By Martin Häring, Chief Marketing Officer, Finastra
No bank can remain in business with outdated technology. This was one of the key findings of a survey on Open Banking and PSD2 published by the European Financial Management Association (Efma) earlier this year.
The survey also identified the ‘Bank-as-a-Platform’ model as a key strategy to manage, run and scale a bank’s operations under the new regulation.
The reality is that the traditional banking business model is no longer sustainable and must be modernized if banks are to cope with growing competition and customer expectations.S succeeding in the open banking era will no longer solely depend on a bank’s reputation, but largely in the approach they take.
As big tech – especially the “GAFA” firms (Google, Amazon, Facebook, Apple) – have set the standard for a platform economy, now banks too must adapt their approach in order to keep up with their customers’ expectations. The ever-growing customer-bases, large-scale brand loyalty, and comprehensive platforms of the tech giants poses a daunting threat to financial services institutions. With firms such as Amazon exploring the potential behind checking accounts it’s not too far a stretch to imagine how customers could use one of the tech giants as their interface to the wider world. Banks need to be alert to the risk of losing the direct relationship with the customer and becoming a commodity service provider behind the scenes.
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What key takeaways can we learn about platform-based business models and how can banks implement them to remain competitive?
Open banking is drastically changing not only how a bank delivers services to its customers, but also how consumers perceive and interact with their bank. Those banks that fail to capitalize on the opportunity of the regulation face losing out to those that offer better customer experiences and more innovative services.
The ‘Bank-as-a-Platform’ approach seeks to solves this challenge and provide banks with a competitive edge: enabling third party participants to connect, interact and create value together in a platform-based ecosystem. By sharing access to their own APIs and those of innovative fintechs and third parties, banks can open entirely new avenues to generate revenue, accelerate innovation and deliver the types of new services customers crave.
A squeeze on margins across the board and historically low interest rates have impacted bank profitability, therefore it is crucial for banks to start pursuing new partnerships and revenue streams. This will enable them to better compete with possible threats from tech giants exploring options in financial services. With the potential to cross-subsidise banking services if they were to offer them, banks should take a similar approach to the tech giants via the use of a platform. The use of open APIs will enable banks to identify possibilities to cross sell services, opening a variety of opportunities through the platform, such as offering a loan when customers are looking to buy a new car. Making these transactions as frictionless as possible through the use APIs will also be key to success.
Senior banking professionals surveyed by Efma also agreed that an out-of-the-box, platform-based approach will be vital to compete against the threat of these tech giants.
Identifying new opportunities
Putting this idea into practice, just last year, Alipay (a subsidiary of Alibaba) introduced its ‘smile to pay’ service, showcasing an innovative example of using a platform approach to generate new revenue streams. The service uses facial recognition technology, enabling customers to quickly pay by simply smiling. It’s not just the technology itself that makes the service innovative, but the entire business model that’s enabling it.
Alipay doesn’t provide the underlying technology, it is created and managed by a third-party start-up integrated into Alipay’s platform. Alipay just charges a small percentage on every transaction.
Services such as this have the potential to generate significant revenue in the long-term, given the potentially large frequency and volume of transactions delivered through Alipay’s platform. And this is just one example of third-party integration – building up a number of such services has great potential to greatly increase revenue streams. This is the model that banks are competing with and should use as an example.
Collaboration breeds innovation
Innovation has long been, and still is a big problem for incumbent banks. As Gareth Lodge, Senior Analyst at Celent highlighted in a recent report, it has been a problem they have faced now for over a generation. Whether a bank has an innovative culture or not, ultimately it is the technology they have that will hinder their efforts.
In this respect, working with nimble, innovative fintech players will be essential to addressing these innovation challenges. Through platform-based ecosystems that enable fintechs and other third-parties to share ideas and concepts, banks will be able to pioneer new services to customers, improve their business proposition and generate new opportunities for revenue – just as Alipay has done.
There is also growing recognition amongst influencers that the ‘bank-as-a-platform’ approach will play a major role in the industry. Earlier this year Celent surveyed senior management in banks across the world finding that 85% of respondents would be open to a platform-based approach.
Ultimately, those banks with the vision to capitalize on this new era of platformification to innovate their business model and uncover new sustainable revenue streams, will be best placed to compete, collaborate and thrive in the future, alongside the digital giants.