The Disruptive Power of Platform-Based Models in Banking

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Consumers are increasingly embracing platform-based businesses delivered on digital devices because they reduce friction, lower prices, and provide better service. On the flip side, seven of the 10 most valuable companies globally are now based on a platform business model, bringing together consumers and solution providers in marketplaces where they can interact and transact seamlessly.

Tech giants like Amazon, Google, Apple, Facebook, Airbnb, Uber, Netflix, and numerous others have further proven the great potential of platforms. Until recently, the word “platform” was only associated with such technology companies.

One of the major benefits of a platform-based model is the ability to innovate through the combination of different businesses. There is also a faster speed-to-market component. While some firms may build a platform from the ground up, most will pursue a hybrid model, in which a traditional company supplements its existing business with a platform business for some activities and for market differentiation.

The availability of affordable digital technologies enables companies of any size to embrace data, analytics, and a cloud-first approach to redesign traditional business models. One of the advantages of digital platforms is their ability to provide a ‘pay-as-you-go’ business model that can combine traditional solutions with those from outside providers facilitated by application programming interfaces (APIs).

Financial service organizations need to find ways to maintain relationships with consumers who are being approached by traditional and non-traditional companies vying for their business. While discussion is often centered on competition from technology firms like Amazon, Facebook and Alibaba, success requires more than technological prowess to succeed. Especially in the banking industry, consumer trust is imperative when combining traditional and potentially non-traditional solutions.

Banks and credit unions are uniquely positioned for success in becoming the prime entity for building and maintaining relationships with customers in a platform economy because of trust built over decades. To collect and potentially share customer data with outside organizations, there must be the belief that the data will be safe and be used ethically.

According to an IBM Institute for Business Value survey, more than 68% of consumers indicated that they were willing to share personal information and data with their bank or another financial institution. This percentage is by far the highest compared to other types of organizations with which consumers interact.

Consumers are not only willing to share information with their financial institution, they also trust it to protect their data. The IBM research found that over 90% of consumers trust their financial institution to protect their information and data to at least a moderate extent.

Because of these advantages, banks and credit unions should leverage open banking to evolve beyond traditional business models, building more expansive and flexible ecosystems of both financial and non-financial solutions that will make the consumer’s daily life easier. If traditional financial institutions do not take advantage of the ‘trust benefit’, they may be disrupted by organizations that already have sophisticated ecosystems and large consumer databases.

When financial services executives have been surveyed on components for digital banking transformation, the Digital Banking Report has found that there is a broad awareness of the opportunities and threats of the new digital banking ecosystem. It was also found that preparedness for digital banking transformation is sorely lacking in most instances.

The IBM research also found a strong understanding of the dynamics of platforms. Almost three quarters (72%) of financial executives believed that platform business models are disruptive to the banking industry, with 70% stating that platform business models are driving changes in traditional value chains across the industry.

While it is not totally clear how prepared financial institutions are to compete in a platform-based ecosystem, 38% of bankers saw cross-industry platforms as a threat, while 45% viewed platforms as an opportunity. The latter group said that platform business models will help them in the areas of profitability, innovation, and access to markets beyond banking.

In the IBM research, close to 90% of banking executives believed cross-industry platforms will become more important to the industry over the coming decade. They also say that adoption of platforms will positively impact revenues (90%), profitability (86%) and customer satisfaction (83%).

While there are numerous benefits of adopting a platform-based banking model, there are still many challenges. Probably the greatest challenge is existing and potential regulations governing data and privacy. Where the initial benefit of platforms focused on the use of data and advanced analytics, there will almost certainly be a growing number of rules and regulations around the use of consumer data. The banking industry is better positioned than non-banking players to handle this challenge, but overarching regulations will impact all organizations.

Not surprisingly, four of five banking executives surveyed by IBM believed there would be challenges associated with regulatory compliance, potentially preventing platform business models from realizing their full potential. This impediment becomes more pronounced when regulators don’t fully understand the dynamics and components of digital transformation.

Banking executives who were surveyed also believed that cultural differences between banking and non-banking providers would be a major inhibitor of platform business model development. IBM found that 82% of banking executives thought that trust and transparency between partners would be a key challenge.

Another factor that isn’t discussed as often is that many of the marketplace opportunities have already brought competitors into the ecosystem. In other words, a lot of the best opportunities have seen platforms built around them — P2P payments, for example, have been disrupted by non-traditional platforms.

Finally, there continues to be the challenge of finding talent to respond to digital transformation. Platforms are data rich and require advanced analytics, new testing capabilities and data scientists. Incumbent banking organizations have quite a ways to go to compete for talent with digital leaders.

Despite the challenges, traditional banks and credit unions have valuable experiences to draw upon. They understand the value of trust, today’s complex regulatory environments and have a great deal of capital that can be used to build for the future. The question becomes, do traditional firms have the leadership and culture to transform their business models for a digital future?