Platformification in banking: How the uptake of as-a-service offerings is redefining finance
Disruption is continuing to play out in financial services. In fact, 2020 was the year when the market capitalization of the top four payment companies, including PayPal and Square, eclipsed the market cap of the big six banks on Wall Street. Over the last ten years the total market value of banking and payments provided by traditional banks has dropped by 24% as new entrants capture a greater share.
To avoid disintermediation, financial institutions first need to realize and recognize the scale of the challenge. Next, they need to start thinking differently and consider how they can become more agile and innovative. Technology is key to bridging the gap, as is a change of mindset and a willingness to adopt a more open, collaborative approach. The accelerated adoption of cloud-based infrastructure over the last year has engendered a growing acceptance that financial institutions no longer need to run every aspect of their technology infrastructure in-house. By leveraging expert partners to deliver non-core services, they can focus attention on the things they do well, and seek to expand these areas of their business. For example, delivering day-to-day banking services, mortgages, savings, and investments.
Many smaller players have already taken the first steps of their cloud journey. There’s been a strong appetite from community banks to move their retail core to the cloud. Once they experience the benefits of a managed service that removes the worry of maintaining and running their own core infrastructure, they’re often willing to adopt and run other services in a similar way. The breadth and scope of functionality offered ‘as-a-service’ continues to grow, encompassing payments, foreign exchange, lending, buy-now-pay-later, fraud detection, regulatory reporting, and more. Community banks are seeing first-hand how a platform-based approach can open up a world of innovation, allowing them to select and plug-in apps from fintech partners quickly and cost effectively. This in turn helps level the playing field, enabling them to offer new services and a great experience to customers to compete more effectively with larger players. Without this capability, small institutions would be at a distinct disadvantage.
Larger financial institutions are not standing still. They too are recognizing the benefits of a more collaborative approach, leveraging open APIs and platform technology to connect to a wider ecosystem of tech and fintech providers. It’s not so simple, or even desirable, for large financial institutions to replace their systems of record and migrate to the cloud. But it doesn’t need to be a binary choice. On premise infrastructure and cloud technologies can co-exist through open platforms that allow financial institutions to access fintech solutions that augment their core solutions. Benefits include increased access to innovation, faster time to market for products and services and increased customer satisfaction.
Accelerating ‘Banking-as-a-Service’ through open platforms
Just as a platform-based approach is allowing financial institutions to consume apps and ‘functionality as a service’ from fintechs and other third parties, banks can also use the same distribution mechanism to deliver their banking services to others. Other financial institutions, or consumer-facing brands, can choose to embed these services within their own offerings. Distributing banking services through an open platform can help financial institutions achieve scale and reach a wider customer base.
But before banks can fully make banking as-a-service capabilities available, they need the ability to ‘unbundle’ each banking service into its constituent parts, and then they must reassemble and repackage the services for consumption via this new channel. Working with an open platform technology provider can accelerate time to market for financial institutions. In addition, third-party brands on the platform can then access these services and embed banking services as part of their own offering to customers. Examples include integrating payment capabilities within an app like Uber, or integrating mortgage purchasing options within a real-estate app. Rather than consumers needing to exit these apps and engage with a financial institution to make a payment, or arrange a mortgage, these services can be offered within the same app at the optimum moment in the customer journey, creating a frictionless experience.
The availability of ‘banking as-a-service’ components creates huge potential for banks and non-banks to mix, match and re-bundle components to create the optimum service for customers, and to do so at the best price point.
Let’s consider corporate banking. A bank that services large multi-national clients executing high value cross-border payments will typically use SWIFT. But when it comes to processing lower value payments, the fee for handling the transaction in the same way may no longer be cost effective. Here, other players like Revolut or Wise could potentially deliver a lower price point. But because the corporate banking offering ‘is pre-bundled’ the financial institution often simply accepts any loss made on the deal. What if instead, the financial institution could dynamically bring in third parties that can execute specific elements of a transaction at lower cost, and re-bundle the service? In this scenario, the bank retains its full service offering for corporates, but can deliver the service more cost-effectively, delivering savings for the client and its own bottom line.
Recreating the financial services value chain
The journey to an open ecosystem is well underway – bringing financial institutions, fintechs, big techs, consumer brands and other third parties together to offer and consume services through a platform-based approach.
There’s no longer a requirement for financial institutions to run every aspect of the technology stack or execute every component of a financial services transaction themselves. Winners will include those organisations who become adept at assembling and packaging services in the best possible way for customers. As a result, financial institutions will evolve into managing a value chain of technology providers and to providing their own capabilities as-a-service via new channels. Those that are ready with open platforms and an open mindset will be in the best position to take advantage of the opportunities ahead.