Platform Banking: Building API-Enabled Digital Ecosystems

As Deloitte describe ‘Platform Banking’:

“is a digital marketplace, owned and operated by a bank or another (potentially nonbank) entity, that provides banking and possibly nonbanking services. It is not the same as open banking; however, the latter enables and amplifies the former.”

The leading disruptors of the banking sector are migrating to the Cloud to build ecosystems that harness an open innovation marketplace model for integrating multiple offerings into new digital services.

The Platform Business Model

Digital ecosystems are also defined as ‘Platforms’, a concept first implemented in the commercial sector, by the sharing economy digital giants.

Massive new startups like Uber taxis, Airbnb and many more are pioneering the ‘On Demand Economy’, implementing a Cloud-based On Demand Business Framework which overlays a ‘digital mesh’ across a marketplace of vendors, such as taxi drivers or travel accommodation.

The repeatable secret sauce is the Platform Business Model, described in detail through academic literature and popular business books.

For example the MIT book ‘Platform Revolution‘ describes these hyper-scale disruptors like Netflix, Uber, Airbnb, Facebook, Twitter et al, as the book describes:

“Facebook, PayPal, Alibaba, Uber-these seemingly disparate companies have upended entire industries by harnessing a single phenomenon: the platform business model.”

The book builds on prior MIT research, such as this detailed 2007 research report on Platform Networks, this highly recommended presentation Platform Strategy and Open Business Models, and in a simpler format in this presentation, which defines:

“A “Network platform” is defined by the subset of components used in common across a suite of products (Boudreau, 2006) that also exhibit network effects. Value is exchanged among a triangular set of relationships including users, component suppliers (co-developers), and platform firms.”

Banking as a Platform – API-Enabled Digital Ecosystems

It’s a model also very well advanced and adopted in banking, driven by the Open Banking trend.

McKinsey sets the strategic context for the scale and nature of the opportunity, and in his Linkedin blog Pascal Bouvier offers a reference model. FinExtra suggests 6 Strategies for Building a Platform Bank and the NextWeb explores the sector by focusing on a specific niche opportunity of PSD2 payments that it might be targeted towards, highlighting that this change is a natural fit for a platform approach.

The common blueprint at the heart of the disruptive trend is the evolution to Platforms – Digital Ecosystems formed through multiple collaborating partners, achieved through open API integrations.

Open APIs are the core component for building Platform ecosystems but they alone do not represent achieving this business model. Tolga Tavlas makes this point writing for FinExtra, suggesting an evolution where Open Banking is the first steps of primary school and adapting strategically to a Platform model the progression to university.

This is a critical point repeated by Cap Gemini too – In their Open Banking article they highlight how Open Banking APIs are one step on a broader journey towards a digital marketplace model, a maturity journey very effectively explained by Innopay:

Similarly PwC describes three waves of evolution culminating int Digital Ecosystem Banking, a network of APIs, digital marketplaces and platforms offering new distribution channels.

In their Open Banking article Cap Gemini highlights how an API platform will provide the foundation for cultivating a developer innovation ecosystem:

“This involves the creation of secure APIs by the banks that will be able to perform these activities on your account. This will allow third-party providers, such as FinTech companies, to be able to write applications that consume these APIs and perform these financial transactions on your account.”

In Data Sharing and Open Banking McKinsey define three distinct types of API:

  • Public / open – APIs used by external partners and developers who build innovative apps and products.
  • Partner / B2B – APIs used by business partners, including suppliers, providers, resellers, and others for tighter partner integration.
  • Internal – APIs are used by developers within enterprise.

Each brings different benefits, such as enabling innovation through engaging developer community and extended market reach, reduced partner costs and API monetization, enhanced security, cost reduction and operational efficiency.

They conclude with this strategic recommendation:

“Regardless of location, over the next 18 to 24 months banks should capitalize on their incumbent advantages by taking the following actions:

  • Explore data-sharing agreements with fintech and nonfinancial services firms to stay ahead of the curve.
  • Develop a perspective on APIs and their benefit to the bank’s service model, both in leveraging mandated third-party access and potentially extending access beyond statutory requirements.
  • Fully understand both existing data privacy mandates and likely changes, and determine their institution’s appetite for a less conventional approach. And examine how customer messaging would best facilitate any such change.

Banks will need to address the potential loss of revenue from existing payments revenue streams resulting from the lowered barriers to competition. Change is rarely comfortable, but as market evolution in the United States and other countries illustrates, the forces of change are inevitable.

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