Bank as a Platform: the only way forward for banking?

Bank as a Platform: the only way forward for banking?

25-Apr-2017 by Gregoire Michel

You know it, I know it, everybody knows it: same old won’t cut the mustard in the future if you’re a bank. So what’s next? Partner with fintech companies? Sure, most banks have started doing it already or are planning to according to this report by PWC. But everybody else is doing what exactly? A range of things.

Incumbents are starting to deploy APIs – voluntarily or driven by the PSD2 imperative – giving access to certain parts of their infrastructure to outside developers. Many of them are executing proof of concepts and pilots with startups, however with a dismal conversion rate to actual commercial contract. Few have struck true partnerships with fintech companies (think JPM and OnDeck) and even less have actually gone all the way and acquired fintech companies (the obvious one being BBVA).

Neobanks on their side have the advantage of building on fresh ground and mostly focus on delivering different variations of platforms. The common trait in their strategy is to build their own (or on top of an existing) core infrastructure and single product, like a current account with basic functionalities and offer around it best in class products and services made by specialised fintech companies. This works for retail (Monzo, Starling, Atom, N26) and for business banking (Penta, Tide, BankUP, Griffin).

Also worth mentioning are the much talked about Bank as a Service companies, the likes of Solaris in Germany and and Arkea in France. These two are predominantly tech companies with a banking license. Their business model is to charge fintech companies for accessing their “pipes” and piggybacking on their license.

With fintech companies as mentioned above starting to eat their lunch, incumbent banks have to rethink their role and value proposition. Their inability to ship products and services quickly that their customers really want makes them fundamentally unable to compete with the new entrants. But they have something that the startups would be willing to kill for: millions of client relationships. Logically, the win-win scenario here would be to transform themselves to platforms as well. While doing this, they would outsource product and service development to people who excel at it and integrate these new products instead of or alongside their own. Sounds good right? Well, as for many things it depends.

See, much like for “the” blockchain, there is not one single platform or one size fits all solution. There is a multitude of variations of it depending on what your market position is and who your customers are. Pascal Bouvier has done a terrific job at summarising these variations in this blogpost. You should also read Ron Shevlin and Philippe Gelis’ posts that he’s referring to. This is mandatory reading.

Leaving aside the inevitable compliance issues for a moment, there are in my mind a few aspects of the BaaP (Bank as a Platform) that need reflecting more on:

1. First and foremost, if we assume that banks are to become platforms, it presupposes that they were pretty bad at providing services over and above a current account in the first place. Now the technology is evolving at the speed of light, the tide is going out and we finally notice that they’ve all been swimming naked this whole time. But can’t this be said of many industries? To me this becomes almost a philosophical question of which business models are suited to sustain incredibly fast innovation. And if past a certain size you’re just stuck and can’t disrupt yourself anymore meaning you have to outsource innovation? This would mean that in order to survive as a large company you would have to structure your business as a platform if you want to stay relevant.

2. Let’s face it, marketplaces are great but only if you highly curate the content. I already have a hard time enough picking a meal among the 155 choices at a Vietnamese restaurant; I don’t want to have to scroll through a dozen international transfer providers. The problem then is twofold: a) who would a bank partner with? The provider with the best client satisfaction or the one with the better margins? Experience shows that banks tend to pick the latter and b) what happens if one of the service providers goes bust? Who then services the client? How do you roll into another service provider? Do you even have contingency plans? Companies go bust, even banks, we know it now so the whole infrastructure would have to be built to reflect this possibility.

3. Lastly, the hard fought battle for who will “own” the customer or last mile. The real crown jewels of banks aren’t their outdated core banking infrastructures and pipes, it is their millions of client relationships. Each of these have cost anywhere between 150 to 250 pounds (for retail). This is a lot of money but on the plus side, banking relationships are sticky as hell. Banks have quietly enjoyed this fact but now that they are challenged on their own turf, they should actively take advantage of this stickiness. The truth is if you’re like me you’d much rather have one app containing services by Nutmeg, Transferwise, Zopa and Mobillity rather than five different apps. And it would be terrific if my bank could provide me with this interface from which I could manage all of my finances.

Ultimately, this is what it is all about for customers, having one place from which I can access top of the range, flexible services. It doesn’t have anything to do with trust. It is pure and simple convenience and quality of service. The bank who delivers this will win in my mind.

On 3rd of May, we brought together both sides: banks and startups at Startupbootcamp FinTech’s headquarters in London for our latest FinTech Social. We were joined by a panel of experts on the topic – Roshan Rohatagi from Royal Bank of Scotland, Carlos Sanchez from ipagoo and Megan Caywood from Starling Bank.

Roshan Rohatagi talked about the bank’s approach to the platformification and why RBS sees fintech startups primarily as collaborators rather than competitors. Megan Caywood, Chief Platform Officer at Starling Bank told us the difference between Starling Bank and other UK challenger banks, and gave insights into how platformification brings the tech marketplace model into financial services. Carlos Sanchez shared how ipagoo differentiates itself from traditional banks and the importance of providing the best experience and service for the consumer, in line with the ability to be as mobile as possible and provide the best service across borders.

If you missed the event, you can find out more about the latest trends in fintech and open banking in our FinTech Trends Report and keep an eye out for our future events.

Did we have banks and startups on stage 5 years ago talking about how they can integrate and work together? Today we do! 

Portfolio Manager at Startupbootcamp FinTech and InsurTech