Editor's Note: The most significant trend of 2016 will be the 'platformication' of banking, where both existing banks and startups begin a strategic shift towards becoming banking platforms, much like how Amazon is a platform in retail." - Ron Shevlin. In this blog, we discuss the concept of Banking as a Platform and how it works within financial institutions.
The above quote by Ron Shevlin appeared in the Top Ten Retail Banking Trends and Predictions for 2016 published by Jim Marous. In a blog post in July 2016, Ron did something prognosticators seldom do (at least not economists); he reviewed the veracity of his predictions. At that point in time, he noted that while financial institutions and FinTech vendors had started to think about to concept of banking as a platform, not much concrete action had been taken.
The blog referenced, by the way, is a very researched, thorough, and as is Ron's style, snarky treatment of what some have called Banking as a Platform (BaaP) that anyone interested in the topic should read. The gist of the concept Ron captures is using the Amazon Marketplace as a quintessential example of a platform. Amazon provides the marketplace platform and other companies sell their goods on it. The idea in banking is that the financial institution provides a platform for delivering services to their customers or members that are provided by third parties.
The term "Uberization" of banking is sometimes included in the discussion of BaaP to further make the concept clear. As in Uber's case, i.e., a company that provides transportation but owns no cars, a bank or credit union that goes the platform route may offer loans and does not do the actual loan underwriting. As in the case of Amazon and Uber, the products and services offered by the third party are offered under the financial institution's brand, not the supplier's or vendor's, and the bank or credit union owns the customer or member relationship.
The concept is an interesting one and for financial institutions that already tend to buy or outsource things such as online and mobile banking, it would seem a natural next step. Yet, there are challenges which are well documented by the postings listed above. The particular ones that seem to me to be, require large-scale changes in the mindset of bankers have to do with vendor management and customer experience.
When it comes to vendor management, the mantra for years has been less, not more. The overhead associated with managing vendors is non-trivial. Some aspects of this might seem to be mitigated in a "plug and play" platform but, to me, not as much as some think. The bank or credit union - as with Amazon - is ultimately going to be held responsible to customers and members for any issues that arise with the vendors invited to use the platform; e.g., availability in particular, since evidence exists that suggest some FinTech offerings are not particularly robust or scalable. Thus, the platform approach is not one I see reducing vendor management overhead, but rather increasing it, ultimately as more and more types of niche services and products are created.
As for the customer experience challenge around BaaP, the issues are two-fold: 1) consistency of the UX and 2) support associated with addressing users who seek redress for a poor experience. On the former point, financial institutions already have issues providing a consistent UX across multiple service points precisely because the software supporting those various services comes from different sources. At D3 Banking, this lack of consistency in the UX is often the second thing (the first being the overhead of vendor management) driving a prospect to consider our solutions. The consistency issue multiplies in terms of the points of divergence from the desired goal with the BaaP strategy.
Support of a customer having had a poor user experience, specifically when dissatisfied with some aspect of what they were offered, is something the Amazon Marketplace platform does far better than most. If you don't like the purchase, send it back. In many cases, a label is presented immediately to use for free return shipping. Plus, if you have been a loyal shopper on the platform and hold a Prime Membership, the warranty periods may not even apply for a defective product (within reason).
Banks and credit unions, however, offer products and services that are different from the treadmill bought from Amazon. This makes mitigating the dissatisfaction of the customer or member more difficult. Further, one could argue, that many financial institutions (of all sizes) lack experience in implementing "the customer is always right" mentality across their organization.
The user experience and customer support issues notwithstanding, BaaP is still a viable concept, especially if it is applied to the channels in a bank and credit union where growth and change are constants: e.g., digital banking. With digital becoming the branch, financial institutions that can build their digital banking operation on a platform that is API-driven, built to leverage data and based on a current tech stack gain a significant advantage. While they would expect to get the platform provider functionality that covers a comprehensive set of basic banking services, this type of platform would afford them ability to expand that set of services using third parties other than the platform vendor to do so. This will be particularly desirable as the industry sails into the future that promises only one thing - the further digitizations of the consumer's life.