Like drunken sailors swinging fists at one another, we have been hurling around various terms to describe new ways of banking, new ways to deliver banking services. This post attempts to sort out a taxonomy and clarify the meaning behind the most salient terms.
I am using these terms within the context of the banking world in this post. Do note they apply equally to the insurance, asset management or payments worlds, indeed to the entire financial services industry.
API Banking: Also called “open banking,” API banking is the ability, for third parties, to access a bank’s software system thereby enabling a programmatic integration between an external third party application and a bank’s internal application via bank-grade security, authentication and access management.
Within the context of PSD2 in the European Union, banks are mandated to provide access to checking accounts, which will most probably be managed via APIs. In the US, several banks are working on developing various APIs to interact with a variety of fintech startups to provide an enhanced service to their customers or end users.
For example, Capital One has launched its DevExchange for 3rd party developers to leverage APIs it has built for two-factor authentication, rewards, and offers.
In and of itself, API banking is a tactic, not a strategy, although there can be strategic components to an API tool such as key policies, access management, volume, pricing. API Banking can be either push or pull driven:
- Push: a bank can integrate to a service it needs (for example an API integration with a compliance service provider, or
- Pull: a bank allows integration for a service its clients want or need.
Certain banks have started to develop APIs and early indications are these APIs are part of a bigger strategic intent. In other words, a bank’s API initiative could be part of a platform strategy.
Platform Strategy: The deployment of a set of business capabilities to maximize value creation across a value chain and articulated around defining what capabilities are core and remain within the responsibility of the bank and what capabilities are given to platform partners when delivering services or products to customers or users.
Technology companies such as Intel, Microsoft, Facebook, Amazon have been very successful at prosecuting platform strategies where value is delivered to customers while the platform owner/sponsor and the platform partners share in the value creation.
Historically, banks have crafted what many believed to be platform strategies where they owned the entire value stack and did not share with partners, In effect, banks created single-brand financial supermarkets. In our view, these efforts did not (and do not) qualify as platform strategies, as the platforms did not truly enable value creation along a value chain.
Platform strategies come in multiple flavors. For example, the platform strategy of Intel was/is very different than the one followed by Amazon. It should be noted that based on size, technical sophistication, market dominance, certain banks will own a platform – in platform parlance, they will be the platform sponsor – and its strategy, while other banks may, having strategically decided so, be partners of another bank’s platform strategy.
Certain large banks have developed platform strategies not immediately apparent to the fintech community. One example is the proprietary software platforms owned by global banks in the trade finance and supply chain finance sector.
Marketplace Banking: A type of platform strategy where a bank creates a digital place where third parties can showcase and sell their products and services to the bank’s customers. In a sense, a marketplace banking strategy is akin to the eBay or Amazon’s marketplaces where buyers and sellers of products meet and transact. Certain banks have or are in the process of developing app marketplaces.
The platform strategy, for the sponsor, will consist in defining the rules of engagement, the selection of vendors allowed to the marketplace, the governance, the monetization, data privacy issues, the level of technology integration, amongst other things.
Successfully executing a marketplace banking strategy will require the sponsor to deliver “match-making” capabilities to help consumers find the right producers—and vice versa. This will become a hurdle for many existing banks as they may be inclined to push their own proprietary products and services. A startup bank may be better positioned to deliver this capability.
Presumably, marketplace banking requires APIs. Retail Banks as well as Wholesale Banks can implement marketplace banking platforms. In as much as lending is predominantly a banking activity, notwithstanding non-bank lending, marketplace lending should be viewed as either a subset or first degree cousin of marketplace banking.
One can argue (as Philippe Gelis from Kantox has) that marketplace banking could be delivered by new entrants, such as a non-bank or a fintech startup or by an incumbent bank. Some fully digital startup banks in the UK have signaled their intent to build marketplaces.
It is my view, and that of Ron Shevlin, that this will be quite challenging for a startup to effectively deliver. To be successful with a marketplace banking strategy, the platform sponsor must be a “magnet” – drawing a critical mass of both consumers and producers to the marketplace. As a new entrant into the industry, this will be quite challenging for a startup. An existing bank has a head start as it has already has a critical mass of consumers to feed the marketplace. In other words, many have tried to become eBay or Amazon starting from scratch and only eBay and Amazon have succeeded.
Smaller banks could participate as vendors within the marketplace platform of a larger bank. In addition, it may be feasible for smaller banks to pursue a marketplace banking strategy if it is focused on a specific consumer segment with unique needs. We should expect marketplace banking to develop and segment itself by size, geography, type of service, type of customers.
Bank as a Service (BaaS): The delivery of certain banking capabilities in a programmatic fashion to enable third parties to deliver their own financial products or services.
For example, a bank could deliver AML/KYC services, checking account capabilities, financial data storage, payment services via an API. These services would then be used to build and deploy “last mile” financial services by a third party, be it a fintech startup, another bank, a non-bank. An analogy would be the technology services Amazon Web Services provides to its clients.
The strategic intent behind a BaaS strategy is the creation of new non-interest income revenue opportunities, created by driving down the marginal cost of delivering a given service to near zero.
BaaS can also deliver the necessary drivers to enable a marketplace banking strategy. A bank, a startup or a non-bank can implement BaaS, although an entity that is not licensed as a bank will presumably only deliver a subset of services, compared to a licensed bank. It should be noted that we are now seeing new entrants intent on providing BaaS, notably in Europe.
As with marketplace banking we should expect segmentation and specialization in this space. The various banks that have lent their license and/or balance sheet to provide certain services to alternative lenders (p2p, marketplace) should be viewed as proto-BaaS. Finally, certain fintech startups have developed a BaaS for specific services targeted at equity crowdfunding companies.
Bank as a Platform (BaaP): Fancy term for a bank’s platform strategy, does include API banking by definition and may include BaaS or marketplace banking.
A few more important thoughts. The “platformification” of the banking industry, in one way or another – as per the above definitions – will necessarily mean different approaches to strategic thinking and technology. As far as technology is concerned, and we have seen this occur with different industries and technology giants, such as the ones referenced above, open source and open standards or standardization of either technology building blocks or data/meta data and its associated methodologies and ontologies, are necessary and required.
We should therefore expect an acceleration towards standardization. We would not be surprised if certain financial technology building blocks would end up being released as open source libraries, very similarly to what has happened to the AI world (machine learning, deep learning) thereby helping the platformification process. Whether incumbents, new entrants or technology minded third parties with an interest in market optimization and social mandates do so is anyone’s guess.
I will also note that regulatory trends in the US may force banks to pursue platformification if banks are required to provide some kind of fiduciary responsibility for providing financial services (beyond just investment services).
If you want to learn more about the subject I recommend you revisit the following posts:
Articles written by Ron Shevlin:
The Platformification of Banking
Article written by Philip Gelis:
Why “Marketplace banking” is better for newcomers while “Platform banking” fits incumbents
Finally, I owe a debt a gratitude and special thanks to Ron Shevlin for pushing me to think through my arguments as well as having provided his thoughts and comments to this article.
As usual, thoughts and comments are welcomed and highly encouraged.