Why Banks Should Transition to a Platform-Based Model
When we consider the modern penchant for the platform business model, the businesses that spring to most people’s minds are the AirBnBs, Ubers and even Alibabas of this world. Banks - those legacy, bulky businesses - are not commonly called on to become a platform business. However, this kind of transformation could be hugely beneficial to traditional banking businesses, if only they can overcome the cultural and mindset barriers.
Banks are facing a set of at least four key challenges, and the platform model may offer a viable solution to ensure that banks are not outstripped by digital disruptors like Monzo and Starling, which understand that the way financial institutions interact with their customers has long needed an overhaul.
But why would the platform be a useful model for banks? Below, Matt Locsin addresses the key challenges for banks in today’s society and why transitioning to a platform-based model could answer those challenges.
Becoming the plumbing
Banking institutions are starting to fear that they are increasingly perceived as a utility in terms of people’s financial management – the ‘plumbing’ of the system, while big tech companies can jump in and snap up the sparkly parts. Google’s reported foray into banking is a prime example of this fear coming to light, as Citigroup and Stanford Federal Credit Union offer the infrastructural support to a Google-labelled financial offering which takes care of the customer relationship.
However, banks have a huge opportunity here if only they can grasp it in time. Platforms connect people and services in an asset-free or asset-light model – in that they tend not to own the means of production, but connect consumers with those that do. There is a huge market of people who need help on major life activities that involve finance. If banks want to mean more to people than their electricity provider, they need to start providing the financial assistance people really need.
For instance: mortgages, car ownership, leaving home for a new rental lease – these are all transactions and contracts with moving parts that many people are ill-equipped to handle and for which they need expert help. Currently, banks are not providing the help needed. If they could evolve to become a platform for people to access experts who can help in these important life moments, they could become a one-stop-shop for people looking to make financial decisions.
If banks want to mean more to people than their electricity provider, they need to start providing the financial assistance people really need.
The vulnerability of a commercial income relying on net interest
Banking income focusing on interest margins and fees from retail banking is all well and good when bank rates are high. At the moment, however, they’re low – and this is a problem for banks.
That’s why they have monetised basic transactions – such as exchanging currencies. However, it’s this that has allowed disruptors like Revolut, Monzo and TransferWise room to breathe: customers are tired of being charged for something that should be simple. Banks need to find new types of transactions to charge for. Look at Airbnb – it is allowing SMBs to host ‘experiences’ as it expands out of accommodation. Uber now even lends its drivers cash. Banks need to start applying this lateral thinking to the kind of transactions it can support and monetise.
The cost vs income ratio
Banks are expensive to run. The cost of compliance alone is enough to ensure banks have not historically had to compete with technology businesses. However, part of the expense comes from the mindset that banks are a kind of ‘product factory’ – selling unsecured lending, credit, derivatives and other financial products.
Transitioning to a platform led offering, in which revenue is generated in an asset-light model would mean that the business could be built on modular, inexpensive architecture in a lean talent structure. Legacy infrastructure cannot be magicked away, but banks can start to migrate to a lighter asset model to make any growth more profitable.
If they could evolve to become a platform for people to access experts who can help in these important life moments, they could become a one-stop-shop for people looking to make financial decisions.
Return on equity
Generating consistent returns for shareholders is a constant pressure for financial institutions. Platforms, however, are valued considerably higher than traditional business models.
Currently, banks have a very linear relationship with their customers: they see money as an input for a product, and consumers as users of those products. In a platform, the consumer and the supplier are the product. If we consider every participant in a platform as network capital, value is driven by users. This means that banks have a chance to fundamentally reframe their relationships with customers and acquisition of new customers, and to drive value through scale.
The reality is that banks are in many ways already a platform: they are a technology that connects people with assets and people who want to put those assets to good use. Centuries ago, when the bank came into prominence, this very idea was revolutionary. It’s time to start thinking big again and change the way banks monetise their businesses.