French essayist and critic Charles Du Bos summed up the ability of humans to change when he wrote, “The important thing is this: to be able at any moment to sacrifice what we are for what we could become.”
For a long time, most banks have been one thing: vertically integrated product manufacturers and distributors, shops that sell only their own brand products. But with the move towards regulatory-driven Open Banking in competitive-friendly markets like the U.K., Hong Kong and Australia, new business models are emerging—including Open Platform Player, one of four bank business models we identified as winners in the digital economy.
Is the open platform bank an intermediate point on the journey towards lifestyle platforms, on which financial services are just one of many offerings?
Unlike a traditional bank, a banking open platform is like a department store that carries all your favourite brands and also helps you coordinate outfits and do your interior decorating. Open platforms create a market where producers (supply side) and consumers (demand side) connect and interact in efficient exchanges of value. The result is a bank-branded app store where consumers shop to assemble the products and services they need to satisfy their everyday financial needs, building their own bank from components they know will work easily together. In this business model, the platform owner has the opportunity to maintain management of the customer experience and vet the third-party products and services being offered in that experience. In turn, aggregation of demand allows them to extract economic rents from suppliers.
This business model is attractive to new entrants because it allows them to aggregate fintech product innovations while focusing on customer navigation and advice. A good example is Belgium-based fintech banqUP. It offers a current business account, credit and debit cards, and business apps in a unified small- business banking platform. Another is the UK challenger bank Starling, which has moved to offer a wide array of third-party products and services anchored on a core current account.
For incumbent banks, the economic equation of becoming an Open Platform Player can be more challenging. While an open model offering best-in-breed products can be enticing for customers, replacing balance-sheet income with fees isn’t always an attractive trade-off. A $100,000 mortgage with a three-percent net interest margin is equivalent to a lot of traffic on a toll road. So rather than pivot completely to an open platform model, we are beginning to see established players—like HSBC and RBS in the UK—experimenting with the introduction of third-party products that they either can’t produce as well as other providers, or which, for risk appetite reasons, they may not want to provide. In the US, for example, eight of the top 10 banks now have some sort of alternative credit provider for small-business lending that falls outside their risk appetite, creating an emerging platform model in that segment.
Of course, in an open platform model, there must also be suppliers. While fintechs like Transferwise are most prominent, there is also scope for traditional banks to componentise their product offerings and create APIs that allow easy plug-and-play with open platforms. This export model, where the customer interaction is ceded to a platform owner, requires changes in how a bank deploys its resources, people and technology. For example, the focus of relationship managers and banking sales representatives would need to evolve to emphasize B2B customers, developers and community builders, rather than B2C interactions. It also means excelling at broader skills, such as ecosystem analytics, API security and identity management.
While becoming an Open Platform Player may look attractive to both new entrants and incumbents, it is interesting to ask the question of if the open platform bank is just an intermediate point on the journey towards lifestyle platforms, on which financial services are just one of many offerings.
Speculation is rife that Amazon will begin to offer a wider array of retail financial services products—including a checking account—which may pay no interest but instead offer discounts on other Amazon products and services as compensation for holding your balances in that account (balances which could be insured by them being held on a regulated bank balance sheet). In China, the WeChat messaging app has already become a true lifestyle platform where consumers are able to conduct a huge array of financial and non-financial transactions without leaving the app. In this world, the “Alibabas” and “Amazons” may truly become the “everything” stores through which we run our lives.
In an era of increasing fragmentation, banks could choose to establish Open Banking platforms that focus on financial services aggregation. However, we suspect that many banks will accept that competing against the likes of WeChat, Amazon and other bigtechs of the world is a losing proposition, and decide to focus on being a product supplier instead of trying to hold onto managing the customer relationship.
I invite you to read more about open platform banking in A New Era: Open platform banking