Thought Leadership
Responding to External Threats:
Is it Time for Platform Banking?
May 01, 2018
The Rise of the Fintech Threat
The term “fintech” became part of our lexicon in 2008, the same year the Global Financial Crisis started. The first fact is not a happy coincidence of the second. At a time when distrust in banks was at its peak, we saw fintechs such as Stripe, Dwolla, PayPal, Greensky and Prosper not just enter the “banking exclusive” domain of payments, but flourish and grow quickly.
The success of these fintechs can be attributed in part to people’s attitudes towards banks at the time, as well as our acceptance of using phones and tablets as tools in our financial lives. But, truthfully, the fintechs also provided a “faster, cheaper, better” alternative to traditional banks.
- Faster: A lot of the fintech services at the time could provide same day or next day access to funds versus banks that could take several days to complete a transaction.
- Cheaper: Fintechs were more transparent and affordable versus banks that charged high fees and commissions on relatively simple transactions like ACH and wire transfers.
- Better: Fintechs focused on creating good digital user experiences with ease-of-use and simplicity
Following the success of early fintechs, we saw new fintechs like Orange, Kickstarter, Skrill, and TransferWise enter the payments space. We now have a wide array of payment and lending alternatives that range from cross-border money transfer to peer-to-peer payments and lending services. And many of these technologies are now firmly entrenched in our daily lives– the digital wallet, for example.
Fintechs from Competitor to Collaborator
So, with fintechs successfully entrenching themselves in the payments space, competition between banks and fintechs heated up. Fintechs popped up in the deposits, financial planning and finance domains. They established relevance by 'not being a bank' and focused their strengths in developing innovative solutions that appeal to consumers’ increasingly technology-focused expectations and adapting quickly to emerging trends in the financial services space.
In contrast, traditional banks are built on outdated back-office technologies that are often mainframe-based and lack easy integration capabilities. This has created a convoluted mess as banks have added layers of technology over the years to modernize.
However, what banks lack in agility, they make up for in experience, regulatory support, connected networks, data and, most importantly, customer trust. When large dollar amounts are involved, customers would rather deal with a bank than use a fintech service. And customers would prefer to discuss a complex financial product, like a mortgage, in person instead of with a faceless online chat assistant.
Finally, after years of competing, banks and fintechs are starting to collaborate. Banks are introducing heads of fintech, launching accelerator programs, and announcing fintech partnership deals. Notably, French banking giant BNP Paribas recently announced a fund to support and invest in startups that are developing new platforms for the financial services and insurance sectors. According to the official announcement, the fund “will also make indirect investments through Venture Capital funds whose priorities in technologies (such as AI, data, blockchain, cyber-security…), geographies and topics match those of the BNP Paribas’ businesses.”
Source: https://cbi-blog.s3.amazonaws.com/blog/wp-content/
Figure 2: Collaboration Benefits of Banks and Fintechs
Source: https://medium.com/accion/banks-and-fintech-startups-are-working-together-to-accelerate-financial-inclusion-33ddf35a7b7 As more a fintech firms and banks join forces, the fintech threat to retail banking seems to be abetting. Maybe so, maybe not.
Platform Giants – The New Threat
There are new bank challengers in town: platform companies like Amazon, Alibaba, Apple, and Google have all launched offerings that compete directly with banks and can win customers by cutting costs and delivering convenience. In fact, a Bain & Company survey of more than 133,000 banking customers in 22 countries found that consumers trust Amazon and PayPal with their money nearly as much as their banking providers. Some 55% of U.S. consumers said they are open to buying financial products from established tech firms. And, 73% of millennials said they would be more excited about a new financial offering from Amazon, Google, PayPal or Square than from their bank. If a platform giant like Amazon did decide to move into banking, they would enjoy some major advantages over traditional banks and credit unions: better data, a superior user experience, a digitally-native platform, and tremendous customer loyalty.
Platform companies are very adept at bridging the value chains of various industries, blurring sector boundaries, and reshaping one industry after the other. Add on top of that, platform companies have great customer data and know how to make the most of it, especially when it comes to customer journeys that include big financial decisions.
What are the major threats that banks face from platform companies?
Disintermediation - banks lose access to customers who switch to non-banking channels.
Unbundling- products and services are no longer integrated or are the exclusive domain of the bank.
Commoditization- banks struggle to stand out as customers compare banking products online with greater transparency.
Invisibility- banks are losing brand awareness and becoming invisible as customers can access financial services without even knowing the brand.
Platform companies expanding into financial services are targeting the origination and sales side of banking, which produced 47% of global banking revenues and 65% of profits for banks in 2017.
If platform companies can establish a beachhead in financial services, it could be very costly and potentially life-threatening for banks.
A bank in everything but the name
Amazon Pay: Used by 33 million to pay for goods at non-Amazon sites.
Amazon Gift Cards: Available at brick & mortar retailers all over the country.
Amazon Store Card: With financing options on qualified purchases; issued by Synchrony Bank.
Amazon Cash: A virtual debit card that allows cash deposits to the Amazon Pay wallet.
Amazon Rewards Visa Signature Card: An affinity card issued by Chase Bank.
Amazon Prime Reload: It pays a 2% bonus for cash deposits into Amazon Pay.
Amazon.com Corporate Credit Line: A way for businesses to pay for Amazon purchases via monthly consolidated billing, underwritten by Synchrony Bank.
Amazon Lending: It has originated $3 billion to smaller merchants since 2011.
Credit Card Marketplace: Includes Amazon co-branded cards
along with Discover and American Express.
Gift Card Marketplace: Hundreds of prepaid gift cards
from other retailers along with restaurants, travel, and
entertainment providers. Amazon Currency Converter: For purchasing on Amazon.com
in local currency. Amazon Allowance: Tool for parents to enable their kids
to pay directly. Shop With PointsSeveral major banking rewards programs
can shop directly at Amazon with their bank-provided points,
including Citibank, American Express, Chase and Discover. Alexa: Supports banking and payments info (aka skills) from a
number of financial institutions, including Capital One, US Bank,
and American Express. So, how do banks compete with platform companies? By taking
their fintech collaborations and partnerships one step further
via “platformification”.
Simply put, platformification, or platform banking, is a new
business model for banks, based on an “API first” architecture
that has a plug-and-play approach to adding new features
and functions.
With platform banking, banks, fintechs, corporations, and
end-consumers connect to the platform to create and exchange
value via API-based solutions. This allows financial institutions to
still operate as the essential 'financial center' or 'hub' while allowing
direct integration to fintechs and third parties. The net result is a one-stop shop for consumers to access
both traditional bank services, as well as other innovative
solutions from fintech partners. Financial institutions become
the focal point for both fintechs and end-consumers seeking
the right products and services across a series of innovative
financial solutions. In the end, banks benefit by providing innovative new services
for their customers and open the door to new revenue streams,
with relatively minimal infrastructure development. Meanwhile,
fintechs have access to the bank’s vast financial network and
customer base. Without the ability to attract a meaningful number of the “right”
participants, a platform cannot succeed. Simply having a lot
of producers and consumers is no guarantee of success.
The platform must attract the right producers (those with the
most desirable products and services) and the right consumers. Reality: Today's banks are consumer magnets, not producer
magnets. Banks do a fairly good job of attracting consumers.
But, there is no focus on attracting other producers, outside of
the one-off partnerships that a bank pursues.
A platform requires a mechanism for matching consumers
to the right producers and for enabling producers to reach
the right consumers via the platform. At its most basic level,
a search engine can be a matchmaking mechanism. Reality:Banks only match consumers to their own products or
services, if they even do that. The key to successful
matchmaking on a platform is matching a consumer to a
number of providers. This is what enables producers (and consumers) to easily
plug-and-play on the platform. Therefore, APIs are so critical
to firms pursuing platform strategies Reality: Banks don't have toolkits. They have a mixed track
record of integrating the products and services of the firms they
partner with, let alone providing the ability to plug-and-play. Banks today are one-sided. They attract consumers and they
are the only provider of services to their customers. When
offering consumers a choice of products and services, they’re
bank-selected products and services. Fintechs have trouble
reaching consumers while banks have the challenge of not
being able to provide their consumer base with expanded
products and services If modern-day banks are going to ward-off the platform giants,
the logical choice is to become more open. The clear move
is to evolve the operational model and create new revenue
opportunities by becoming platforms themselves, where fintechs
and consumers can build their own experiences via APIs. We are already seeing this with the likes of BBVA, CITI,
Capital One, and HSBC, which have all launched open banking
platforms to build next-generation applications. FIS and PlatformifiFIS Code Connect is an online API gateway. It allows FIS clients
to access FIS and FIS fintech partner APIs, as well as publish
their own APIs to develop and test innovative new solutions. FIS Code Connect includes more than 300 APIs in the category
of banking, payments, and consumer finance. Additionally,
it provides access to innovative application use cases,
such as FIS™ Enterprise Customer, Mobile Banking, and
Account Opening. Code Connect puts FIS clients squarely at the forefront of the
open API revolution and allows clients to tap the large and
growing ecosystem of technologies and solutions being
developed by FIS and our partners
FIS Code Connect gives developers access to the FIS product
catalog in one central marketplace and allows banks to:
Accenture Research (2016). Platform Economy: It’s time for
banks to join in and welcome others. Retrieved from
https://www.accenture.com/us-en/insight-technology-visionbanking-2016 Berend de Jong, Michael Little, Luca Gagliardi (2017). Open for
Business. Retrieved from https://www.accenture.com/us-en/
insight-open-business David Brear, Pascal Bouvier (2016, March 4) Exploring Banking
as a Platform (BaaP) Model. Retrieved from https://
thefinancialbrand.com/57619/banking-as-a-platform-baapstructure/ Gregoire Michel (2017, April 25) Bank as a Platform: the only
way forward for banking? Retrieved from https://www.
startupbootcamp.org/blog/2017/04/bank-platform-wayforward-banking/ Pascal Bouvier (2016, October) Platform Banking Taxonomy.
Retrieved from http://finiculture.com/platform-bankingtaxonomy/ Ron Shevlin (2015, September 14) Full Stack Banking: How
Fintech Will Fuel API-Based Competition. Retrieved from
https://thefinancialbrand.com/53975/full-stack-banking-howfintech-will-fuel-api-based-competition/ Ron Shevlin (2016, July 19) The Platformification of Banking.
Retrieved from https://thefinancialbrand.com/60019/theplatformification-of-banking/ PWC (2017) Redrawing the lines: FinTech’s growing influence on.
Financial Services Retrieved from https://www.pwc.com/gx/en/
industries/financial-services/fintech-survey/report.html
Yamini Kona (2017, January 4) Does the Rise of Fintechs Spell
the Demise of Banks? Retrieved from https://
internationalbanker.com/technology/rise-fintechs-spell-demisebanks/ W.UP (2017, November 23) The future of banking: The rise of the
platform giants Retrieved from http://wup.digital/whatsup/
future-banking-mckinsey/ McKinsey & Company (2017, October) Remaking the bank for an
ecosystem world Retrieved from https://www.mckinsey.com/
industries/financial-services/our-insights/remaking-the-bankfor-an-ecosystem-world
Phillippe Gelis, Timothy Woods (2013) How fintech is reshaping
the finance sector and how you handle your money Retrieved
from http://kantox.com Fintech Futures (2016, April 6) Platformification: all together
now Retrieved from https://www.bankingtech.com/2016/04/
platformification-all-together-now/ Penny Crossman (2018, February 7) Fintech partnerships can
work (see: Radius Bank) Retrieved from https://www.
americanbanker.com/news/fintech-partnerships-can-work-seeradius-bank Mark Bonchek, Sangeet Paul Choundary (2013, January 31)
Three Elements of a Successful Platform Strategy Retrieved
from https://hbr.org/2013/01/three-elements-of-a-successfulplatform Michael Schlein (2017, July 31) Banks and fintech startups are
working together to accelerate financial inclusion Retrieved
from https://medium.com/accion/banks-and-fintech-startupsare-working-together-to-accelerate-financial-inclusion33ddf35a7b7
FIS is a global leader in financial services technology,
with a focus on retail and institutional banking, payments,
asset and wealth management, risk and compliance,
consulting and outsourcing solutions. Through the depth
and breadth of our solutions portfolio, global capabilities
and domain expertise, FIS serves more than 20,000 clients
in over 130 countries. Headquartered in Jacksonville, Florida,
FIS employs more than 53,000 people worldwide and holds
leadership positions in payment processing, financial software
and banking solutions. Providing software, services and
outsourcing of the technology that empowers the financial
world, FIS is a Fortune 500 company and is a member
of Standard & Poor’s 500® Index. For more information
about FIS, visit www.fisglobal.com.Banks Survival Depends
on Platformification
What Does Platformification Look Like?
Requirement #1: Become A Magnet
Requirement #2: Act As Matchmaker
Requirement #3: Offer A Toolkit
FIS and Platformification
Enablement via FIS and 3rd Party Assets and Services
References
About FIS