Sometimes known as the API (application programming interface)economy, the platform economy has arrived in recent years and has been reshaping industry sectors such as hospitality, retail, transportation, music and video, to name a few. Banks need to recognise that the financial services sector is next in line to be disrupted by this movement. Those that don’t wake up to its opportunities and threats may already be too late to take the actions they need to take to keep up with the competition.
Take the example of the restaurant that just a few years ago owned the brand and the whole customer experience and relationship from physical outlet to online menu, payment and loyalty scheme. In many cases, the introduction of disruptive online-ordering and food-delivery companies has taken over the customer-facing elements of that proposition and the brand recognition.
Today it’s the food online ordering company that has the brand name, orders, payment deals; provides the loyalty schemes; and delivers the food – while the restaurant is left primarily with just the physical outlet. The online ordering firm has access to data not just about that one restaurant but all of its customers’ takeaway-eating habits, and can shape offers and services accordingly.
You can see evidence of the platform economy in the behaviour of big consumer brands as well as newer digital disruptors such as Airbnb and Uber. After all, Google probably didn’t buy Nest (which makes smart appliances) for only its smart thermostat and smoke alarm technology, but for its adjacency to the utilities industry and as a means to get into our homes and expand those services.
Nike is building a health and fitness platform from its sportswear business and recently acquired Zodiac Inc., a leading consumer data analytics firm, which will help “power 1:1 relationships with consumers through digital and physical consumer experiences”.
The platform economy empowers small businesses as well as global super brands. A platform such as Etsy opens up independent makers of arts and crafts to a global audience looking for individual creative pieces.
While technology is powering this significant transformation, the platform economy is more about business model transformation and less about IT (information technology). Prominent players in the platform economy often don’t own any assets, but have instead come up with innovative, tech-driven ways to transform business models.
Once in place, these so-called two-sided or multi-sided networks can continue to expand exponentially, with one side fuelling the growth of the other. It’s where consumers and producers of services alternate roles to create an accretive feedback loop and co-create value. For example, the more drivers Uber employs, the more passengers can use the service. The more passengers demand to use the service, the more drivers will supply this demand.
Why is this happening so fast in the last few years? For the first time in history, technology providers and businesses have access to virtually infinite computing power and most of the data residing in the Cloud. This enables them to analyse both structured and unstructured data at huge speeds to drive real customer insights and develop frictionless, personalised products and services.
What can banks learn from the experiences of brands so far in the retail, hospitality and consumer-goods sectors? If you apply the same principles, banks used to own more of the customer proposition and would think about extending into adjacent areas. Consumers and businesses alike would work with their banks for everything from personal finance management to corporate banking and more. Banks need to leverage their most important asset – the trust they have with us, their customers.
Now, new market entrants are chipping away at the outside of the banking industry, just as the food online ordering firms have taken control of restaurant brands, payment, customer relationships and loyalty. In most cases, new fintechs want to innovate from the outside in and don’t concern themselves with the core and other banking services in which banks excel. They want to find ways to create a better experience and capabilities for consumers to manage their finances holistically, not just those held with one bank.
The speed with which consumers are increasingly able to switch banking services should also be cause for alarm. Millennials expect to be able to order a payment or credit card on their phone and receive it in a couple of days. They don’t want to meet a person in branch or spend ages waiting to speak to a representative, preferring instead to seek advice from a chatbot, if any is needed.
The biggest challenges that banks face when responding to such velocity are the same as they have been facing for decades. IT is siloed and difficult to change; budgets are reduced; skills shortages are growing. All of this is exacerbated by “Not Invented Here” syndrome, which sees so many financial institutions building technology in-house rather than using an off-the-shelf solution.
The truth is, as Peter Drucker famously said, that culture eats strategy for breakfast. Resistance to change can be a bank’s worst enemy.
The good news is that there is a growing trend for banks to take their non-mission critical legacy systems and move them to the Cloud. There is recognition that banks have the expertise and scale to create effective and collaborative platforms, and that the days when IT ran the bank are over. A transition is underway through which the CMO (chief marketing officer) collaborates with the CIO (chief information officer), looking at innovation from the outside customer’s point of view.
Banks have already begun looking at all of the players in their ecosystems to identify areas in which they can co-create value using an open platform and provide a better service for customers. Technology such as Finastra’s newly launched FusionFabric.cloud will enable banks to expose legacy system capabilities through open APIs and create a new open platform for innovation.
Based on Microsoft’s highly secure Azure cloud, FusionFabric.cloud includes a development environment, secure runtime environment and application marketplace. Software developers from any company or academia can create apps according to a published set of APIs that mean banks can deliver new levels of customer service and improve customer retention. The open platform enables financial institutions to move faster and innovate by bringing functionality to market in weeks, instead of months or years.
Closed systems are part of the past – openness and collaboration are the new innovation. Banks now have the freedom to find new ways to meet and exceed customer expectations, driven by the Open Banking movement and the indisputable momentum of the platform economy.
What’s needed now is fast and bold decision-making, new outside-in thinking and top-down cultural change. Technology is the enabler, and it opens up a whole world of new opportunities. Today it’s all about speed—so who will be the quickest off the blocks?