The Platformification of financial services

Anyone who has an interest in business trends over the last decade or so will have spotted a number of new digital entrants achieve exponential growth out of nowhere. Google, Facebook, Amazon… these companies are just a few examples of a platform business model: they operate as a two sided marketplace.

Because of the success so many have seen, the platform has become the new business model of the choice for growth firms. More and more we are seeing the economics of platforms accelerate companies to new levels in ways that simply didn’t happen in the last century.

This is enabled largely through the information age and the internet: the reducing cost of technology and the increase in speed of business means if you can’t go fast then you probably cant go anywhere.

Every industry you look at is now starting to feel the effects of platformification. But one of the last to be impacted is financial services. We are always slow, but this is finally starting to play out and now businesses are beginning to position themselves to take advantage.

The two sided platform

A two sided platform generally is thought of as a model where demand on one side drives greater supply on the other and therefore a cycle of added value for all participants is created. Uber is a classic example, whereby the more taxi drivers you have, the better the service for the ride hailer. This drives (no pun intended) more usage, which in turn makes it more attractive for more drivers.

There are plenty of great examples. Airbnb, Facebook, Uber are the ones that people tend to think of most often.

The key for a modern digital platform is that it just connects the supply and the demand rather than making the supply and demand. This means those platform organisations don’t need to get their hands dirty in the supply chain. This allows them to be far more efficient and therefore more profitable, provided they are great at what they do — connecting.

To continue the Uber example, not only do they not supply the taxis, but they even use Googlemaps technology as part of the app and other payment services to process transactions. They pay to use these services, but it means less work for them — their platform can be ‘thinner’ and they have fewer overheads.

Platformification

McKinsey predicted that platforms will consolidate industries down to 12 segments. These are depicted in the image below. This shows the potential for a platform business to broaden and to move into other verticals more easily once they have mastered the ability to platformify.

Lets use Uber as example again. They’ve started off with a ride hailing app, now they have Uber Eats and able to offer business services like Uber Eats. Ride hailing app in the west (e.g. Didi) have even expanded into financial services knowing the payment and bank accounts needs of those needing a taxi.

So if platform businesses are taking over the world, how is it changing finance?

In finance, the prevailing arrangement we can see emerging is based around features that supplement a bank account on one side of the platform and customers on the other. So if you’re the bank, the more good features you have and richer the experience you can provide, the more popular the bank becomes. This is the theory behind plenty of the new FinTechs that have emerged, especially in the UK and Europe: Monzo, Starling, N26 are good examples but they each have slightly different flavours.

Have a look at Monzo and you’ll see it’s far more than just a standard current account. They’re now offering loans, foreign exchange, savings accounts and have more on the way. But the difference between them and other banks is they have used third parties to provide these services — Monzo just connect in and offer it through their app. This is the same type of approach being taken by Starling and N26 plus many more.

By effectively outsourcing the provision of those features to third parties then you have a true two sided platform. And then the cycle can be completed as the more customers the bank has the more third parties start queuing up to supply more features, and the bank starts beating them down on price.

The FinTechs have been good at this and are progressing at a pretty good pace, connecting new features regularly through their modern platforms. But, the incumbent banks have started to respond and have the scale.

Feature Parity

This is why we have a battle in the banking sector around ‘feature parity’, where the new FinTechs (who are able to churn out new features very quickly) have jolted the banks into introducing new copy cat features like card freezing and maps. The incumbent banks are now concerned that if they don’t increase their internal rate of change they’ll eventually be overtaken. We’ve seen the likes of Lloyds and Barclays release similar card freezing and map features like Monzo and the other FinTechs.

The advantage the incumbents have at the moment is that they have the scale – they just don’t have the pace of the FinTechs and that is often because they are still trying to do it themselves and that takes time. Hence, many of them are starting to open up their own platforms and work with third parties and FinTechs themselves.

So the question becomes: can the FinTechs achieve scale before the incumbents achieve speed?

Of course, you can follow a strategy that doesnt mean having to transform to a platform. You might be perfectly happy being really good at supplying one of those features and connecting in to other platforms. Time will tell which banks choose this option and which ones look to retain a central customer relationship as a platform.

What do you need to be a success?

Incumbents are burdened by legacy: legacy tech, legacy mindset. Sooner or later that weight is going to mean feature parity isn’t possible for the incumbents trying to do it all themselves. However, if they can transform quickly enough we know that customers are unlikely to move away from their bank en mass.

Therefore the odds are stacked in the favour of those incumbents who can successfully partner up with third parties to supply the new products and services helping them to achieve this feature parity or go beyond. The problem is their tech has not been designed to do this.

To be a success, the trick is going to be getting good at connecting, and understanding what to connect. This will inevitably see a greater emphasis placed on an organisations ability to interpret their data, move forward their ability to integrate via APIs and provide awesome user experiences. There will also need to be a shift in the way banks traditionally make money.

FinTech is already good at this, they just don’t have the number of customers to truly compete yet.

The scene looks well set for technology companies to come in and make a big impact. GAFA (Google, Amazon, Facebook, Apple) already have both the scale and the pace. We’ve seen some first tentative moves into finance by Apple with the new credit card, and Facebook have announced Libra. I think it’s unlikely they will take over anytime soon, but those who they choose to work with will be getting a useful ally.

Additionally, it’s hard to overlook the clout some of the big organisations. There is a lot of investment going on, and it wouldn’t be a big surprise to see one of the leading FinTech player purchased.

Where will it end?

We’ll see more services and features start to be provided through these platforms. It’s likely that increasingly unusual partnerships will come to the fore and ultimately those who get the partnerships right will be those who make the biggest gains.

I think the incumbents are best placed to get this right if they can successfully transform, and don’t be surprised if more GAFA partnerships emerge. FinTech have a huge role to play, not only in finding where there is most value for users, but we’ll probably see some of them begin to work with incumbents themselves.

Unfortunately, they are also the ones most susceptible. A consolidation is pretty likely as there isn’t room for everyone, and we’ll see some FinTechs either change strategy or be consumed by the larger players — be they banks or technology companies.