Platform banking: the imperative to reshape the business model

18 August 2021 5 min. read

Banks are facing stiff competition from challengers that have been quick to adopt innovative technologies and embed them into the heart of their operations. Gonçalo Traquina, KPMG’s Management Consulting Lead for Financial Services in the Lower Gulf, explores the need for banks to follow in their footsteps or risk obsolescence.

Banks are increasingly having to compete with large, established technology companies like ‘the four horsemen’ or GAFA (Google, Amazon, Facebook, Apple), as well as a crop of FinTechs which are constantly coming up with innovative and customer-centric solutions. To survive and thrive in this era, banks will need to adopt new models.

Most major banks today are vertically integrated, with closed-loop offerings. Their products and services run within proprietary distribution channels and tightly controlled infrastructure. Driven by regulation, the advent of open application programming interfaces (APIs), for instance, open banking, will upend the status quo by allowing third parties to act as alternative distributors and offer a new range of products. 

Gonçalo Traquina, Management Consulting Lead for Financial Services, KPMG Lower Gulf

Additionally, customers have embraced platform-based businesses for reduced friction, lower prices, and better service, along with the convenience of using mobile devices as the primary point of contact. 

An evolution in consumer preferences is also driving the shift towards platform-based models. Indeed, our research and experience suggest that — after nearly a decade of fragmentation and unbundling of services in their lives — consumers are starting to revert towards ‘rebundling’. Instead of having multiple apps for ordering food, ride-sharing, and payment options, they may want just one. Consumers may not be specifically demanding ‘super apps’, but many want the convenience and simplicity that super apps can offer. 

The concept of banking as a platform

Digital platforms are poised to dramatically alter business models, competitive structure, pricing, and customer behavior in banking, in line with what we have observed in other industries, such as retail. Given the rapid pace of change, incumbent banks are being forced to consider alternative models – one of these options being Banking as a Platform (BaaP). 

By establishing a banking platform, banks can allow third-party FinTech developers to build products and services on behalf of bank customers, creating a broad network of FinTech applications for loans, payments, investing, wealth management, and other services, while enabling financial institutions to deliver a unified banking experience. 

Learning and leveraging from FinTechs

Recognizing the market opportunity to serve mobile-first customers, FinTech companies are introducing disruptive business models that eliminate unneeded expenses and display greater efficiency in terms of capitalizing on customer data. 

These business models support no-fee or low-fee products and services that threaten banks’ fee and margin revenues. Players like Alipay (China) and WeChat (China) offer their customers access to thousands of products from hundreds of financial services providers in a single digital ecosystem. 

Two more super apps have emerged in South East Asia, from the leading ride-share platforms, Go-Jek and Grab. Both apps now offer a range of other services from food delivery to medical advice, and both are competing to help consumers select and purchase financial products. 

FinTechs are leading the way in innovation using rapid development methodologies on the latest technology stacks, launching products and services not yet offered by banks. Banks would be well advised to take heed of these developments for several reasons. 

They are disintermediating banks from their customers. Super apps like WeChat and Alipay offer a range of basic banking, savings and investment products to customers. While for now, these products are being originated and underwritten by traditional financial institutions, this still means that these institutions are being moved one step further away from their customers.

Much like what happened in the insurance sector with platform plays and aggregators, traditional financial institutions may quickly find they have been relegated to performing the regulated activities while the super apps retain the customer experience and relationship. 

The rise of super apps

Increasingly, “super apps” are using their vast wealth of data to deliver better services, and improve operational processes – for instance by using social media and transactional data to risk-assess loan applicants, and better target financial products to customers, at the exact time they need them. Traditional banks, with their siloed data and mainframe technology estates, are struggling to obtain a complete and representative view of their customers. 

Apps are also building their brand reputations in financial services. Offering payment services within the app may seem fairly innocuous at first; a marketplace without a payment mechanism may be doomed from the start. Currently, the vast majority of these payments are flowing through traditional banking and card issuer infrastructure. 

However, most of the bigger super apps now also have strong relationships with banking arms (e.g. WeChat has WePay for payments and WeBank for banking products; Alibaba has AliPay and Ant Financial) which are using the app’s brand reputation and reach to access new customers and build trust in financial services. 

Using these approaches, FinTech companies can provide banking products and services without the legacy cost structures of traditional banks. The banking industry has thus far avoided the level of disruption seen in other industries, owing to a combination of regulatory barriers, industry structure, entrenched customer relationships, and customer concerns over privacy and reputation. 

Yet those are not insurmountable obstacles, especially when customers expect and demand high levels of service and convenience. With mobile networks and platform-based business models, FinTechs can bypass the strengths of today’s banking industry. Banks should respond to these challenges, and future-proof their operational strategy.