What do fast-growing companies like Uber, Airbnb, Amazon, Deliveroo, and Facebook all have in common? They’re all platforms.
Deliveroo delivers food – but doesn’t make it; Uber is the world’s largest taxi firm, but doesn’t own any taxis; Airbnb is one of the world’s largest accommodations provider, but owns no accommodations.
These platforms have quickly grown to become giants in their fields because they benefit from network effects: the more people and businesses that join them, the bigger the benefit of being a member, which creates a positive feedback loop encouraging further growth.
But What About Banking?
So far, banking has been almost unique in resisting the platform business model: there were no benefits from network effects – so no reason to share a platform, and banks owned the way customers purchased financial services – so no reason to share an alternative.
But all of that is changing.
New technology is lowering the barriers to entry, new regulations on information sharing (such as PSD2) are creating opportunities for new business models, and changes in customer attitudes are encouraging fresh approaches.
Soon, banks may lose their dominant position as the primary intermediaries for their customers, and traditional industry leaders will face calls to either revamp or risk becoming obsolete.
What does the future hold for your bank? And how will BaaP fit into the equation?
What will BaaP look like?
In the traditional model, banks create products and sell them to their customers. Almost all of the products and services offered are owned and controlled by the bank, and there is only limited collaboration with key partners.
In contrast, a BaaP model allows for much more in the way of partnerships. Banks focus only on their core activities, with other functions fulfilled by partners. There is scope for partners to develop and offer their own products, which will work in partnership with the core products through the use of APIs and open source. Key data is shared with partners to enable this.
Three Questions Banks Must Answer to Succeed at BaaP
Moving to a platform model is a big step, involving reversing the silo mentality that many banks have and replacing it with a new culture in which other FinTech organisations aren’t necessarily your rivals.
Here are three key questions banks must answer before getting started:
What is your focus going to be?
When you move to a platform model, you no longer need to be producing and controlling every product. The possibility for other businesses to have products on your platform means you must decide exactly what value you are going to bring, as this will influence which partners you try to attract to your platform.
How will your architecture support your platform?
Most legacy software used by banks were built with the idea that other businesses should not have access to the information within. These silos need to be broken down, and new infrastructure built in their place that enables APIs and open standards.
How will you maintain and improve security?
The necessary changes in culture and technology to move to a platform strategy will inevitably create new security challenges. As these changes take place, it is imperative that banks continue to invest in their security; a significant breach in the early days of a platform could cause significant damage to reputation, making it harder to gather partners.
Should You Choose a BaaP Model?
BaaP is happening now – and those that embrace it now will have a significant advantage over those left trying to catch up. The platform model offers almost limitless possibilities for those that choose it, and banks should decide soon whether they want to have an absolute platform or not.