Dr. Tim Sievers, Founder and CEO of Deposit Solutions
Five of the ten most valuable companies in the world today pursue a platform strategy. Central to the success of this approach is a focus on becoming the single source for their customers’ needs. To this end, the company’s own range of products and services is expanded to include products and services from other players in the market.
The advent of “Open Banking” has paved the way for this model to flourish in the financial sector and is already encouraging banks to review their business models, making lasting changes to the ways in which banks relate to one another.
Platform strategies separate the product supplier from the customer relationship, helping create competitive advantages for both parties. Very few banks can offer the best products in every segment of the market in the traditional self-contained approach. With the help of a platform strategy, banks can put together an optimal choice of both their own products and those of third-parties to compete across the full spectrum of the market, aiding both customer retention and acquisition. Product suppliers, on the other hand, achieve additional sales and reach new target groups by providing their services via the platform – without having to invest in the necessary marketing or customer acquisition themselves.
Since platforms in the digital economy are no longer limited by distance, the European internal market is also given a new lease of life by this differentiation of roles. The customer experience remains local, even if the product supplier has its origins in another European country. This is in part why the idea of a single European financial market is becoming a mounting reality.
Of course, the underlying principle is not new to the financial industry. Before “Open Banking” was even conceived, using the practice of “open architecture” banking in certain product segments was long open to third-party providers – initially for investment funds – but also since the late 1990s for mortgage loans and later for structured products. In the wake of these developments, corresponding infrastructure providers have emerged in these areas, such as transaction platforms in the investment fund sector.
Now though, “Open Banking” is extending the “open architecture” principle to reach even more product categories – including savings deposits, which at USD 50 trillion worldwide is one of the largest and most relevant product categories for end-customers.
Another new occurrence is the matter-of-fact way that end-customers regard “Open Banking” product offerings and demand easy access to attractive solutions from their bank. Today, if the customer does not find an attractive offer in an important product category at their bank, they will look for a solution elsewhere – falling exchange costs and increasing market transparency act as catalysts for this development. Both policy and regulations also promote and even demand further opening of the banking sector. Thus, the European Payment Services Directive PSD2 now even allows providers without a banking licence to access account information for their customers and to initiate payment processes – therefore enabling them to enter the competition for the financial point-of-sale.
Of course, when opening up to third-party products, banks must always take into account the possible cannibalisation of their own product margins. A platform strategy, therefore, requires courage. However, industry leaders with large customer bases and established brands have enormous opportunities to use third-party products to expand the level of business with their own customers, while at the same time gaining new customers.
For many banks, the growing interest in platform strategies is also a response to increased competition for the customer relationship. Challenger banks and other fintechs actively compete with traditional institutions. They often focus on a few anchor products for customer acquisition and then try to monetise their newly won customers across all product categories. But even established players from outside the banking realm, such as Amazon or Apple, have also begun skipping established product boundaries, penetrating traditional banking worlds in the process.
Therefore, for most banks, the integration of platforms into their own business model and the associated opening up of customer offerings to third-party providers will likely be unavoidable in the long term. In addition to product margins, earnings from commissions will also gain in importance as a source of income. The success of platform banking to date has already led most banks to realise that a decisive factor is emerging: if you don’t open your customer relationship to third-party products, you won’t maintain the margin – you’ll lose the customer instead.