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Platformification in banking: what lies ahead?

Changing customer needs really tested the digital capabilities of financial institutions in 2020, spurring a huge acceleration in the pace of digital transformation across the industry. Around the world, branch closures show the dramatic shift that’s been taking place as customers move away from branch-based banking to online and mobile banking. As the banking habits of customers are changing and they are becoming more confident with all things digital, there’s a danger for financial institutions that it’s also much easier for customers to switch providers to those offering the best customer experience and value-added services. This is compounded by the growing number of competitive offerings from fintechs, big techs and other third parties.

If banks and credit unions don’t already have a clear strategy for how to keep pace with tech innovation in today’s rapidly evolving financial services landscape, they need to put one in place. Fast. 

New business models for banking

Those financial institutions that are embarking on digital transformation and are leveraging the power of the cloud can start to unlock a whole new world of possibilities. A variety of different banking business models are emerging – including Banking as a Platform and Banking as a Service.

The thinking behind the Banking as a Platform model is that it allows financial institutions to securely expose their services to fintechs and developers in the cloud via open APIs. The approach helps to facilitate collaboration and co-innovation with trusted third parties, allowing them to access and build on top of the financial institution’s existing infrastructure. This Banking as a Platform model allows financial institutions to augment their traditional services with third-party offerings and make all these services available to customers through their own channels.

The Banking as a Service model allows banks and credit unions to expose their banking services via APIs to other financial institutions and non-financial institution brands, enabling these third parties to embed financial services capabilities into their own customer journeys. While the bank no longer owns the direct customer relationship, the approach does enable them to gain a wider reach for their products and services. By packaging up their capabilities and selling them on to any brand looking to embed financial services within their own offerings, banks and credit unions have the potential to build scale and grow revenues, effectively turning cost centres within their business into profit centres.

There is also some potential for cross-over between both approaches. Some financial institutions that are further ahead on their journey have created their own platforms – such as the BBVA Open Platform in the US and Starling Bank in the UK. Through these platforms they allow third party companies to access, integrate and package banking services as part of the offerings they sell on to their own customers in a ‘banking as a service’ model.

For BBVA it’s about allowing companies across different vertical industries to start infusing banking services into their products and ecosystems. For Starling Bank it’s about allowing smaller fintechs and application creators to provide more functionality directly to their fast-growing customer bases, while the bank takes on all the regulatory aspects, including scheme compliance, anti-money laundering and KYC requirements.

Non-financial institutions are also setting up platforms in this space. In some cases, in partnership with a single institution, and in others inviting multiple financial institutions to offer services through their platforms.

With the landscape changing rapidly, competition is set to intensify.

What next?

For financial institutions just starting out on their digital transformation, the journey can appear daunting. Many are realising that their core systems for banking, lending or payments processing have little differentiation. Surrounding the core with unique, innovative applications that appeal to customers will be key, and a platform-based approach is a great way to tackle the challenge.

The key to making the “right” progress is to think about things from the customer’s point of view. Work to fill in the gaps with systems and processes via open APIs within a strict governance and security framework, using an open platform. Insights into data, both historical and real-time, will create opportunities to build personalized services and new revenue streams.

Choosing the right technology partners is essential. In many cases financial services providers and fintech application creators need an intermediary who can help them connect and collaborate more easily and to access the latest innovations, without having to rip out their existing infrastructure.

Such an approach enables financial institutions to offer their customers greater choice, including the very best products and services from across the fintech ecosystem. It also allows financial institutions to act as trusted aggregators, sharing data and services securely and effectively between all parties.

For financial institutions that put a clear strategy in place, differentiate themselves, and bring the right partners on board it can allow them to keep pace with advances in technology and avoid being left behind.

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