The Bank as a Platform
Financial Services Industry is going through a period of rapid change, as global forces are redefining the entire concept of “the bank,” and in turn, banking
Elements such as technology and new regulatory systems are changing the banking system, but innovation in terms of profitability and competiveness can only be achieved through profound cultural transformations and business models that push towards the concept of the “bank as a platform.” It is widely believed that the Financial Services Industry is going through a period of rapid change, as global forces are redefining the entire concept of “the bank,” and in turn, banking. The explosion of digital technology initiates this change, opening the way for new service methods, as well as interaction with customers and prospects, ultimately allowing for new players to enter the market without the need of cumbersome legacy technology. Consumers, more than ever, are appreciating increasingly open and transparent business models at a time when the level of trust in the banking system is at historic lows. All of this has happened within the context of a financial crisis that has triggered a new wave of capital regulation and liquidity, while the parallel market of banking services, which includes features such as payment, is increasingly open to external agents. The presence of a zero economy—low interest rates, the absence of inflation, low growth, etc.—has, in fact, set off a dangerous spiral in terms of the profitability of banks.
But are these really elements of charge, or are they merely symptoms of a more radical transformation that impacts the entire rationale underlying banking? An analysis of the contribution that technology and regulation has made to this process of change can help to answer this question.
Technology requires huge investment in order to adapt; at the same time, it is increasingly becoming a commodity. Banking is an information business, and the digital aspect of this business exposes it to the risk of being easily replicable, at least when it comes to less complex areas subject to the laws of “freemium.” Consequently, the use of technology will become less of a competitive advantage, and more of a prerequisite for survival, working to stabilize revenues and compressing costs.
With regard to regulation, European reforms will tend to be more homogeneous, leveling the playing field and paving the way for more efficient and attractive competitors. This likely will allow for more M & A, but hardly leads to competitive advantages for individual companies.
Given these factors, there must be some other factor, still in its infancy that is changing the roots of the banking system that will manifest itself in the coming years.
This change can be seen as a transformation in action. Up until earlier in the decade, the bank had complete control over the processes of banking due to regulations or because they involved large economies of scale or expertise. Today, an increasing number of banking processes are being created by non-banks, at prices and quality levels that allow consumers to make more disruptive choices: payment services have historically been the first to assist in this phenomenon, with solutions for credit cards and the wallet, such as Square, JUSP, PayPal, and the recent Apple Pay.
Inspired by the social paradigm, P2P solutions in the credit and insurance area are also entering the market, such as The Lending Club, Smartika, and Friendsurance. On the mobile, more efficient and intuitive solutions are flourishing in Personal Finance Management, such as Mint, Spendee and Manilla. The next innovation in the global market is the multi-national Ipagoo, which has strength in multicurrency transactions in real time, meaning that markets bound by geographical boundaries are gradually losing their value.
The next predicted wave of current bank accounts lies in global solutions such as Ipagoo, which will have a decided advantage in the market. But how will this transformation fully come to form? How will banks adapt to this “divorce” from banking? The industry will have to change its culture, working outside of their comfort zones, looking for spaces in the market where, despite not being directly related to the banking process or the historical DNA of banking institutions, they might begin to develop solutions. They will exist in a unique ecosystem with non-banks that create the processes of banking and banks that offer solutions beyond traditional banking processes.
If this is the future, the business model of the bank will be an integrated platform of ideas, processes, technology, and information; it will be hooked on value-added services that extend 360 °coverage to consumers.
This is the path taken by BBVA, which has created an environment dedicated to external developers, launching a “Hackathon,” giving everyone the chance to develop apps interfaced with the bank. The architecture of "App based" paves the way for external contamination and possible new revenue generation models based on the bank's ability to be an intermediary in meeting the needs of its customers.
This is happening in a context where the traditional banking sector maintains several important competitive advantages: customer base, investment capacity, ability to activate or acquire skills.
So, it turns out that having a market presence of 500 years is important: this strategy integrates the power of traditional assets with the paradigm of the "bank as a platform," still giving banks an advantage over new competitors.
Carlo Murolo is a Partner at Deloitte Italy - Head of Financial Services Industry Consulting