Banks and Fintech on Platform Economies – How Payments Are Transforming the Banking Experience

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The advent of platform economies is a tsunami for traditional corporate culture, especially for bankers. Always, Paul Sironi, Global Research Leader in Banking at IBM, reveals how FIs should prepare

The global financial crisis has revealed the existence of profound imbalances in the functioning of financial services. Central bank intervention temporarily saved the system by lowering interest rates and forcing a substantial reduction in the risks of banking activities, but further hampered bank profitability in a narrow economic space. The new, lower-margin normal is here to stay, and the way for banks to get out of the Catch-22 situation is through transforming traditional business models to conform – through technology – to the emergence of global economies. platform.

What does it mean to adjust the banks’ business model to platform economies?

The advent of “platform economies” is a tsunami for traditional corporate culture, especially for bankers. Sustainable business performance is no longer based on linear relationships between manufacturers (for example, asset managers), distributors (for example, asset managers) and consumers with a logic of incremental production of costs and valuable. Instead, the main economic levers lie in the ability of new business models to continuously engage users and usher in a new era of “hyper-personalization” and “hyper-contextualization”. Digital platforms can transform entire industrial sectors primarily because they foster the transition from an economy centered on “outputs” (products) to an economy centered on “results” (results). In platform economies, “assets” (products) do not disappear but become peripheral from the point of view of value creation. They focus on contextualizing user experiences at affordable prices, removing friction in consumption and interactions with users.

The shift from business models from “products” to “results” is complex. What is needed is a commercial map to guide navigation. The card is the Banking Reinvention Quadrant (BRQ), which is the centerpiece of my latest bestseller “Banks and Fintech on platform economies”. The axes of this quadrant are called the information quotient (IQ, y-axis) and the communication quotient (CQ, x-axis). What are they?

the Information quotient is the “technological” axis and represents the intensity of confidence in the use of data and information on Open Banking platforms, transforming customer engagement into products and services, into the participation of business ecosystems. enriched users by eliminating engagement frictions in adjacent industries (eg, digital payments on food delivery apps). the Communication quota is the “business” axis and represents the intensity of confidence in the use of artificial intelligence (AI), supporting digital or human relationships and decision-making, and digital interfaces fueled by smarter analyzes ( for example, instant AI-based credit approval).

How can banks and fintechs orient the BRQ towards areas with higher commercial value?

Financial institutions wield market power when they excel in information and communication, which means investing in basic banking services and interfaces. The tension between information and communication defines the emergence of new economic models based on different information systems. These are “Contextual Banking” platform strategies (based on Banking-as-a-Service architectures, opening up banking data and information to be used by third parties within external ecosystems) and “Conscious Banking” platform (based on Banking-as-a-Platform Architectures, opening up banking innovation to the integration of external banking and non-banking offers to increase the value of banking relationships). While traditional banks and most digital banks still operate in “exit” economies, configured linear value chains, the conscious banking and contextual banking platform strategies operate within “economies”. results ”by sharing business-critical information via transparent artificial intelligence platforms. This is why they release most of the achievable business value on the BRQ.

“It’s the opportunity to eliminate friction in interactions with users that makes banking contextualized to integrate and unleash ‘new’ value. “

“It is the need to demonstrate value – which customers are urged to pay to access the platform – that makes banking aware of remaining transparent and unleashing ‘hidden’ value over the long term.”

What is the role of payment providers?

Cloud-native payment providers were among the first in financial services to learn how to move banking out of the linear value space occupied by digital banking, striving to deepen banking contextualization. .

PayPal CEO Dan Schulman revealed during a 2021 call with Wall Street analysts that PayPal aspires to be the world’s next banking “super app”, offering a set of built-in features that once would have required a series. different applications. Similar to Alipay in China, these would include tools for payments, purchases, financial services, and even new forms of digital identification. While PayPal sees contextual banking as a way to expand its financial services footprint and compete with big tech ‘super apps’, other fintechs are adopting new platform strategies to contextualize financial services within. more specific ecosystems.

Payment provider Square – founded by Twitter CEO Jack Dorsey in 2009 – has announced plans to acquire a controlling stake in Tidal in 2021. Jay-Z’s music streaming service is a smaller competitor to Spotify. The logic of the transaction boils down to a simple idea of ​​how contextual banking can help solve the chicken and egg dilemma in platform theory. Fintech innovation could be used to support the work of artists. In return for their success, positive network effects would attract larger fan bases to the music platform. In Dorsey’s own words: ‘New ideas lie at the intersections, and we think there is a compelling one between music and economics.. ‘

You need a banking reinvention!

However, for new ideas to succeed, technology is not enough. According to recent research by IBM, the institute of business value, the potential revenue impact of investing in a hybrid cloud infrastructure, thereby leveraging the enhanced data and AI, can be multiplied nearly 20 times when combined with an end-to-end transformation that tackles the main drivers of open organization. The open organization is based on a cultural transformation that allows banking reinvention. It is about renewing the incentives and the way of working to conform to the dynamics of digital platforms and the orchestration of ecosystems. The trip on the BRQ is not easy, but it could be very rewarding for banks wishing to reinvent themselves.

About Paolo Sironi

Paolo Sironi is the world leader in banking and financial market research at IBM Consulting, the Institute for Business Value. He is one of the world’s most respected fintech voices, providing business expertise and strategic thinking to a network of executives among financial institutions, startups and regulators. He is a former quantitative risk manager and start-up entrepreneur. Paolo’s literature explores the biological foundations of financial markets and how technology and business innovation can strengthen the immune system of the global economy in today’s volatile times. Visit Paolo’s website thePSironi.com for more information.

About IBM Institute for Business Value (IBV)

the IBM Institute for Business Value (IBV) uses data-driven research and expert analysis to provide leaders with insightful information on emerging trends, opportunities and challenges. Founded in 2002 as part of IBM Consulting, IBV’s Thought Leadership Reports offer prescriptive recommendations to address the most pressing industry and market challenges and opportunities that will determine the organization’s future success.


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