Voice of the Industry

Banks and Fintech on Platform Economies - how payments transform the banking experience

Friday 17 December 2021 08:17 CET | Editor: Mirela Ciobanu | Voice of the industry

The advent of platform economies is a tsunami for the traditional business culture, especially for bankers. Still, Paolo Sironi, Global Research Leader in Banking at IBM, reveals how should the FIs prepare

The Global Financial Crisis revealed the existence of deep imbalances in the functioning of financial services. The intervention of the central banks temporarily saved the system by lowering interest rates and forcing a substantial de-risking of banking activities, but further embroiled banks’ profitability in a narrow economic space. The lower-margin new normal is here to stay, and banks’ way out of the Catch-22 situation is through the transformation of traditional business models to comply – through technology – with the emergence of platform economies.

What does it mean to adjust bank business model on platform economies?

The advent of ‘platform economies’ is a tsunami for the traditional business culture, especially for bankers. Sustainable business performance is no longer based on linear relationships between manufacturers (e.g., asset managers), distributors (e.g., wealth managers), and consumers with the logic of incremental production of costs and value. Instead, the main economic levers lie in the ability of new business models to engage users continuously, and usher in a new era of ‘hyper-personalisation’ and ‘hyper-contextualisation’. Digital platforms can transform entire industrial sectors mainly because they favour the transition from an economy centred on ‘outputs’ (products) to an economy centred on ‘outcomes’ (results). In platform economies, ‘assets’ (products) do not disappear but become peripheral from the point of view of generating value. They focus on the contextualisation of user experiences at affordable prices, removing frictions in consumption and user interactions.

The shift of business models from ‘outputs’ to ‘outcomes’ is complex. What is needed is a business map to guide the navigation. The map is the Banking Reinvention Quadrant (BRQ), which is the centre piece of my latest bestseller ‘Banks and Fintech on Platform Economies’. The axes of this quadrant are named the Information Quotient (IQ, y-axis) and the Communication Quotient (CQ, x-axis). What are they?

The Information Quotient is the ‘technology’ axis and represents the trusted intensity in the use of data and insights on Open Banking platforms, transforming client engagement out of products and services, into the participation of enriched user ecosystems by eliminating engagement frictions in adjacent industries (e.g., digital payments on food delivery apps). The Communication Quotient is the ‘business’ axis and represents the trusted intensity in the use of Artificial Intelligence (AI), supporting digital or human relationships and decision-making, and digital interfaces powered by more intelligent analytics (e.g., AI-driven instant credit approval).

How can banks and fintech navigate the BRQ towards spaces of higher business value?

Financial institutions exert market power when they excel in information and communication, that means investing in differentiative core banking and interfaces. The tension between information and communication defines the emergence of new business models based on different information systems. These are ‘Contextual Banking’ platform strategies (based on Banking-as-a-Service architectures, opening banking data and insights to be consumed by third parties inside external ecosystems), and ‘Conscious Banking’ platform strategies (based on Banking-as-a-Platform architectures, opening banking innovation to the integration of external banking and non-banking offers to increase the value of banking relationships). While traditional banking and most digital banks still operate inside ‘output’ economies, configured linear value-chains, Conscious Banking and Contextual Banking platform strategies operate inside ‘outcome economies’ sharing business critical information through open finance platforms, and enrich the communication with clients with transparent artificial intelligence. That is why they unlock most of the attainable business value on the BRQ.

‘It is the opportunity to eliminate frictions in user interactions that makes banking contextualised to become embedded and unlock ‘new’ value.’

‘It is the need to demonstrate value - which clients are asked to pay for accessing the platform - that makes banking conscious to remain sustainably transparent and unlock ‘hidden’ value.’

What is the role of payment providers?

Cloud-native payment providers were among the first in financial services to learn how to push banking out of the linear value space occupied by digital banking, striving for deeper banking contextualisation.

PayPal CEO Dan Schulman revealed in a 2021 call with Wall Street analysts that PayPal aspires to become the world’s next banking ‘super app’, offering a set of integrated features that once would have required a series of different apps. Similar to Alipay in China, these would include tools for payments, shopping, financial services, and even new forms of digital identification. While PayPal sees Contextual Banking as a way to expand its financial services footprint and compete head-to-head with bigtech ‘super apps’, other fintech are embracing new platform strategies to contextualise financial services inside more specific ecosystems.

Payment provider Square - founded by Twitter CEO Jack Dorsey in 2009 - announced its intention to acquire a majority ownership stake in Tidal in 2021. Jay-Z’s music streaming service is a smaller competitor of Spotify. The deal rationale comes down to a simple idea about how Contextual Banking can help resolve the chicken-and-egg dilemma in platform theory. Fintech innovation could be used to support artists’ work. In return for their success, positive network effects would attract larger fanbases to the music platform. In Dorsey’s own words: ‘New ideas are found at intersections, and we believe there’s a compelling one between music and the economy.’

You need banking reinvention!

However, for new ideas to succeed technology is not enough. According to a recent research by IBM, the Institute for Business Value, the potential revenue impact of investing in hybrid cloud infrastructure, thus leverage enhanced data and AI, can be multiplied almost 20 times when combined with end-to-end transformation that addresses the key drivers of the open organisation. The open organisation is based on cultural transformation that allows banking reinvention. This means refreshing the incentives and the way of working to comply with the dynamics of digital platforms and ecosystem orchestration. The journey on the BRQ is not easy, but it could be very rewarding for those banks willing to reinvent themselves.


About Paolo Sironi

Paolo Sironi is the global research leader in banking and financial markets at IBM Consulting, the Institute for Business Value. He is one of the most respected fintech voices worldwide, providing business expertise and strategic thinking to a network of executives among financial institutions, startups, and regulators. He is a former quantitative risk manager and startup entrepreneur. Paolo’s literature explores the biological underpinnings of financial markets, and how technology and business innovation can bolster the global economy’s immune system in today’s volatile times. Visit Paolo's website thePSironi.com for more information.

About IBM Institute for Business Value (IBV)

The IBM Institute for Business Value (IBV) uses data-driven research and expert analysis to deliver thought-provoking insights to leaders on the emerging trends, opportunities, and challenges. Founded in 2002 as part of IBM Consulting, IBV thought leadership reports offer prescriptive recommendations to address the most pressing industry and marketplace challenges and opportunities that will determine future organisational success.

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Keywords: banks, embedded finance, digital banking, platform
Categories: Banking & Fintech
Countries: World
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Banking & Fintech

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