Platforms have disrupted the world. It is time for banks to adapt.
Platforms have disrupted the world. It is time for banks to adapt.
Preparing to launch
Uber may not own a car nor Airbnb own any property, but these firms are among the most valuable in the world. As platforms, they are in good company. Most business apps on our smartphones are platforms, helping users to order groceries, book a vacation or purchase a luxury watch.
What are platforms? In simple terms, a platform is a business that connects producers to consumers, enabling them to transact.
Platforms have outperformed traditional business models for a decade. As Michael Porter has explained, a traditional business has a linear value chain, where the product undergoes step improvements in value towards the final output, which is sold at a premium. This business invests upfront and then reduces the marginal cost of production by lowering price and creating an entry barrier. We can think of this business as a pipeline business.
But these businesses have been overtaken by platforms for several reasons:
- Value. Platforms can create value because they can bring multiple producers and different propositions to consumers without the marginal cost of production incurred by pipeline businesses. They can pivot the products and services or add complementary services more easily than can pipeline business.
- Efficiency. Platforms eliminate other intermediaries, in the process being competitive on pricing.
- Networks. Platforms thrive on network effects, which lock in users. Platforms build open electronic ecosystems for millions of remote participants and can be larger than most pipeline-based organisations. The data generated from these users helps in refining the experience further, in turn attracting more users.
Platforms can give banks a stronger value proposition
Most industries have been disrupted by platforms. But banking has been a rare exception. So, should banks become platforms?
We can quickly discount two classic reasons for embracing a platform – banks have no need for economies of scale (they have that already) nor are network effects relevant (most deposit customers stick with their bank).
However, there are credible reasons for banks to consider becoming platforms.
Platforms can allow banks to provide a stronger value proposition, thereby enhancing customer experience and increasing share of wallet. Banks can establish partnerships and then enable frictionless transactions. No customer wakes up in the morning thinking about banking products, but most people aspire for products like a house, a car and a high-definition television. Most customers consider banks as a necessary pain, but banks enable customers to purchase these products.
Additionally, banks have much more customer data than do most e-commerce or social network companies. Data is the rocket fuel to propel a platform, an issue we return to later in this article.
The challenge is to convert a traditional business into a platform business. One strategy is for banks to start by using cost advantages to create value and then differentiate on a platform.
Banks typically use two types of platform architecture: banking as a platform (BaaP), where banks are orchestrators; and banking as a service (BaaS), where banks are participants.
In the BaaP model, a bank designs a value proposition, identifies a supplier’s partnerships, and builds the customer side by catering to diverse needs. In the BaaS model, the bank just provides the banking services to other businesses such as fintech and e-commerce providers, who offer those services to their customers.
Three examples show this in action
Platforms need to be clear about the value they offer to users
Platforms intend to allow consumers to transact with producers. In every interaction, the producer and the consumer exchange information, goods or services, and currency.
The design of each platform should start with the design of the core interaction, which involves three components: the participants, the value unit, and the filter.
Focusing on the value unit – the item exchanged, such as a song on Spotify – is vital. Deciding who can create value units, how they are created and integrated into the platform, and what differentiates a high-quality unit from a low-quality one are critical issues.
For DBS in the earlier example, the value unit was helping customers to find the home of their choice and get a home loan to pay for it – all in one place, within a few clicks. DBS found the customer journey for home purchase is full of friction, from the house search to the loan. Platform design begins with the core interaction.
But over time, successful platforms tend to scale by layering new interactions on top of the core interaction. It can be seen from the evolution of DBS as it later scaled the concept to other customer needs, such as travel, health, cars and education.
Large enterprises have advantages when launching platform businesses. They have existing value chains, alliances and partnerships with other companies, pools of talent, and arsenals of resources – including loyal customers.
At the outset, a platform faces a chicken-or-egg problem: the value it creates is predicated on one side of the market seeking to transact with the other. At the start, when there are no producers and no consumers, a designer can simply focus on one side first – as a traditional company would do. Then once it has developed a value proposition that makes sense for customers, it can pivot to start a platform by opening the other side.
Marketplaces often need to attract the supply side first. A bank has an advantage here as it already has the demand side by virtue of its traditional business and it can do a lot by understanding its customers better. It does not have a chicken-or-egg problem because it likely already has a huge customer base it can tap into.
So to transition to a platform, a bank must first develop a solid value proposition on the supply side and then get new or existing customers to transact on the new platform.
There are eight strategies banks can use to establish a platform
There are eight proven strategies that have produced successful platforms:
- Select supplier strategy. Learn what you can about your demand side, then open your customers to select supplier partners. This strategy is handy when you know your customers well. If you understand their pain points and delight points, the products they usually purchase and where they purchase from, you can partner with suppliers to target customers. For example, if a customer purchases plumbing services in many locations, you can partner with local plumbers amid a fragmented market with suboptimal customer experience.
- Magnet strategy. Use your producers or users to attract the other side. By enabling one side to transact, your platform may give incentives to the other side to bring in participants through their own networks. For example, if you have a strong business banking network, you can provide incentives to these clients to get their customers on the platform.
- VIP strategy. Also called the marquee strategy, this strategy consists of attracting star producers or consumers on the platform, who in turn attract more producers and/or consumers.  For example, game console platforms often sign exclusive partnerships with developers to attract players with must-have games only available on their console.
- Meshed communities strategy. Attracting both sides at the same time can be challenging, so it helps when early producers also happen to be consumers. For example, eBay initially launched collectables categories, in which the identity of consumer and producer is blurred.
- Connection strategy. Connecting two customer segments can be effective. Banks can connect their small and medium enterprise customers (as producers) to retail customers. This could initially be within a single town or city, then expanded as far as globally.
- Piggybacking strategy. There are many tales of platforms igniting by piggybacking on existing networks. For example, Craigslist served as a source of suppliers and service providers for a lot of startups, including Airbnb, to build their initial supply side. The startups would use scraping to pull the details of the suppliers from Craigslist to create a database of providers and solve the chicken-or-egg problem quickly. Banks have payments services, BNPL services and finance embedded into platforms where they can easily understand – and replicate – the customer journey.
- Bowling pin strategy. One way to overcome the chicken-and-egg problem is to find a niche where the problem is more easily overcome and then find ways to hop from that niche to other niches, and eventually to the broader market. Think of a bowling ball striking the head pin, which strikes another then another. For example, Facebook was first ignited as a platform at Harvard and then slowly expanded to other Ivy League universities in the United States. The bowling pin strategy, a term coined by Geoffrey Moore,2 is relevant for hyperlocal services where platform owners need to create local matching in limited geographic areas.
- Event strategy. Also known as a big bang launch strategy, this strategy involves choosing an event where a critical mass of an identified target community is present to kick-start the platform in the hope that other communities will follow. For example, Twitter (and later Foursquare) were launched at Austin’s famed South by Southwest (SXSW) festival. Platform businesses that intend to use free pricing need to ensure the value they create and hope to monetise is fully controlled by the platform.
Successful platforms are built on a few key elements
The success of a platform comes down to four elements:
Engaging: How can you get producers and consumers to engage with the platform, at the start and throughout the platform lifecycle?
Matching: How can you help producers and consumers to find each other? If you provide too many options, transactions will dip because of the paradox of choice, but if there are too few options, customers will not return.
Transacting: How can you minimise friction in transactions? Payments firms have been able to create one- or two-click journeys with multiple new options such as BNPL. Banks will have a strong advantage.
Learning: How can data be used to improve the value proposition? Platforms generate a lot of data that can generate useful insights into customers touchpoints, which can be used to enhance the value proposition for users, which in turn brings in more users that generate more data.
A five-step approach can help to launch a platform
In converting a pipeline business into a platform or to launch a new platform, designers need to consider five steps.
- Design the value proposition and strategy. The first step is to develop the value proposition by identifying the core interactions between consumers and producers. This is an iterative process. Banks can apply different strategies to engage, match, transact and learn from these core interactions.
- Define access and governance for the platform. One key decision is whether you will be an orchestrator (BaaP) or a participant (BaaS). Then you need to decide who to let into the platform and whether it will have open architecture (like Android) or closed architecture (like iOS), and what activities the participants can perform.
- Define the revenue model and key metrics. In traditional businesses the revenue model is almost always at the forefront. But for platforms, the central idea is to get a critical mass of transactions when the network effects take over. The revenue model can then be developed. Designers need to track the right metrics for the relevant maturity level of the platform. For example, early in the lifecycle of a platform you need to measure the level of engagement, such as through the percentage of sign-ups that engage, match or transact.
- Prepare the organisation. Consider two capabilities – people and technology. On the people front. develop the organisation’s digital capabilities so it can understand the impact of scaling the banking business toward a technology-based platform where each interaction shapes the experience for participants. As for technology, look at developing a tech stack that can easily integrate with different partners through APIs (application programming interfaces), which can help a bank be agile in experimenting with value propositions. (This step could arguably come first in the process. Depending on the maturity of an organisation, we could have the people capabilities start earlier, but we consider this the right time for technology capabilities.)
- Refine the customer experience iteratively. The customer experience depends on the products and services offered by the supplier. But understanding critical feedback from the consumer at different touchpoints and iterating the suppliers or value proposition accordingly is critical. This step is ongoing and runs across each stage of platform maturity.
The financial services sector is at an inflection point
The financial services industry is at an inflection point. Immense competition is coming from unexpected players. Only some banks will thrive in the next decade; those that will thrive will be those that embrace innovative business models to engage customers by catering to their aspirations and desires.
Providing only basic financial services is table stakes and will not take them far. Banks need to find the right partner in their digital journey to tailor the right platform strategy.
Get in touch to discuss how we can help you develop your platform strategy.
Prepared with input from Kaushal Vyas.
Published on 21 August 2023.
 Platform Revolution: Geoffrey Parker, Marshall Alstyne and Sangeet Paul Choudary
 Laure Claire Reillier and Benoit Reillier (2017). Platform Strategy: How to Unlock the Power of Communities and Networks to Grow Your Business. Routledge