Out-Law Analysis | 29 Jun 2022 | 3:22 pm | 3 min. read
Financial institutions that can create platforms and populate them with products and services curated to attract customers will be the ones that rise to the top in an increasingly digital-first marketplace.
Platform delivery could be the next big step-change in financial services technology. The brand power that the established financial institutions have puts them in unique position to become the marketplace for apps and facilitate more agile products and services, without having to do all of the development in-house.
Much is made of the agility and speed to market of innovative fintechs – but established financial institutions have the benefits of a trusted brand and established customer base. Through effective collaboration both players will benefit – as, ultimately, will customers.
Historically, banks have focused on controlling their systems internally, taking a ‘build not buy’ approach to new products and services. The growth of open banking, and the move to application programming interfaces (API), is radically changing this approach. The market is shifting towards a more collaborative environment where banks may do some of their own development but will also partner with others, such as fintechs, to get interesting products and services in front of customers.
We are seeing the shift towards delivery of products and services through platforms across all sectors. There is a frequently-cited quote from TechCrunch: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.”
That “something interesting” is about the value in platforms to create connectivity between a customer and the products and services that the customer wants.
The rise of platforms can be linked back to the cloud: it is the ability to access computing power and data storage in the cloud that enables many platform businesses to develop. For established financial institutions, engaging in the new platforms economy is bound to be a driver of movement to the cloud, since it enables the kind of openness and collaboration that is essential to successful engagement and that is not possible with closed, legacy systems.
The platform-based approach opens up opportunities for financial institutions beyond what is traditionally considered to be a ‘financial service’. We will increasingly see the involvement of financial institutions in platforms evolve into participation in broader platforms that are not exclusively financial services-focused. For example, a bank offering mortgages could participate in a digital platform that facilitates all aspects of home buying, not just the financial services aspects.
There are also already examples of collaboration between financial institutions and the automotive industry. These demonstrate the potential for cars to become effectively like digital wallets – the location from which payments not only for fuel and parking are made, but also many other day-to-day purchases.
Another new opportunity arises in relation to the provision of financial services solutions ‘as a service – for example, the provision of ‘risk analytics as a service’ using the extensive data held by a financial institution, or the move to embedded finance solutions. Many commentators also see the provision of ‘banking-as-a-service’ as a smart response by banks to the potential for loss of business to embedded finance providers. With the right technology in place, this could offer banks a low margin, high volume business line.
Speed to market and the ability to be entrepreneurial is key to developing some of these new ventures, which links back to the need to have the right culture in the financial institution, often including a willingness to collaborate with fintechs.
The relationships which platforms enable financial institutions to create will not in many circumstances fit into agency, distribution, supplier/customer, joint venture, outsourcing or subcontracting models for which the extent to which risks may be retained, shared or transferred is often well-established. A thorough understanding of how legal and regulatory requirements impact on risk in the context of these new types of relationships needs to be specifically investigated and addressed.
Data sharing requirements, intellectual property protection, dispute resolution procedures and complaints management mechanisms in these contexts may need to be handled in ways bespoke to the specific type of arrangement. It may not be sufficient to simply rely on what has worked in a related but different context.
It is obvious that technology is fundamental to change in financial institutions, and business-focused investment in technology will be key to success. Cloud adoption is a fundamental element of business transformation for financial institutions along with embracing the “brave new world” of platforms.
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