Digital platforms are radically altering business models, competitive structure, pricing and customer behaviour in all sectors, banking included.
India today is seeing a plethora of new-age players competing against incumbents across every sector and especially so in retail and financial services. With very different business models that mix and match capabilities of their own with various other partner capabilities, these deliver a differentiated composite product and services.
With banking as a platform (BaaP), banks and financial services providers can establish or participate in collaborative ecosystems that can enable significant business growth and expansion.
The philosophy of BaaP is closely aligned to the concept and global progression of open banking, and this is expected to increasingly drive the business and operating models of banks in India as well. The effects of BaaP are likely to be very significant, and already visible in these key trends:
- Unbundling or disaggregation of the customer lifecycle -- from acquisition through servicing and fulfilment
- Increasing disintermediation of banks from being the front for end-consumer relationships
- Demand for highly digitized customer experiences that seamlessly integrate banking services into our day-to-day lives
According to a report by BCG and Google, India has in excess of a billion mobile phone connections. The smartphone user base is expected to grow to 520 million users by 2020. This is further accentuated by over half the population being under the age of 30, and increasingly technologically savvy and eager to experiment with new products and services that give them a good deal. Especially in the midst of the current Covid-19 crisis when social distancing is essential, digitization is more important than ever before for India’s financial services industry.
Banks in India have historically had many co-operation models with third-party product and service partners. There are banks operating at vastly different levels of maturity and technology integration when it comes to this though. There are some who still rely on traditional partnership models that are based on one-to-one business or service arrangements such as those for product distribution, sourcing of customers, transactional servicing, collections, or other service provider partnerships, and still follow largely semi-automated models of engaging with these entities. The service experience tends to be friction-prone in many cases, and the delivery of seamless customer experiences is far from ideal.
The evolution of fintech over the last five years has been quite dramatic in that they have devised new operating and business models that are changing the landscape. They are doing so by bringing in differentiated specialisation in a specific area, which traditional banks are unable to match.
For example, there are a few who have created a business around becoming a ‘trusted advisor’ to consumers offering valuable guidance to them on their financial needs and enabling them to make the best choice on financial products and services. Banks which were hitherto aligned to an exclusive sourcing arrangement with a partner now have to contend with integrating seamlessly with these ‘advisors’ and participate in their competitive marketplace to acquire more customers. Not doing so is increasingly not an option, as consumer behaviour is steadily evolving to demand such experiences, and banks cannot provide these on their own.
And this is truly open banking. While there are no regulatory obligations as of yet to participate in an open banking framework within India, it is a matter of time before this becomes essential in the backdrop of RBI’s account aggregator guidelines expected to come into effect soon.
‘Platformification’ of banking is essentially making available specific banking products and services on collaborative API (application programming interface) platforms that offer a variety of capabilities, spanning not just banking but also various other complementary or supplementary areas. Such platforms allow for the assembly of innovative new products, experiences and services, and organisations which leverage these platforms to create these innovations are going to thrive in future.
Banks will be key participants on these platforms, both as providers and as consumers of services, and of course, as innovators devising new offerings and business models. An API-enabled bank can “unlock their vault” to become an agile participant on these platforms and can collaborate via open banking, offer innovations, and stay ahead of fast-changing customer expectations.
Offering and using open banking APIs can be a force-multiplier for banks for their business and customer base expansion.
While many banks have launched APIs for their corporate customers to use to integrate into their own ERP ( enterprise resource planning) systems, there are some who have taken the lead on offering a large gamut of APIs to enable collaboration with customers, business and service partners and fintech.
Banks need to use process, product and business model innovations leveraging platforms to strengthen their vast captive base of customer relationships, and this can be a great differentiator when it comes to competing with challengers. Being able to expand wallet-share through these platform-enabled innovations while offering the assurance and security of a well-established player is a powerful combination that can position banks for continued success.
Harish Prasad is head banking solutions, APMEA, at FIS. The views in this article are his own.