Platform economy in banking

In a world where artificial intelligence (AI) is firmly established and the platform economy is becoming an emerging topic, it is time to take a closer look at the implications of the platform economy for the banking industry. While the trend is still slowly gaining momentum in the European market environment, it has become indispensable in the Asian and US markets thanks to companies such as WeChat, AliPay and ApplePay. Platform banking was therefore one of the key topics at the Handelsblatt BankingTech annual conference. This is not the only reason why the Intero Consulting Banking Trend Monitor 2023 rated this trend as up-and-coming and close to the "launch phase". (Further information can be found HERE)

This article examines the emerging trend in detail and ventures a competitive analysis of the European and German markets

 

Platform economy - a general definition

The platform economy refers to internet-based business models that bring providers and customers together on a digital marketplace. The benefits range from regular sales to the use of downstream products such as subscriptions and services. Globally recognised examples from non-banking sectors include giants such as Amazon, Ebay, Spotify and Airbnb.

 

Drivers and success factors of the platform economy in banking

The platform economy in the banking sector is driven by external factors, such as customer needs, technology (including AI, APIs and regulation), as well as internal drivers, such as expanding the offering, increasing efficiency and access to technologies and markets. Of particular relevance is regulation, which promotes open banking. Open banking includes systems that enable the exchange of financial data between users and external partners. Regulatory and yet innovative milestones here are the Payment Service Directive 2 (PSD2) from 2018 and the announced FIDA regulation, which will be discussed later in the text.

However, a platform is only successful if it has a certain reach, scalability, trust and efficient IT systems. In our experience, specific success factors for banking platforms are a broad product and service offering, a clear customer journey and functionality without exceptions.

In the banking environment, FinTechs and BigTechs are accelerating this change by quickly seizing on the drivers and promises of success.

 

Business models in platform banking

Banks can pursue various business models in the platform, which differ primarily in the role of the bank and the depth of the offering. The most common models are

• Bank-as-an-Utility-Sheet (offering banking products on other platforms),
• Banking-as-a-Service (offering infrastructures/bank licences),
• Customer experience (partnerships between banks and non-bank companies for a better user experience) and
• Banking-as-a-platform (the bank as operator of its own platform).

There are prominent examples of all models, clearly visualised in the diagram. International competitors such as ApplePay are focussing on the customer experience model by entering into partnerships with banks such as Goldman Sachs, while WeChat and AliPay are pursuing the banking-as-a-platform model.

The selection of the appropriate model for a bank depends on the evaluation of the market drivers or success factors. The following illustration shows both examples and advantages of the models:

Since the introduction of PSD2, platform banking has also been gaining momentum in Europe. Since then, start-ups as well as large US tech companies such as Apple and Google have gradually introduced platform banking services to the European market and have since seen their market share grow steadily. One example is the introduction of Google Pay at the time of the introduction of the new payment directive in 2018. The background for the market entry of the BigTechs was the possibility now created to access bank data via interfaces (APIs). But where do the German banks stand?

The top dogs of large and medium-sized German banks such as Hypo Vereinsbank, Deutsche Bank and the savings banks in particular are currently still reluctant to address this issue. These market players are primarily focussing on expanding partnerships, such as the range of intragroup insurance products offered by the savings banks, and have hardly invested in platform banking in recent years. Their activities in the area of "Bank as a utility & balance sheet" are primarily recognised - for example through the connection to the mortgage lending platform Interhyp.

The situation is different in the area of challenger banks such as N26, Solaris, Qonto and Revolut. They are picking up on the trend and actively recruiting participants for their platforms. N26, for example, is building a banking-as-a-platform model by integrating various services from other companies such as Barzahlen, auxmoney, TransferWise and Allianz into its app. Solaris Bank's Banking-as-a-Service model, on the other hand, focuses on providing banking licences for non-bank companies to offer banking services under their own name.

The Scandinavian private bank SEB, Sweden's largest universal bank, can be seen as a ray of hope on the major European banking market. With its SEB Embedded product, the bank offers banking-as-a-service for retail customers, making it a pioneer in the large banking market.

The proposed introduction of FIDA in June 2023 with the aim of greater innovation and data protection will further increase the competitive pressure on the major German banks. FIDA will give customers more control over all their own financial data and thus complete the transformation from open banking to open finance. In future, it will be possible to share all financial data with the providers specified by the customer at the touch of a button via data sharing. This may further accelerate the platform trend, as customers will be able to design their own personalised financial home - i.e. a provider that they consider suitable, possibly outside the bank, and which manages all financial data via interfaces. This proposed framework can be an advantage not only for customers, but also for challenger banks in particular - but represents an enormous challenge for large banks.

The platform economy is on the rise in banking, and international providers and start-ups are ahead of the EU top dogs. With the announced regulatory liberalisation of the EU market, the major German banks should now take up the trend in order to defend their market share.

 

We are happy to help you with our expertise, especially in the area of IT transformation of major German banks, to make the appropriate adjustments. Get in touch with us!

 

Sources:

Heinemann, G., Kannen, K., & Bleil, S. (2020). Platform economy and eCommerce in banking: basics, platform business models, options and solutions. Springer Fachmedien Wiesbaden GmbH.

Junghanns, H., Niebudek, M., & Partner, P. D. (2019). Platform Banking & Digital Ecosystems. Cooperation with third-party providers as an important factor for providing a wide range of services and products. PwC. Available online at www.pwc.de/de/finanzdienstleistungen/studyplatform-banking-and-digital-ecosystems.