Do You Really Want to be the Next Big Banking Platform?

As is the case at many large organizations, when leaders at banks form a digital vision, it’s often to become the next big banking platform — i.e., the gravitational center of an ecosystem, the Netflix, Uber, Google or Amazon of its industry.

These sorts of visions can be enticing. But they’re remarkably difficult to execute. Organizations need to consider whether they have the resources, personnel, and will to pursue such a course — and even if they do, they may also need a bit of luck on their side.

To be sure, by virtue of changing regulations and customer behavior, most banks’ futures will probably involve ecosystems. But for many, the most lucrative path may not be aspiring to be the platform at the center so much as leveraging other ecosystem participants to offer better services and reach new customers and markets.

The Rise of Banking Platforms

Historically, banks provided financial services to people and businesses in local towns. Because these regional ecosystems were tailored to the contexts and needs of those nearby, local branches have served their communities well for generations and grown accustomed to owning many aspects of the customer experience.

In today’s digital era, however, customers are no longer limited to offerings in the local ecosystem. Customers who bank with traditional institutions increasingly manage their finances via apps rather than brick-and-mortar branches, and new, digitally-native fintech companies are increasingly usurping functions that used to belong to legacy banks. For customers, the expanded catalogue of offerings is a clear benefit — but as activity has become fragmented across more services and less beholden to geography, banks have sometimes found themselves at a disadvantage.

Many banks face an incomplete view of a customers’ holistic financial status, for example, and thus possess incomplete data for launching new functionality, such as a service that provides personalized advice for managing money. A bank may know that a customer transferred funds to some third-party digital wallet or payments platform, for example, but visibility beyond that may be nil.

It’s no surprise, then, that some banks have attempted to unify customers’ various banking activities into a single view or to otherwise leverage disparate data sources for new services — but in doing so, are they more likely to achieve success by focusing on becoming the core platform at the center of customer experiences (i.e., the banking equivalent of Google Maps or Facebook) or one of the participants leveraging other platforms within an ecosystem?

What Does it Take to Become a Major Banking Platform?

To create a digital platform that generates an ecosystem around it, several key foundational conditions generally need to be in place:

• The bank has excellent API products: To be at the core of an ecosystem, a bank’s platform needs to provide capabilities that other financial platforms want to take advantage of, which means the bank needs application programming interfaces, or APIs, to makes those capabilities easy for third parties to consume. These APIs should be designed and managed not merely to expose systems but as products that empower developers and partners. Building a strong, well-managed API platform is one of the foundations to attracting an ecosystem around a company’s services.
• The bank possesses uniquely valuable assets and/or a robust R&D budget: A huge ecosystem probably won’t form around APIs that offer access to run-of-the-mill information, like bank branch location data, or that merely provide minimal compliance with regulations, such as open banking mandates that financial institutions provide third parties access to account information and payment initiation. To attract an ecosystem, most banks will need differentiated, compelling offerings — and the budget and talent to keep them on the cutting edge.
• The bank derives strategies from a data-driven, outside-in perspective: When banks had a monopoly on services and data, they could roll out ideas slowly and deliberately, and they could afford to rely on internal intuition about what customers might want. Because today’s customers have so many options, banks should become laser-focused on what those customers need. Banks should collect data about how customers interact with their products, and they should use this information to form strategies and improve services. They must also expand the definition of “customer” — it’s not just end users but also the developers and partners leveraging APIs.
• The bank cultivates strong relationships with developers. Outstanding services and API products don’t sell themselves. From investing in real-time monitoring that provides insight into developers’ use of APIs to establishing a presence at important developer conferences to assigning full-time developer evangelists to build relationships, successful platform companies are typically among those with the strongest ties to developer communities.
• The bank is first to its market. Once a developer community and a base of end users have adopted a given platform, it becomes that much harder for competing platforms to make strides. Being later to market doesn’t preclude a bank from success — but it increases the burden on all the other conditions for platform growth.

If the above sounds like a tall mountain to climb, you’re right — and it may be even taller than it seems once you consider all the ripple effects these conditions impose. A bank generally can’t just decide one day to start making API products that will appeal to developers — it will also likely need to adjust funding mechanisms to allow for continuous iteration of APIs, implement new governance models that allow developers to make the most of APIs, adopt new metrics centered around API consumption and ecosystem growth, invest in hiring developers, align IT and business units on the value of the new vision, and so on. While no mountain is too high, not all businesses are currently equipped for the climb.

There is Another Way

When a bank tries to be the platform driving an ecosystem, its technology typically has to support the coordination of suppliers and consumers throughout the bulk of the entire ecosystem. But when a bank is one of the participants in an ecosystem that is anchored by some other company’s platform, its responsibilities may be significantly more modest and its opportunities for success may be significantly more diverse.

For example, suppose a bank has historically specialized in student loans but possesses no real expertise or experience in other areas, such as mortgage services. This bank could try to fill in these holes in its portfolio in an attempt to become a more all-encompassing platform — or it could focus on services in its area of expertise, piggybacking off an existing platform to promote scale and adaption.

The bank might partner via APIs with another platform to offer additional services, for example, allowing it to provide better experiences for its customers without building expensive new resources from scratch. Or the bank might use its APIs to allow others to layer their own technology atop the bank’s student loans data and functionality, increasing the variety of end users reliant on the bank’s services even if those services aren’t always front and center in the app experience.

This last example can be particularly interesting and challenging for bank leaders. Many banks are attracted to ecosystem-spawning platform capabilities because the banks’ leaders are accustomed to seeing themselves at the forefront of the end user experience. If you’re the big platform through which everyone else exchanges value, your logo is always there, reinforcing the brand. It can be difficult to embrace strategies in which someone else’s logo is in the spotlight.

But being the visible focus of end user interactions won’t be achievable for all organizations, especially because it increases a bank’s responsibilities toward both end users and all the other companies participating in the ecosystem. When a company is attempting to leverage an existing ecosystem for scale or to fill go-to-market gaps, it doesn’t need to have the internal capabilities or R&D budgets of a gravitational platform. Entering a saturated market will always be hard, but banks that attempt to participate in ecosystems, rather than form them, may find there is less pressure to be the first to bring a new capability to market. They’ll likely still need to invest in developer talent but they may find that their ramp-up curve isn’t as steep. They’ll still need excellent API products but may find they can develop and improve them more organically and iteratively, rather than facing the pressure to satisfy a huge developer community with the first release.

In short, it’s easy to see why banks, and large enterprises in general, are tempted to envision themselves as big platforms — but for many of them, it may not be the best way forward. Becoming the platform at the center of an ecosystem is incredibly difficult and can be prohibitively expensive, but leveraging an existing ecosystem for scale and new capabilities — even if it sometimes means moving a bank’s brand to the background — can lead to results fast.

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