Implementation of Platform-based banking

Ashish M. Shaji

13 Jun, 2020

Initially, when business started out, trade was carried within a small community, and from there it expanded its roots to states then the nation and finally the globe. Today business is conducted on a digital platform, and the platform business model dominates the leader board of companies. It has spread quickly from one industry to the other, including banking. Traditional banks are well placed to adopt platform-based banking. They have an opportunity to capture new value by building an ecosystem where their needs are fulfilled by the customers and where vendors build their business thereby the banks gain loyal customers as well as additional revenue through transaction fee etc. 

What is platform-based banking?

Platform banking is a digital marketplace that is owned and operated by a bank or another entity that provides banking and non-banking services. It is not similar to open banking, but the latter enables and amplifies the former. For instance, in the case of home mortgages banks may not just provide loans but also help the customers in buying homeowner’s insurance, house maintenance services on the bank’s platform.

Platform banking may seem a farfetched construct to some, but we can see many such examples in financial services. Paytm is an example that has evolved from a single entity in the prepaid wallet business to a platform that offers customers with airline tickets, movie tickets, hotel reservations etc.

Significance of Platform-based models

Consumers have been actively embracing platform-based businesses that are delivered on digital devices because they reduce friction, lower prices and provide better services. Many valuable companies have started implementing the platform business model, which has resulted in coming together of consumers and solution providers. Due to the trust between banks and credit unions, and their ability to handle complex regulations, they are in the best position to implement a platform-based banking model. However, many executives don’t understand this model or don’t see it’s potential; therefore, they don’t give too much importance to it.

Traditional institutions and Platform-based banking

Financial service organizations are finding ways of maintaining their relationships with consumers who are being approached by the traditional and non-traditional companies contending for their business. Consumer trust is imperative, especially in the banking industry, when combining traditional and potentially non-traditional solutions. Banks and credit unions can taste success in becoming the major entity for building and maintaining customer relationships in a platform economy owing to the trust established over decades. In order to collect and share customer data with outside organizations, there must be trust and belief that such data will be safe, and it would be used ethically.

As per an IBM (International Business Machines) institute for business value survey, more than 68% of the consumers suggested that they can share personal information and data with their bank or any other financial institution. This number is higher in comparison with other organizations with which the consumers interact. The consumers are not only ready to share information with their banks, but they also believe that their data will be protected. The IBM research specified that more than 90% of consumers trust their financial institutions to protect their data to at least a moderate extent. A close look at this information reveals that Traditional banks should leverage open banking to evolve beyond the traditional business models thereby building an expansive and flexible ecosystem of financial solutions that will help the consumers and make their lives easier. 

If traditional banks don’t take this opportunity by the scruff of its neck, then they may be disrupted by organizations that possess sophisticated ecosystems and large consumer databases.

Benefits of Platform-based banking

Majority of banking executives believe that cross-industry platforms will become more crucial to the industry in the future. Adoption of platform banking accrues many benefits.

Some of them are specified below.

Why should the traditional banks advance to platform-based banking?

Banks have a great opportunity in front of them, but they must grasp it in time. Platforms bring people together and services in an asset free or light asset model. There is a huge market of people who require help in major activities in life that involves finance. If banks must improve in their functioning, then they need to start providing the financial aid that people really need.

Banks are expensive to run, and the cost of compliance is good enough to make sure that banks have not historically had to compete with technology businesses. Transitioning to platform-based banking where revenue is generated in a light asset model; it would mean that the business can be built upon modular and inexpensive architecture. Banks can migrate to a lighter asset model to make growth more profitable.

Currently, banks possess a linear relationship with their customers. They see money as an input for a product and consumers as users of that product. In a platform, the consumer, as well as the supplier, is the product. If we consider each participant in a platform as network capital, value is goaded by users. It provides banks with a chance to fundamentally reframe their relationship with customers and leads to the acquisition of customers and to drive value through scale.

The ultimate fact of the matter is that banks in many ways are already a platform. They are the technology that connects people with assets and with people who wish to put those assets to good use. Platforms are considered more valuable than traditional business models; therefore, it’s pertinent to begin a complete transformation in the way banks monetize their business.

Challenges of Platform-based banking

No doubt, there are numerous benefits of adopting a platform-based banking model; however, there are certain challenges that cannot be ignored. The greatest challenge lies in the existing and potential regulations governing data and privacy. On one hand, the initial benefit of platforms focussed on the use of data and advanced analytics but on the flip side there may be a huge growing number of rules and regulations around the usage of consumer data. It may be noted that the banking industry is better positioned as compared to non-banking players to tackle this challenge, but excessive regulations will impact all organizations.

Many of the banking executives believe that there would be challenges with regards to regulatory compliance which may prevent platform-based models from realizing their true potential. This hurdle becomes more apparent when regulators don’t realize the dynamics and the components of digital transformation. Banking executives believe that cultural differences between banking and non-banking providers would be a primary suppressor of platform business model development. Trust and transparency may be a vital aspect that would present as a challenge.

There continues to be a challenge of finding talent to respond to the digital transformation. Platforms are data-rich and need advanced analytics, new testing abilities and data scientists. Incumbent banking organizations have found ways to compete for talent with digital leaders.

In spite of all the challenges, traditional banks have invaluable experiences to draw upon. They have realized the importance of trust and today’s complex regulatory environments and possess a great deal of capital that may be used to build for the future. 

Platform-based banking post Covid-19

The Covid-19 impact on digital banking has made everyone realize the need for digital transformation, and banks are required to take a pragmatic approach. As per a report, platform-based banks will find it easier to increase profits because people have found platform based banks offering better agility and scalability. Such banks are expected to increase their operating profits, unlock new sources of value and enhance its operational efficiency. However, traditional banks have been reluctant to move to a platform model owing to cybersecurity and privacy concerns. 

Conclusion

Also, read: Neobanking in India: New trend in banking