Platform thinking: Why platform business models represent a double-edged sword for big banks


The term “platform business” has become one of the hottest buzzwords in business in recent years, much like “disruption” before it. In fact, the two terms are often used in the same sentence. This is especially true when it comes to Airbnb and Uber, which have become popular examples of both terms. However, Uber and Airbnb only represent a small share of what is also referred to as the “platform economy”. In fact, five of the world's most valuable companies are now platform businesses, up from just one in 2007.

This raises the question, what is a platform business and how is it different from a traditional business model, also referred to as pipeline business? A traditional business model is a single-sided model focused on bringing goods or services along a linear value chain, a pipeline, with clearly defined suppliers and customers. In contrast, a platform business model is a multi-sided model focused on facilitating an interaction between the producer and consumer. The interaction element is core to a platform model, and consequently the value chain is not linear.

There are many examples of platform business models, as well as Uber and Airbnb we also have companies like Amazon and WeChat. Despite the fact that these successful platforms businesses now operate across vastly different industries, they all share common traits such as a rapid growth rate, disruptive impact on industry profitability and customer relationships, and a winner-take-all market dominance

For incumbents, platforms represent not only a potential threat but also an unmatched opportunity. A handful of companies have successfully pivoted their business model towards the platform economy by opening themselves up to both consumers and producers, and by doing so establish new revenue streams and market dominance. Perhaps the two best examples of such a strategic pivot are Amazon and Apple, with their marketplace and app store, respectively.

Despite the massive success of platform models, the global banking industry has yet to see the emergence of the Uber of banking. However, with global Fintech investment still rising, increasing interest from big tech, and the regulatory catalyst of PSD2, the platform revolution in banking could be right around the corner.

The world's top banks, particularly those heavily exposed to the retail sector are increasingly becoming aware of both the risks and opportunities associated with the platform economy. That awareness is being accelerated by PSD2 as banking is set to become more open, more competitive,and with more empowered consumers. The truly innovative banks will respond to PSD2 by increasing their openness beyond what is legally required in an effort to take a dominant position in the platform economy.

A number of large retail banks in Europe are in the process of strategically assessing what position in the platform economy they can take. Most large banks already hold strong technological platforms with significant consumer bases, however, their producer side consists almost exclusively of the banks' own financial products and services. Their challenge is how to pivot this existing model towards an open platform where third parties can increasingly operate as producers and providers of services. To successfully design a platform and take a truly dominant position on it, banks must first focus on facilitating interactions and how they can create value to both the consumer and producer side of the market.

The process of pivoting to increased openness to both sides of the market is often viewed as one which requires a trade-off between the different interests and clouded by fears of giving away competitive advantage. However, if the pivot is designed and managed strategically, the need for this kind of trade-off disappears.

We've been working with Sangeet Choudary, an MIT professor and author of two books on platforms, to develop a methodology that effectively and comprehensively designs a platform strategy that can minimise the need for trade-offs. Using our methodology with one of Europe's leading banks, they've recognised that the future of banking is evolving around platform models and are creating a structured process for designing a platform model.

Developing the Uber of banking is the subject of a fiercely intense competition between big banks, nimble start-ups and big tech. Applying the latest knowledge and adopting a proven methodology could give the players the vital edge they need to succeed.

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