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Why Banks Must Shift to Platform-Based Models for Growth

Until recently, the word “platform” was only associated with technology companies like Amazon, Google, Facebook, Uber, Netflix, and numerous others. In the banking industry, it is a relatively new term. Recent research reports however suggest that banks must evolve into platform-based models to fuel the growth and innovation needed to stay competitive, which in turn is critical to long-term success.

The World Retail Banking Report 2020 published by Capgemini and Efma, that draws insights from focused interviews and surveys with more than 80 senior executives of leading banks, also reveals that more than half (57%) of consumers now prefer internet banking, up from 49% pre-Covid-19, with 55% preferring banking mobile apps, compared with 47% previously. (Read the full report here) and these factors will help in further driving the adoption of digital platforms.

Why shift to digital platforms

One of the advantages of digital platforms is their ability to provide a ‘pay-as-you-go’ business model that can combine traditional solutions with those from outside providers facilitated by application programming interfaces (APIs), believe researchers.

“Consumers expect a seamless digital experience from their financial providers, as they’ve grown accustomed to Big Techs in other parts of their lives. Traditional banks are being challenged to meet these expectations given that digitally native new entrants focus on customer experience from day one,” said Anirban Bose, CEO of Capgemini’s Financial Services and Group Executive Board Member.

“Banks that invest now in modernizing their core technology and evolve it to a platform-based experience will simultaneously delight customers and grow profitably,” he said.

Another recent research by IBM Institute for Business Value survey, reveals close to 90% of banking executives believed cross-industry platforms will become more important to the industry over the coming decade.

IBM research observes the trust advantage most banks possess that most organizations don’t have. The study suggests that people are willing to share their personal data with their bank, and banks are trusted to keep the data safe and use it ethically.

According to a recent IBM Institute for Business Value survey, more than 68 percent of consumers are willing to share personal information and data with their bank or other financial services institution. This percentage is by far the highest compared to other types of organizations with which customers interact.

They also say that adoption of platforms will positively impact revenues (90%), profitability (86%) and customer satisfaction (83%).

Platform Banking Challenges

However, the researchers in both their studies noted while there are numerous benefits of adopting a platform-based banking model, there are still many challenges. Barriers to a platform-based model include security, legacy core banking systems, outdated data management, inherent risk-averse culture, identification of the right partners and budget constraints. And probably the greatest challenge is existing and potential regulations governing data and privacy. Where the initial benefit of platforms focused on the use of data and advanced analytics, there will almost certainly be a growing number of rules and regulations around the use of consumer data.

Researchers at IBM believe there would be challenges associated with regulatory compliance, potentially preventing platform business models from realizing their full potential. This becomes more pronounced when regulators don’t fully understand the dynamics and components of digital transformation.

Banking executives who were surveyed also believed that cultural differences between banking and non-banking providers would be a major inhibitor of platform business model development. IBM found that 82% of banking executives thought that trust and transparency between partners would be a key challenge.

At the same time, there continues to be the challenge of finding talent to respond to digital transformation. Platforms are data rich and require advanced analytics, new testing capabilities and data scientists. Incumbent banking organizations have quite a ways to go to compete for talent with digital leaders, the IBM study noted.

Likewise, the Capgemini report also sees Bank executives recognize the obstacles to moving to a platform model. With many banks having an accumulation of legacy systems in place, the situation makes it a challenge to integrate emerging technologies, which is affecting customer experience and operational excellence.

The report also found that 80% of bank executives cited cybersecurity and privacy concerns, outdated data management (68%) and identifying the right partners (73%) as primary barriers to moving to a platform system.

Hence, banks are reluctant to take transformative action because of the levels of resource required and the risks associated with inefficient implementation.

Despite the challenges, traditional banks and finance companies have valuable experiences to draw upon. They understand the value of trust, today’s complex regulatory environments and have a great deal of capital that can be used to build for the future.

As the Capgemini report noted that banks that have already embraced platform models are better at expanding their market reach, improving operational efficiencies, increasing business profitability and offer differentiated, personalized products and services over their traditional competitors.

Experts believe, by shifting to a platform-based model, banks that were experiencing incremental customer growth can create new business models to monetize some of their strengths.

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Sohini Bagchi
Sohini Bagchi is Editor at Trivone Digital, a published author and a storyteller. She can be reached at sohini.bagchi@trivone.com