Why "Marketplace banking" is better for newcomers while "Platform banking" fits incumbents

It’s been more than a year since I wrote down my thoughts on what I defined back then as marketplace (or "Fintech") banking and we are already witnessing how some players are moving towards this new type of collaborative ecosystem. In the article, I outlined the main features of this disruptive business model in which the bank – specialising mainly in the provision of current accounts – becomes a platform that connects customers with third-party providers through their APIs.

"Imagine that you are a client of this 'marketplace bank' and that you need a loan. You do not really care if the loan is provided to you by Lending Club or Bank of America, what you look for is a quick and frictionless process to get your loan, and the lowest interest rate possible. So, through the API, the "marketplace bank" will consult all its third-party providers and offer you the loan that best suits you." Philippe Gelis’ "Why Fintech Banks Will Rule The World" .  

However, the specific features of the current banking players, whether incumbents or newcomers, will determine their capabilities and the incentives and challenges they face when evolving their business model towards such platform ecosystems. That’s why, although we will surely find a range of hybrid formulas, I would distinguish between three different model categories:

1. Traditional Banking Model
2. Marketplace Banking Model
3. Platform Banking Model

The first one does not need much explanation since it is the strategy that traditional banks have been following for decades – in which they offer their own ‘closed’ full supply of products to their clients. The other two are much more interesting, since they are part of the so-called ‘platformification’ trend which actually affects many industries apart from banking.

“The most significant trend...will be the ‘platformification’ of banking, where both existing banks and startups begin a strategic shift towards becoming banking platforms, much like how Amazon is a platform in retail.” Ron Shelvin's 'The Platformification of Banking"

Marketplace Banking Model

The over-diversification of the traditional banking model – in which traditional universal banks supplied their clients with their own full-service portfolio – led to the provision of very generic products, designed to generate quick profits, and a poor digital experience. The goal of the marketplace banking model is to replicate the integrated experience that banks provide to their clients, without giving up on the supply of the most advanced solutions that only collaboration with specialized third parties may provide. These are the main features of such a model:

1. The bank specializes in the offering of the current account service;
2. It has been granted a banking licence and manages the banking back-end infrastructure;
3. In order to provide its clients with additional financial services, it makes a curated, cherry-picked selection of specialized third-party providers and integrates them with its core system – and its current account service – through APIs. So, not everyone is allowed to offer services in the marketplace – there is a "quality filter;
4. That’s how the bank becomes a ‘marketplace bank’, by connecting customers with these curated third parties, whether Fintechs or incumbents.

So in the end the key distinctive feature is that the client can only choose from the solutions included in this ‘closed package’ of specialized third-party products that has been curated by the ‘marketplace bank’.  

Here we could also draw a distinction regarding the level of integration between the marketplace bank and the selected partners, which ultimately boils down to who owns the end-client. I would distinguish between two subcategories:

1. Those cases in which the client belongs exclusively to the marketplace bank through a white-label agreement, or through the ‘Powered-by’ formula.
2. Types of integration in which the end-consumer becomes a client of both the ‘marketplace bank’ and the third-party provider.

You might feel uncomfortable with the use of the word ‘marketplace’ for such a curated – and therefore limited – supply of products. However, think of it like a grocery store or supermarket that chooses the specific products that it wants to offer its customers, selecting third-party suppliers based on price, type and quality of products, with their choice varying on their target clients. 

Platform Banking Model

Unlike the marketplace model, the platform strategy is a completely different approach that goes far beyond the traditional product offering. This type of business model has received several names such as Banking as a Service (BaaS), Platform Strategy and App Store Banking and I would highlight the explanation I found in Ron Shevlin’s article, which seeks to get to the bottom of what a platform is:

"A platform is a plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other and create and exchange value." Via Pipes To Platforms    

Here is my own understanding of this model, so we can easily compare and contrast it with the marketplace model explained above:

1. The bank could be either merely a current account provider or a supplier of a full suite of services – probably the latter;
2. It has also been awarded a banking licence and also manages the core back-end system;
3. The bank creates a ‘platform’, opening its API up to other Fintechs and third-party developers, so they can use their data to build their own products on top of this platform;
4. Any third-party providers can "plug in" their products to the platform if complying with certain basic standards. There is no cherry-picking.
5. The clients of this "plug-and-play" bank can therefore choose from a much more open supply of products.

The first key difference in this distribution channel compared to the marketplace one is that there is no closed or limited participation of third-party suppliers beyond the minimum ‘plug-in requirements’ established by the ‘platform’ bank. As a result, such participants can easily engage with and disengage from the platform. This could translate into a platform that offers products from every banking player, from neobanks to Fintech solutions as well as traditional players' products – even if these are in direct competition with the bank hosting the ‘plug-and-play’ platform.

This means that the end-customer not only can choose from a much greater variety of different products, but also has a wider supply of the same – or very similar – directly competing products. On the one hand, this gives the end-consumer the chance to find solutions that really match their specific needs, but there are at least two obvious drawbacks. Firstly, this model requires greater effort on the part of the consumer when shopping around for specific solutions, in terms of identifying and selecting the most convenient products. Secondly, the more participants in the platform, the more difficult a seamless integration and experience becomes.

Pursuing a platform strategy can therefore put banks in a Catch-22 situation as they choose between openness and integration. The more you, as a bank, opt for an open platform – i.e. the more you allow third parties to plug-and-play, and increase your supply of products, which is positive for the end-customer – the less you can create an integrated and seamless experience, which is in turn negative for clients. Managing this tension will probably be the main concern faced by banks deciding which model to follow – either marketplace or platform, or any hybrid in-between option. For an example, check out our interview with Starling Bank on the topic. By the way, it is also worth noting that the PSD2 will probably force banks to open up their APIs so they have no other option than to become platforms in some sense.

“Banking as a service (BaaS) offers banks a way to level the playing field by radically shifting from being builders of financial solutions to assemblers of consumer-driven financial management tools and related offerings. By doing so, banks can accelerate their entry into new markets and quickly size up and meet the needs of digital consumers — or fail fast and move onto other more profitable services and consumer-relevant offerings.” Cognizant’s How Banking as a Service Will Keep Banks Digitally Relevant and Growing

Beyond financial products: A Platform for data monetization

My December 2015 piece revolved around how banks could exploit the potential of leveraging the tons of transaction data they own. Huy Nguyen also wrote a great article explaining how banks were not monetizing this financial data – compared to the Googles, Facebooks, etc. – and highlighting how following such a strategy would imply changing the business model in itself.

Why do I bring this issue into this article? Mainly because the platform is set to play a key role in the monetization of such data. When talking about the platform model, we usually tend to think of third-party integrations consisting of firms offering financial products. But we should not leave aside a much wider range of non-financial companies willing to become users of the platforms in order to leverage the bank’s consumer data in a way that is profitable for every party.

“The bank could detect that you buy business books in Amazon every month. As if by magic, you will be sent a personalised email with a special offer –not from Amazon, of course– for the last book written by Warren Buffet. The book supplier will be paying commission to the bank at the time and therein the bad practice is continually fed. The bank could set up a bidding system, so that the highest bidder –meaning whoever pays the most commission– gets the sale.” Philippe Gelis’ “Big data…the bank’s secret weapon ”

Netflix, Amazon, Youtube or Spotify:The business model of the internet age is all about ‘platforms’   

Just to put things into perspective, variants of such collaborative environments – which will differ depending on the specificities of every industry – are the kind of models succeeding in the digital landscape, and the ones that leading tech giants have adopted. So, whereas the likes of Facebook, Google, Amazon, YouTube, Netflix, Twitter, Airbnb and BlaBlaCar have developed such a platform strategy, banks – due to their late entrance into the digital world – have only taken a few steps in this direction.

Which banking players are best positioned to implement these ‘marketplace’ and ‘platform’ models? 

In the end, the main outcome I would like to convey in this article is that banks’ decision to create – or evolve – either a marketplace or platform model will depend mainly on their starting point, especially regarding: a) their current product offering; and b) their customer base. 

The above-explained ‘marketplace banking model’ is probably the best strategy for new banks since they don't have an extensive customer base – at least for the moment – nor do they want to create a full offering of financial products themselves; indeed, the only solution they are creating in-house is the current account. Again, they aim at replicating the full-services model, but through the provision of third-party services – and so reducing the time to market and the amount of capital needed to build and scale the bank. That’s why it seems logical that these players – often called ‘new challenger banks' – will create a marketplace that connects their own current account solution together with the above-mentioned curated third-party offering.

On the other hand, since incumbents – i.e. traditional banks – already have both a wide product offering in place and a huge customer base, they will try to leverage this position. The most plausible step, then, would be pivoting towards a ‘platform banking model’ in which they can still combine their full suite of products – already being consumed by millions of clients – with a much more open approach in which a wide range of third-party firms and products are available on the platform alongside their own services.

Interestingly, just like many traditional banks, Amazon – for example – also started out as a very linear model, bringing the offline store model online and managing the production role itself by sourcing products, managing inventory and selling them down the pipe, Amazon.com. After a period of time, though, they ended up becoming ‘Amazon Marketplace’ in which external sellers could meet Amazon’s customers through the Amazon Platform. We'll be watching very closely which banks decide to take a step forward and follow this path in the upcoming months.