Banks are gatekeepers. As digital platforms they work only rarely, but that's still what they all want to be, Patrick Hunger writes in an essay for finews.first.
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At times, digitization has companies devise some awkward smokescreens. Banks try not to fall victim of the voracious tech giants by turning themselves into digital platforms – much like the mimic octopus, probably the most brilliant of actors in the animal world, using changes to structure and color to deter enemies.
A sober appreciation of the peculiarities of platform economics shows that the banks' copying efforts are primarily aimed at helping them survive, notwithstanding their occasional inventiveness. This is in keeping with the animal world. If banks wanted to emancipate structurally, to dispose of their role as industry victims and to shape their future in an active and transforming way, it doesn't suffice to be an actor in somebody’s else role.
«Banks traditionally embody the antithesis of the platform economics»
Platforms such as Google, Facebook, Amazon, Uber and Airbnb are synonymous for economic dominance in the digital world. Platforms enable value-added interaction between users, building on their core activities. The preconditions for such value creation are mainly positive network effects on the basis of an efficient scaling of demand. If we take Uber as an example, more demand leads to more drivers, a better network and shorter waiting times.
Banks by contrast traditionally embody the antithesis of the platform economics. Based on their product pipeline business model, banks keep a tight hold over their clients, much like gatekeepers. They control value creation by way of supply-side scaling. Their focus is not an efficient value creation.
This gatekeeping business has been under pressure for considerable time. Fintechs have manifestly exposed the weaknesses of inefficient value creation chains and their vulnerability to competitors. They also have set new standards for content and speed of innovation as well as customer expectations. They have been less successful in measurably increasing bank customers’ readiness to switch or to build alternative infrastructure.
«The business model discussion seems about to be changing»
The disruption of the finance industry through fintech hasn’t happened, a fact exploited by banks to make good lost ground on digitization and to use fintech as an innovation and technology supermarket. But hardly anything has changed in respect to their one-dimensional relation to the outside world – with the customer remaining customer only. The banks retain their hold over product pipeline and value creation, in some cases together with network partners.
But the business model discussion seems about to be changing. GAFAMs (Google, Apple, Facebook, Amazon, Microsoft) and BATs (Baidu, Alipay, Tencent) are behind this shift. The tech giants as well as some successful platforms (including Ebay, Twitter and Snapchat) have mastered the underlying challenge of platform economics: users don’t visit platforms without some value gain, and a platform has no added value without users.
«This dynamic in particular is a cause for alarm at the banks»
Overcoming the chicken-and-egg problem ends in network gravitation, or in other words the positive network effects with a corresponding – new – user loyalty. Successful platforms scale beyond their core activities to additional activities in a bid to maintain this pull or virtuous cycle economy. Among those are financial services made attractive to non-finance companies by regulatory initiatives such as PSD2. As a result you get distribution champions gradually grow in (data) mass and orchestrate or even dominate the client journey in a diversified manner, such as WeChat.
And it is this dynamic in particular of «beyond the core interaction» that is a cause for alarm at the banks. The business model discussion has moved beyond network partnering discussed in the context of fintech. More to the point, it is distribution which has moved to the fore. The user loyalty to platforms mentioned earlier increases the danger for banks that they will lose the power over communication and distribution and to be reduced to being a mere product provider.
«This is the biggest weakness of the banks»
The fundamental question therefore is whether banks hold the mentioned platform idiosyncracies or if they are able to develop them. The answer is probably no. But for a few exceptions they lack the potential to achieve the mentioned network gravity through their core business and to win the «war for mindshare».
And this probably is the biggest weakness of the banks: their core activity in the context of the client journey nowadays in most cases isn’t sufficient and not social enough – i.e. compassionate and supportive. More to the point, banks are basically forced to provide services that are peripheral within the context of the customers' social environment on the basis of low or no impact – for instance through chatbots, optimized for the benefit of the customer – to allow clients to pursue digital activities that are more social and in keeping with the Zuckerberg diction that time spent on digital platforms is time well spent.
«What then would I be as bank?»
The wish of many banks to be digital platforms isn’t sustainable but merely remotely controlled artistry. The future belongs to the distribution champions. They are technological trendsetters as well and the autonomous implementation of artificial intelligence by banks is intrinsically less intelligent. The discussion of how a traditional bank can successfully attach to a multi-provider platform and how it can position itself is therefore more promising.
What would happen if a bank would assign sovereignty over data and profile in all its consequence to the client? If the client would define his (social) needs for transactions and if user control, in particular with third parties, were to be in the hands of customers? Would such a client-steered relationship finally make open banking tangible and redefine the logic of inclusion fostered specifically by tech giants? What then would I be as bank?
Patrick Hunger, 47, was appointed chief executive officer of Saxo Bank (Switzerland) in September 2016. He is responsible for growing the business for active traders, investors and wholesale clients, and for positioning Saxo Bank as partner in digital transformation. Previously he worked for Credit Suisse Trust, most recently as general counsel and member of the management board. He graduated at University of Zurich and holds an EMBA from University of Zurich as well as an Executive Master in organizational psychology from INSEAD, Fontainebleau.
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