In October, the Spanish banking giant BBVA, which has a sizable footprint on this side of the Atlantic, announced with some fanfare the launch of what it calls the first open banking platform in the United States with a “full suite” of products.
Among other things, BBVA’s platform uses application programming interfaces to give business clients quick, easy access to about 60 financial products and services that they can brand, in white-label fashion, for their own customers.
An example would be an online furniture store that wants to offer financing to customers under its own name. Instead of enduring a long process of requesting proposals, the store’s team can enter BBVA’s developer portal — a sort of online marketplace — choose the API of a product that meets its needs and start offering its own credit product the same day.
“The old-world way would be a direct line-to-line connection between the bank and each individual customer,” said Derek White, BBVA’s Madrid-based head of global consumer solutions. “With an API platform, you can have thousands of companies access that one API, so the speed of connectivity is much faster.”
BBVA’s rollout is among the most ambitious efforts by banks to gain a foothold in a platform economy that proponents say will change everything from the way bank products are created and marketed to the role a bank plays in its customers’ lives.
Platforms are best thought of as technology-enabled marketplaces that bring buyers and sellers together. They are lauded for the speed, agility, reach and cost-efficiency they can offer.
KPMG estimates the size of the global platform economy at $7.2 trillion, and it’s growing rapidly. Seven of the 10 most valuable companies today — think Apple, Amazon and Facebook — employ platform strategies.
Companies in industries as diverse as heavy equipment, health care and hospitality are adding digital platforms, too.
Banks have been relative no-shows thus far, mostly because they have more hurdles to clear and potentially more to lose.
Getting a platform strategy right can require changes to entrenched business models, cultures and back-office infrastructures. Banks must move cautiously to safeguard data and privacy. The jargon — “banking-as-a-service,” “banking-as-a-platform,” ecosystems and developer portals — is also intimidating and difficult to grasp.
Ask 10 different chief information officers to describe how banks can or should participate in the platform economy — or even exactly what it is — and you’re likely to get 10 different responses.
“When you talk about platforms, most bankers will think about their online banking platform or their lending platform. But this is different, and there’s no clear definition of the terminologies,” said Ron Shevlin, director of research at Cornerstone Advisors, a consultant in Scottsdale, Ariz. “It’s a confusing mess.”
But with the world of digital platforms upon us, a growing number of institutions are concluding they no longer can afford to sit out the trend.
“The biggest companies today are platform companies, and banks are looking to them for lessons on growth and driving value for customers,” said Don Westermann, CIO at the $11 billion-asset Eastern Bank in Boston, which is tinkering with various platform approaches.
There’s also a worry that if banks don’t move quickly to offer platform-based financial products to their customers, then big tech will beat them to it. Bookstores, travel agents and stockbrokers all have seen their businesses disrupted by faster, cheaper platform models, and recent big-tech pressure on the Federal Reserve to build a real-time payments network, for example, is seen as a long-term threat.
In China,
“As we move to platform-based transactions, a lot of the fees banks charge for moving money or paying bills will disappear or be pushed to extremely low levels,” said Michael Cusumano, a professor at MIT and the author of an upcoming book on platforms.
“If I were a banker,” he added, “I would be worried.”
The benefits and drawbacks for banks
With time, platforms could dramatically rework bank revenue streams, cost structures, customer acquisition strategies and performance measurement.
The idea of the bank as the primary distribution channel for products and services that only it has manufactured could go by the wayside. So, too, could siloed sales, organizational structures and customer “ownership.”
Pure platforms are open forums focused on what’s best for customers. These platforms don’t own products, but generate “network effects” — a virtuous circle of evermore participants, with both sides growing in response to the other.
The success of the ride-sharing platform Uber attracts more drivers, which in turn makes the service attractive to more riders, fueling even more success.
Few, if any, existing banks are likely to pursue a true platform model, because the industry’s underlying dynamics are different. Banks, by definition, are manufacturers of products and services, and seem disinclined to forgo that role.
But in an age when customers shop for rates and products across the internet, positioning the bank as the center of that financial shopping ecosystem can help it remain relevant.
“As the cost of switching banks goes down for customers, platforms allow you to create more stickiness by adding a layer of intelligence, products and services on top of the core business model,” Westermann said.
“The goal is to be something more than the dumb pipes of the financial system,” he added. “It’s very hard to maintain the value proposition as a simple intermediary in the platform economy.”
There are trade-offs to consider. On a banking platform, a customer might choose a third-party product and authorize the bank to share his or her data using an API, much like an iPhone user gets different apps from Apple’s app store.
Running an open platform this way makes a bank more like the “conductor of a symphony, coordinating partners and customers” that either provide or purchase that content, said Mark Shilling, U.S. practice leader in banking and capital markets for Deloitte Consulting.
“It’s not just a loan platform that does debits and credits and services the loans. It’s a banking platform, which enables a variety of services from different providers for my client,” he said.
Platforms offer banks the ability to use increasingly in-depth knowledge about their customers to help remain at the center of the customer experience, while boosting revenue potential and cutting some expenses.
In the best case, platforms can be good for all involved. Dominic Venturo, chief innovation officer for U.S. Bancorp, offers the example of working with Blend, a San Francisco fintech company. Using a set of APIs from Blend, U.S. Bancorp can allow potential mortgage borrowers to authenticate bank balances and other loan documentation electronically.
“It makes for a better customer experience. Because we’re doing the validation without paper, in real time, we can make a lending decision in minutes instead of weeks,” Venturo said. “And it’s good for us. We’re reducing all the data entry, validation, audit and review expenses by ingesting the data directly, and it’s a faster time to revenue.”
In this case, customers don’t necessarily know they are using a Blend API, as the service is offered through the bank seamlessly.
But with what’s envisioned for some marketplaces, customers would be accessing the services of others more directly.
The downside is that if a bank can’t compete on deposit rates or loan products offered by someone else on its platform — by definition, very likely — it would only get a small fee for playing the role of marketplace middleman.
“If you’re being open and showcasing the best of what the market has to offer, the question is how you offset the cannibalization risk of having your customers choose someone else’s products over yours,” said Alan McIntyre, senior managing director for banking at Accenture.
“For many traditional banks, the core asset-liability aspect is going to make it very hard to offer these services without ruining the economics,” McIntyre said. “If you make $4,000 a year off the spread on a small-business loan, that’s tough to replace.”
Conversely, a bank might become a specialist in a niche and market its products on other banks’ (or other companies’) platforms. Like a Netflix filmmaker, those who create competitive platform content can do well.
Shevlin tells of one big bank that seems “more intent” on embedding its products on other platforms than opening its platform to competitors.
In the platform world, the battle for customers can be intense and global, and you take what you can get.
“The whole idea here is to be able to distribute products and services on both your channels and other channels and expand your footprint,” said Abhishek Gupta, the San Francisco-based chief executive of the new BBVA Open Platform, a unit of BBVA Compass.
Adapting to profound change
For now, innovation labs and IT departments of most big banks (and many smaller ones) are working to figure out how best to capitalize on — or at least avoid being swallowed up by — an evolution spurred by the emergence of faster, cheaper cloud technologies and an explosion of fintech activity.
They’re digesting volumes of consultant reports on the topic, training employees on the nuances of operating in open environments and eyeing each other — and
The most ambitious are reconfiguring their technology backbones, in part to allow them to compete in a platform economy. Capital One, for example, is in the midst of migrating its in-house back-office system to Amazon Web Services.
For banks that want to embrace a platform-based business model, moving to the cloud — with its speed, flexibility and cost benefits — is viewed as basic table stakes.
“The challenge is that banks don’t have the right infrastructure that platforms need to engage and expand,” Deloitte’s Shilling said.
Platform models can represent such profound change that a bank’s leadership must lead the cultural charge and provide the resources needed to transition to a new business model.
U.S. Bancorp, which uses APIs in businesses such as mortgage and payments, runs an internal “API Center of Excellence” where employees learn to create products that meet rigid process and risk-management standards.
“We do internal training and hackathons where we have people spending free time building APIs to get experience,” Venturo said. “It’s like anything else that’s new; folks need to be trained to do it right.”
Experimentation is the norm. The space is new enough, and there are so many possibilities of how things might play out, that there’s no one “best” way to proceed.
Some are throwing open their own platforms to create a marketplace of solutions — some their own, some from fintechs — that give customers more options.
BBVA’s Open Platform boasts products in six core banking areas, all accessible to customers through APIs. Providers are vetted, and then their software is put on the platform.
The bank’s role is as much a one-stop facilitator of trade as it is a manufacturer.
White said it’s all in response to strong demand from customers. Though only a handful of BBVA business customers were up and running on the platform in December, “hundreds” have expressed interest.
“We’re very much of the view that we will become an Amazon of banking,” White said. “We do not own the end-to-end customer experience, nor do we manufacture all the products and services — some of that comes from fintechs in our ecosystem.
“It enables the bank to create products and services that are highly personalized and tailored to customer needs,” he added.
Others are looking to partner directly with big nonbank platforms like Amazon or Facebook. Reports last spring that JPMorgan Chase was
Citi has been working in recent years with
“We see deeper engagement with us through WeChat than through the CitiPay app or website,” Gavin Michael, head of technology for Citi’s global consumer bank, said in an April interview.
As individual banks scramble to leverage the power of platforms to find a competitive advantage, there’s room for creativity. McIntyre predicts a wide variety of “hybrid” models will emerge in the next few years, many piggybacking on customers’ platform strategies.
For a community bank without the horsepower to compete on products, the smart play might be to partner with a fintech, or group of fintechs, that have a more compelling array of products and services. Its banking charter and blessing from the Federal Deposit Insurance Corp. are advantages that fintechs lack, at least for now.
“There will still be value in the charter and the FDIC insurance, but they’re not going to originate a lot of their own assets and liabilities,” McIntyre said. “They will become a balance sheet for rent.”
At the $4 billion-asset Live Oak Bank in Wilmington, N.C., CEO James “Chip” Mahan dreams of using his bank’s platform to provide bank accounts to the customers of online stock traders. “How could we partner with a company like that to give its customers an FDIC-insured account?” he asked.
Mahan also said that Live Oak, a branchless bank, aims to expand an already sizable veterinary lending business by using APIs to incorporate its services into the three practice-management software systems widely used by veterinarians.
“With an open API core, we can bundle our products with the solutions offered to every veterinary practice in America,” he said. “Bank accounts and loans are commodities in the platform world. You need partners to thrive.”
At Eastern Bank, Westermann’s team has been working on a platform strategy that focuses on placing the bank at the center of a community, connecting customers with each other.
It might be promoting a discount to retail customers who use an Eastern credit card at a hardware-store client, or creating an app that brings together an office supply store with a group of bank customers to get bulk discounts.
Eastern also has a growing set of “ancillary products” for small businesses on its platform, such as a “digital assistant” that uses artificial intelligence to predict cash flows and sharpen a client’s understanding of its customers’ behaviors.
“It’s about augmenting the basic banking experience by leveraging the power of the network,” Westermann said. “As technology brings the costs of switching banks down for customers, we want to use technology to create more stickiness in the relationship.”
Especially for smaller financial institutions, the work and potential expense behind pursuing even a partial platform approach can sound daunting. As the model becomes more popular, platform companies have emerged to help them get involved.
Constellation Digital Partners in Raleigh, N.C., was started by a consortium of credit unions to provide these small institutions with access to newfangled online and mobile apps in simple plug-and-play fashion. The company, which plans to allow other credit unions to join in the near future, claims that its services are unique because other such platforms are designed to serve a single financial institution — such as in the case of BBVA’s Open Platform.
Constellation’s platform acts as a secure bridge between fintechs and less-techie institutions, helping participants “try things without needing to buy $400,000 in servers to figure out it doesn’t work,” said CEO Kris Kovacs.
The same model could apply to community banks, Kovacs said.
“A community institution can spin things up and wind them down as needed. It gives the opportunity to experiment without making big investments, and helps fight the idea that those community institutions can’t provide the latest technology,” he said.
A growing number of banks are using platforms to drive sales. Shevlin points to LendKey, a student-loan platform that helps create and aggregate demand. LendKey allows banks to use their strengths, such as underwriting and risk management, while not having to pay high marketing costs.
“There are benefits in platforms, but most of them are less about the bank becoming a platform and more about leveraging platforms to lower customer acquisition costs,” Shevlin said.
There was a time, 20 years ago, when the industry didn’t know what to make of the internet hype, but eventually it figured things out. The same will happen with platforms. And as with the internet, the impact could be profound.
As platforms continue to generate profits, headlines and confusion, banks are likely to feel greater pressure to jump into the fray. While they might not be able to avoid some disruption, they shouldn’t panic.
“Things are changing and you should educate yourself,” Cusumano said. “But in a regulated industry like banking, it’s more of an evolution than a revolution.”
