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Fast followers are fast losers in the digital world of platform banking

In the digital banking world, there are two clear pockets of influence – the really big incumbent banks and their digital-born challengers. The former have “presence” on their side – scale, customer base, reach etc. – while the latter group is all about setting market trends and leading innovation.

On the other hand, the scores of small and medium-sized banks in the middle are going through a crisis of identity. Until now, these banks mostly survived by being competent fast followers. But in the new digital world of platform banking and ecosystems, that strategy will no longer serve, for only the biggest or the first will thrive.

This is because when banking opens up fully and moves towards the platform economy, banks would have to differentiate by either being a consumer-centric marketplace or be an efficient supplier of banking products to leading marketplaces.

Unfortunately almost all mid and lower tier institutions are persisting with the wait and watch and then follow policy. While professing their belief in the platform world, they continue to take half-hearted measures that merely tick the boxes. This is potentially disastrous because when open banking crosses a threshold level of adoption, the market will go to those who are already there and waiting, giving these fence sitters no time to catch up.

The APIs led network-gains will mostly head towards a clutch of top banks with the biggest distribution reach. With key user groups, such as Fintech companies and developers, thronging to the APIs of the market leaders, there is very little scope for other banks to turn their APIs into a viable business, unless they enter the market with a solid value proposition way before their biggest opponents.

The way out then for smaller institutions is to marshal their limited resources to build a sound value proposition and take it to market without further delay. If they get the strategy right, disproportionate gains may follow: India’s RBL Bank is living proof of this. The bank, an early adopter of the platform model, is growing its advances by nearly 50 percent annually thanks to partnerships with non-banking finance companies and Fintech firms.

Clearly, banks that decide to take a strong position in the platform economy will have to exercise two options before them soon enough – to be an aggregator of financial (and non-financial) products and services, or continue as a supplier, inviting third parties to distribute its products. Building a marketplace is expensive business, and probably best left to the deep pockets of big institutions. On the other hand, there is good money to be made as a supplier to the ecosystem: For instance the largest seller on Indian e-commerce site Myntra records an astounding INR 25 billion or so in sales, and is profitable, even as the marketplace itself burns money. Further evidentiary support for this model comes from McKinsey research, which reported that on an average banks’ balance sheet led  business generated 53 percent of revenue, 35 percent of profit and 4.4 percent return on equity (ROE), while the distribution business brought 47 percent of revenue, and 65 percent of profit at a much superior 20 percent ROE.

A mid-tier bank taking the supplier route to the platform economy need only focus on producing well and producing cheaply. On the other hand, if it is brave enough to be an aggregator, it must ensure that its marketplace is first off the blocks. But whatever it decides, one thing is clear: the time to act is NOW.


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