie in the ability of new business models to engage users continuously, and usher in a new era of “hyper-personalization” and “hyper-contextualization”. Digital platforms can transform entire industrial sectors mainly because they favor the transition from an economy centered on "outputs" (products) to an economy centered on "outcomes" (results). In platform economies, “assets” (products) do not disappear but become peripheral from the point of view of generating value. They focus on the contextualization of user experiences at affordable prices, removing frictions in consumption and user interactions.
Does platformization mean that banks will have to be more customer-centric than ever?
Banking is not client centric but modeled around products. As an example, automotive is also a very linear value-chain. Carmakers assemble the work of manufacturer, allowing final consumers to hyper-personalize their purchase in front of the car dealer by choosing the most favored colour for the leather seats and the best-in-class audio system, according to their level of wealth. Ultimately, they pay for an all-in relationship to buy a car that enables them to travel from one destination to the other, they don’t have to deal and pay for the individual manufacturers through that relationship.
Traditional banking operates as a linear value-chain too. On the one side, the manufacturers are the asset managers or the investment bankers helping companies to issue equity or bonds. On the other side, all clients need a savings account, a payment method, a mortgage, a set of investment opportunities, a retirement solution, and insurance coverage. However, they typically enter multiple relationships with the same bank to fulfill their financial journey by purchasing banking products and solutions at different points in time in very disjointed ways. Even the regulators have followed this model that stratified through the years by separating the regulation of financial intermediation between investment products, life insurance products, or retirement products. Yet, the underlying financial uncertainty is always the same, so is the final client.
On platform economies, client centricity does not mean hyper-personalized marketing capabilities of individual products because no single banking product is enough to assist clients in their financial wellness journey from one life destination to the other. In platform economies, client centricity means embracing a shift from “output economies” (distribution channels of financial products) to “outcome economies” (helping clients fulfill their personal, financial, business goals over time). The relationship is the “new product” that must be priced, especially given the evaporation of product margins due to very low or negative interest rates, transparency regulation, the commoditization and simplification of most financial contracts, and the zero-price competition from new contenders. In this complex business environment, digital technology enables the entry of specialized providers that can chip away at banking activities that do not require access to a large balance sheet, such as payments and wealth management. Similarly, digital platforms can interject themselves between banks and customers, collecting most rents and potentially monopolizing access to valuable data. As a result, banks risk losing their position as “first point of contact” for financial services and could be reduced to be merely upstream suppliers of maturity transformation services that have no direct customer access, particularly in retail operations.
What impact does this have on banks' information systems, both in the back office and the front office?
In the dark of the new digital, financial, and economic normal, only a crisp and clear vision can guide all stakeholders in the transformation effort of the banking industry. Regulators must also be aligned on the new digital strategies that will ferry the whole industry to more sustainable shores. What is needed is a business map, and a compass to guide the navigation. The map is the Banking Reinvention Quadrant (BRQ), which is the centerpiece of my latest bestseller “Banks and Fintech on Platform Economies” (see figure 1). The compass is the theory of “Financial Market Transparency” to guide inclusive transformation in the best interest of clients. The axes of this quadrant are named the Information Quotient (IQ, y-axis) and the Communication Quotient (CQ, x-axis). What are they?
According to a paper by the research center of the European Central Bank, financial institutions exert market power when they excel in information and communication, that means investing in differentiative core banking and interfaces. The tension between information and communication defines the emergence of new business models based on very different information systems. These are “Contextual Banking” platform strategies (based on Banking-as-a-Service architectures, opening banking data and insights to be consumed by third parties within external ecosystems), and “Conscious Banking” platform strategies (based on Banking-as-a-Platform architectures, opening banking innovation to the integration of external banking and non-banking offers to increase the value of banking relationships).
The Information Quotient is the “technology” axis and represents the trusted intensity in the use of data and insights on open banking platforms, transforming client engagement out of products and services into the participation of enriched user ecosystems by eliminating engagement frictions in adjacent industries (e.g., digital payments on food delivery apps). Sliding along this axis represents the level of openness in the use of internal and external data, shifting from traditional core banking to hybrid cloud architectures to scale the participation of partners and complementors. Banks must embrace the open organization, tearing down the barriers among the “product-centric” information systems that are typically configured to service specific business units in order to share data and automate end-to-end around “client-centric” relationships. They also need to transform their business culture and align the incentives among all participants, internal business units and external providers of products and services.
The Communication Quotient is the “business” axis and represents the trusted intensity in the use of Artificial Intelligence (AI), supporting digital or human relationships and decision-making, and digital interfaces powered by more intelligent analytics (e.g., AI-driven instant credit approval). Most banking clients are not comfortable in banking on digital as much as they are with e-commerce or car-sharing, especially for the most relevant intermediation activities in terms of revenue generation that focus on wealth management (investment and insurance products). Digital technology is a technology of demand; when on Amazon you typically look for specific products and can easily compare. Instead, these banking revenues are operated in an offer-driven economy (clients are “pushed” financial products way more than they are capable to “pull” themselves from banking shelves). While banks think of selling products, most clients inadvertently buy relationships. That is why intensifying communication capabilities in a hybrid mix of human and AI-enhanced relationships is essential to place an offer-driven industry on a demand-driven technology.
Conscious banking and contextual banking platform strategies share business critical information through cloud-based, open finance platforms, and enrich the communication with clients with transparent, robust, and explicable artificial intelligence solutions. That is why they unlock most of the attainable business value on the BRQ.
Some bankers are still skeptical about the adoption of the concept of Banking-as-a-Service or Banking-as-a-Platform. What would you say to them?
Banking-as-a-Service (BaaS) and Banking-as-a-Platform (BaaP) lie on the same hybrid cloud foundations, built on secured interoperability and transparent portability across computing environments. The main difficulty for banks is not about technology, but to understand how to unlock value with technology. Mario Draghi’s speech in the pressroom of the ECB, a few weeks before leaving office in 2019, was absolutely revealing. He said that banks need to “adjust the business model to the digitalization of financial services”. The focus is not about digitizing existing operating models and offers. The focus is about updating the business models and the ways of working with the help of technology. This requires understanding the relationships between BaaS and BaaP and the cultural transformation towards the open organization. A recent study by IBM, the Institute of Business Value, demonstrates that hybrid cloud investments can unlock 20 times the potential impact on banking revenues when combined with end-to-end enterprise transformation based on open organizations (culture, platforms, and ecosystems) and operational enablers like a “shift-left” in cybersecurity with DevSecOps.
Can banks compete with big tech and become consumer platforms or super apps?
Platforms transform the experiences of consumption of goods and services, and the ways of socializing. Did you take an Uber to go to work? You booked it on a digital platform. During a coffee break, did you read on LinkedIn about my latest bestseller “Banks and Fintech on Platform Economies”? You found it on a social media platform. Was it delivered to your doorsteps by Amazon Prime in less than 24 hours? You ordered it on an e-commerce platform. There is no doubt that platforms are the next game to compete in banking transformation. All payment providers are flexing their muscles to create super apps or orchestrate ecosystems like Square buying Tidal, a specialized music streaming provider, to build a community banking solution around the most compelling business issues of emerging artists.
Already, well-informed institutions are enriching traditional offers with financial and non-financial services according to the prevailing regulatory frameworks, developing platforms that interact with non-banking ecosystems. As a matter of fact, some are orchestrating ecosystem platforms to fight back, competing with first attempts of Contextual Banking platform strategies (e.g., DBS Bank marketplaces, or State Bank of India YONO). On the other hand, well-informed institutions are investing to preserve the integrated provision of financial services for the most communication-intensive activities. They are refreshing digital “merchant banking” models and “trusted advisory” relationships, tailoring new solutions to engage clients with more complex needs. Fintech innovation allows previously separate banking verticals to be re-bundled into stand-alone containers of services. The re-emergence of merchant bank services and holistic financial advice is consistent with the long-held view in the literature that relationship banking can survive competition by increasing relation intensity. They are competing with first attempts of Conscious Banking platform strategies (e.g., UBS wealth management, or Envestnet advisory platform).
Is there a question or an important point that I have not addressed?
I think bankers need to deep dive a bit further into the real foundations of the industry, which is the scope of my latest book. They need to learn new theoretical foundations because the shift is seismic. Like choosing to build a nuclear plant instead of producing energy by burning carbon requires a new theory, similarly “Banks and Fintech on Platform Economies” allows strengthening the theoretical foundations of business action with a novel understanding on how platform economies intersect with the idiosyncrasies of financial services intermediation.
Ultimately, it is the opportunity to eliminate friction in user interactions that makes banking contextualized to become embedded, and unlock “new” value. Additionally, it is the need to demonstrate value - which clients are asked to pay for accessing the platform - that makes banking conscious to remain sustainably transparent, and unlock “hidden” value.
Watch the book's trailer: