The marketplace bank myth

Everything old is new again

If I believe all what's written about banks these days, they either become platforms (and presumably live the happy, profitable life of Google and co.), or become commodities that are dime a dozen. Oh, and half the world now wants to be a bank (because that's where the money is, as Willie Sutton well said) now.

The best description of the platform model I could find is this HBR article. A good platform (aka marketplace) will attract both producers and consumers (aka sellers and buyers) and provide them the tools to do their business, which they will, happily ever after.

In 'popular fintech', Alibaba, Faceboook, Uber and AirBnB are invoked as the poster-children of this new kind of company:

(this must be the hundredth reproduction of this image)

Marketplaces, the popular idea goes, do not produce anything, yet reap most of the profits. They can do this, as they have scale, can engage customers better, using technology and are light on assets thus ROI is great (which is initially true, but afterwards, not so).

In financial services, much have been written about fintech banks and how they will aggregate the best products from all over (well, mostly other fintechs, though) and rule the world. Also that today's banks are not platforms at all:

• Banks have consumers but not producers. Banks attract consumers, but there are no other producers (of financial products). There are some one-off partnerships, maybe complementary products but that's about it.
• Banks only sell their own products. As a corollary to the previous point, banks push their own products. The key to being a platform is matching a consumer to a number of providers.
• Banks don’t have a 'toolkit'. Banks don't integrate with their partners - neither as part of their business model, nor with technology. The reasons are usually old, inflexible systems, but maybe because none of the parties are sure it's actually worth it.

Banks are really ancient platforms

In a somewhat different viewpoint, current banking products are just variations of the three basic banking services: loans, deposits and moving money. (let's put aside the wonderfully complex world of trade finance and trading though, for a while)

If I adjust my perspective a bit, so that the products are not current accounts and mortgages, but money, banks suddenly look like a platform: connecting anyone with money (to save, to invest, to safeguard) to those who need it, and reaping the benefits.

As the "second-oldest profession", banks are doing it for a few hundred years.

Oh, and by the way, banks more advanced things too, other than aggregating supply and demand. Transforming short-term deposits to long-term loans is as if Amazon could transform the excess supply of paperback novels to full-length movies just by itself, on a scale, almost instantly, based on market demand.

A bank does not produce money: it gets it from its customers (or other marketplaces, another trick the new platform titans also started to learn). What's more, banks even create money which is exactly why the business model is so powerful. (Without the leverage of the money multiplier, banking is quite a crappy business model with low margins, high fixed costs and heaps of regulation; thus all the talk about how bad it is to be a commodity. On the other hand, money is both more flexible and scalable than wheat, steel and electricity. Also, it's more risky.)

None of this is really new. But if banks are (were) really marketplaces, how did they become the inflexible, paper-pushing behemoths they are now? Can the same happen with other platforms over time?

The rise of the pros

Most platforms start out the same: someone discovers an opportunity, this attracts buyers and sellers alike. Look at the early blogosphere or the early small sellers on eBay.

Over time, however some of them, the more successful ones, become bigger and bigger and efficiencies of scale even speed this up. Early tech blogs gave way to professional bloggers (Gawker, The Verge, just to name a few), stalls became stores offering wider selection (and a higher entry cost for competitors). Even online, with its low barriers of entry (Amazon provides not just the platform, but also ships your product and takes care of payment) larger sellers appear on all marketplaces.

Case study: the Amazon Marketplace

According to Amazon, its marketplace has over 2 million sellers worldwide and accounts for over 40% of the total units sold by the company. These sellers are not the big-brand ones I've expected: they have names like musicMagpie, MEDIMOPS, -importcds, goHastings, MovieMars, momox. Actually, these are the top five.

Webretailer follows these sellers and ranks them based on the number of feedback they receive. On average, 10-15% of customers leave feedback. It's fairly consistent across product categories, so I've used this is as a yardstick for sales. The structure of the top 1000 sellers worldwide looks like this:

Again, Amazon has about 2 million sellers - anyone can be a seller, right? 16 years after launch, the top 100 sellers sell 49% of all the merchandise. (if you count Amazon as a seller too, then the top 101 sells about 75%). Among the 2 million, the top 0,5% of sellers are doing about three quarters of the sales.

Also, despite being a platform (or maybe because of it, having access to the data) Amazon had even started doing the very un-platform-like: building and selling its own products. 

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What does it all have to do with banking? The same happened there: as small banks (cajas, building societies, savings banks, sparkassen) competed, merged, maybe done business together, larger ones have emerged. However, a few hundred years' of legacy (in systems, thinking and even customers) is hard to escape from.

Platforms are not (just) about retail

At least not all the time: banks have started attracting fintech companies in a fairly scalable way: funding. Besides investing in those, banks (the likes of Goldman Sachs) now provide funding for P2P loans:

"... early P2P lending platforms (Prosper, LendingClub) began with true “peer-to-peer” models, the majority of  capital is now provided by institutional investors. such as hedge funds, insurance companies and, yes, even banks. Institutional investors have been drawn to the asset class by strong unlevered yields and highly predictable credit performance across a large portfolio of loans. In 2014, 81 percent of LendingClub’s loan originations came from institutional and managed investors." (source)

Does this mean P2P is dead? Au contraire! Credit was always P2P (just like insurance) in nature, just not all the P's are the same size: lending, insurance (which both have risk and benefit from the dispersion of it) are a good subject for aggregation and actually benefit from scale. Credit became standardized, so it can be provided more efficiently (and thus more affordably) and now we call these banking products. This also created inefficiencies and opportunities to cover whatever these products don’t.

In the future, even in the extreme case when banks cease to be the 'retail platform' - the user interface - financial services may still run on the much older platform of funding:

• fintechs have been quite successful in lending (as a customer, you care less about who gives you money after checking off a few basics as whom not to borrow from). It’s also a more profitable service and easier to get customers for than deposits, as customers are coming to you. (It also helped that there was a willing market: customers not served by banks, in line with the the classic bottom-up disruption structure)
• deposits, on the other hand need trust and scale. Despite all the noise, banks still have it (for now).
• as a platform matures, professionals appear who take larger and larger share in the platform

Banks continue providing funding to whomever needs it, on the platform they already have. There may be an interesting development though: 'platformification' on w wholesale level gives investment banks a distinct advantage as it’s what they do – initially the question was, who will be willing to pick up the initially smaller tranches, but we are over it now.

And in an even more quirky turn of events, an investment bank had already started to expand its platform: Goldman Sachs is now doing retail banking too.