Can Banks Become Platform Businesses?


Apple’s app store has generated around $29 billion in revenue according to figures released in August 2014. What company would not leap at that kind of revenue? But the interesting thing about Apple is that it gave most of that away. Some $20 billion went straight back to the people who made it happen — app developers.

That, according to Christian Lanng, CEO of Tradeshift, a Danish company that provides free e-invoicing (among other things), is the key factor for a platform business, and one reason why he suspects financial companies are going to struggle to become platforms.

“A platform business is one where you share more value than you take in,” he says. “To be a successful platform, you need to have partners on that platform that will gain more by being there than you do.

Do banks really want to become platform businesses?

“Banks historically have been a full-stack business. They have owned everything. Are they prepared to give that up?”

Change is necessary because interoperability and hyperconnectivity are allowing customers to switch providers easily. Peer-to-peer services and social network referrals are changing how relationships and trust are built. What’s more, there is a shift from a high-value, low-frequency-based revenue model to one based on very low value but high frequency, with micro-fees providing recurring revenue, undercutting the traditional banking margins and fees. Options for banks include becoming pipes or platforms.

“Traditionally the way businesses have worked has been a linear model, which I call ‘pipes’,” says commentator and author Sangeet Paul Choudary, a scheduled Innotribe speaker during Sibos, an annual banking conference. “Think of it as a company manufacturing a product, or a service provider, the model has been very linear where you source the inputs into the business, you create a product or service, and you provide the product or service to consumers at the other end.”

A Platform Business Typically Has Three Components

The problem with the pipe business, says Choudary, is “whenever pipes control the entire market they become gatekeepers, and they become quite inefficient in how they manage interactions.”

Calastone: Platform In All But Name

While Calastone shies away from using the term “platform” (“Platform has a particular meaning in the mutual funds industry,” stresses Deputy CEO Ken Tregidgo. “A lot of our clients are platforms which provide services to networks or place orders for mutual funds. We are not competing with them.”), the London-based company, launched in 2007, has all the hallmarks of being one in the tech sense of the word.

The mutual funds industry is surprisingly un-connected; Calastone, which raised $18 million from Accel Partners and shareholder Octopus Investments in 2013, is looking to connect it up, providing the digital communication tools for the industry.

“The core network is an operational service to lower the cost of processing transactions. There is massive value in clients using that,” says Tregidgo.

But the core network is also the way by which Calastone acquires the data that it can use to provide services back to its clients.

To date Calastone has provided the first two layers of the platform pyramid — the connectivity and the “tools and rules.” It is now moving into the third, making value out of the data it collects.

“We have launched a pilot information service that allows managers to monitor their market share and analyze key sector trends on a timely and accurate basis so they can do that on a daily, weekly, monthly, or even real-time basis,” says Tregidgo.

“We’re able to provide insight into what is actually happening in the marketplace that it would be very difficult for clients to get any other way. We look at it not from where is the value to us, but where is the value to our clients? How can we continue to deserve their business? How can we continue to add value?”

So far Calastone has shadowed Choudary’s analysis to the letter. If that continues, what next? Calastone would not be drawn on future plans, but don’t be too surprised if we see the company opening up its services so that third-party developers can build apps on it.

By contrast, he says, platform businesses are “open network systems where users representing both supply and demand can participate on their own. Most of the systems are self-serving — and these systems are extremely efficient, not only the network themselves, but in the use of data and the use of new forms of data.”

A platform business typically has three components: a network layer that connects all the sides together; a “tools and rules” layer that provides the interfaces and the tools for the two sides to interact with each other; and a data layer.

“It is this final layer that offers such promise,” says Choudary. He first realized this while running new ventures for Intuit, a financial software company. “Around 2008 when I joined the company I realized it was in the wrong business,” he says. “It was processing about one-third of the U.S. GDP and it was making money by selling software.”

Around that time Intuit started a huge shift towards understanding all the data it had and how it could build services on top of that, recalls Choudary. It then converted its software into inputs into a data platform and created new services on top of the data.

All of which sounds like a dream. A company builds a platform, gets people to interact on it, takes a fee (a typical “app tax” — the amount of any deal taken by the platform is 30%) and collects a treasure trove of data from which to build a whole suite of new products.

Slower, Uglier, And More Expensive

A more recent example is London-​based Calastone, an independent cross-border transaction network for the global funds industry. Calastone enables buyers and sellers of mutual funds on different platforms to communicate orders and post trade processing electronically. The company takes a cut of each transaction.

But where Calastone is hoping to add huge value is in the data layer. Having built up its network layer and established a rigorous “tools and rules layer” the company is now looking to build services for its users from the data layer. “We have launched a pilot information service that allows managers to monitor their market share and analyze key sector trends on a daily, weekly, monthly, or even real-time basis,” says Ken Tregidgo, deputy CEO.

So why aren’t the banks doing this? “You’re always going to be slower, uglier, and more expensive than anyone who is a purebred technology [company],” says Tradeshift’s Lanng. “You have all of these compliance regulations, you have legacy. Even your processes to design something are much slower.”

Incumbents tend to destroy disruptive innovation, a phenomenon that Columbia Law School professor Timothy Wu, author of The Master Switch, calls the “Kronos Effect.” (In Greek mythology, Kronos, leader of the Titans, is warned that one of his children will overthrow him; he responds by eating them.) Online banking was the largest identity platform before Facebook. But banks failed to exploit the opportunities it presented.

Or incumbents fail to spot new ways of thinking. “If you think of Airbnb, hotels would never have thought that someone renting out a mattress would be a competitor,” says Choudary. “If you think of YouTube it was about random videos. That was never considered a threat by media companies. Media companies have been forced to participate.”

He points to areas like peer-to-peer (P2P)lending where fintech start-ups are making headway. A combination of factors has stoked interest: interest rates are close to zero; the public is disenchanted with banks; and low costs of trading on the platform have driven growth. In Britain, loan volumes are doubling every six months. In August Zopa became the first British P2P lender to top $1 billion in loans, although this is tiny against the UK’s £1.2 trillion in retail deposits.

“It is mostly experimenting; the mainstream market isn’t really trying this,” says Choudary.

Banks Have A Massive Opportunity

One of the things that probably blinds banks is that the move towards building an organization that thinks about data in this way is not worth the returns they see in the short term.

So what should financial institutions do? Lanng is skeptical that many will transition to being a platform, but sees opportunities in being a service provider on others’ platforms.

“They have access to bigger depositors,” says Lanng. “They have access to the real cash flow. Could you imagine them offering money on Kickstarter? Could you imagine Kickstarter offering an option of say if you reach 20% of your campaign, this bank will offer you the remaining funds?”

Choudary says there are opportunities but banks need to alter their way of thinking. Certainly retail banks are going to struggle to build platform businesses, but that doesn’t mean game over. In fact far from it. Even Lanng is optimistic.

“I think the banks have a massive opportunity,” he says. “The banks that first forget the idea about being a monopoly will be the most successful service providers in the world.”

Image © János Balázs. Released under Attribution-NoDerivs 2.0 Generic.




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