The most significant tendency that we’re observing in 2016 is the “platformication” of the bank, where both of the Fintech (FI) and Banking systems interact strategically and produce mutually beneficial synergies, something similar to Amazon in the retail world.
In an interview some time ago, by the Diario Financiero, I commented that in Chile we’re in a period of evolution from Banking towards Fintech, in Spain they’ve received approval and in the UK and Germany, pioneering countries, they’re already in the age of collaboration.
This is an upward trend, where both players are beginning to understand that they’re not mutually exclusive, on one hand, a change in the paradigm of the traditional system is required, yet on the other hand, the collaboration by those who have for years continue to believe that having a business with high entry barriers and without large structural changes that today can be seen being surpassed by technology.
For the first Banking generation (G1), the competitive advantage was based on infrastructure, brand building, and required a large investment and high operational cost. The second generation (G2), where the majority of local banks are found, took the same products being offered, and brought them to the digital world; they’re owners of their own technology and develop their own products, a sort of debunker exclusively for their clients. This has shown to require an extremely high investment and be slow in it’s development (a top executive from a global bank told us that it’s a great achievement to produce 4 new products a year).
“As a client you don’t care where the consumer credit originates, it might be from Santander Bank, BICE or a specialized platform. What matters to you is that the service is user-friendly, fast, and as cheap as possible.”
The third banking generation (G3) comes to present a completely different system from what we’ve seen so far, where a bank can connect to multiple Fintechs (specialists in a certain topic), have a low investment and associated operational costs and can launch multiple solutions depending on the achieved integration. Consequently, they should orchestrate a business model focused on the advantages that the FI offers as well as a fast integration of new solutions. We will undeniably see a migration from the traditional banking system to one based on the profiteering of the platforms.
The irruption of technology — or better, or technological architects — in finance, obeys a very distinct logic from those who are behind traditional banking, where there is a search to maximize short-term profit (we observed solely the annual compensation system this year), those who are behind the technology companies look to create a product that’s 10x, i.e. that substantially improves the current conditions — what we call a disturbance — that logic explains the boom that has seen experimentation from the FI’s, where only this year they have accumulated investments for 9.4 billion dollars in 374 settlements, indications that an massive change is coming.
But, what is platformication?
To dive deeper in the discussion, it’s necessary to clarify that we understand per platform: a business model of plug-and-play, that allows multiple participants (providers and consumers) to connect and interact among themselves creating and sharing value. (see article by Ron Shevlin) This is how the degree of specialization and efficiency that a Fintech has on a topic can be used by traditional banking if correct integration is accomplished, a true headache for those who have tried it. This formula makes more sense if we consider that the bank possesses a banking license, has a developed back-end core and that they have a large number of customers hungry for better service.
In the coming years we’ll see two possible paths (see image of banking disaggregation): (1) That the bank creates a platform, with the respective opening of it API to hundreds of Fintechs and developers, making the data available so as to build on top of the platform, and where any supplier — adjusted to the required standards — will be able to connect its products to the platform. (2) The emergence of a third party with an intermediary platform that interacts not only with one bank but with hundreds of banks and hundreds of Fintechs that connect on a platform that does not only represent one party with the vices and/or biases that it might possess.
It’s clearly immeasurable the number of challenges the era of integration and bank opening will bring with it, (starting with the resistance to the change of it’s current culture, until how the treatment of the fragmentation in the user experience when connecting to multiple platforms). What we do have clear today, is that we’re about to have the next financial revolution.