Standard Bank announced last week that they are attempting to transform from traditional to platform banking.
But what exactly is a platform bank and what are the implications of this decision?
Before asking Lungisa Fuzile, Standard Bank SA's CEO, to explain more, I thought it would be helpful to explain what a platform bank was anyway and consider the barriers Standard Bank will face pivoting from it's traditional model.
(You can listen to the recording by clicking here.)
First up, what is a platform business anyway?
If you are wondering what a platform bank is (or could be), your not alone, as it is still somewhat ethereal and may mean different things to different people.
I found it helpful to think about a few non-banking platform examples, to digest what Standard Banks is really saying.
Take Airbnb for instance.
Their "platform" allows homeowners to rent their properties out for short holiday-lets, to anyone in the world.
I use the platform regularly, and It has just been of phenomenal value, because it's removed some of the most significant entry barriers, such as marketing, distribution, cash collection, customer validation and security.
Kindle books is another great platform. If you want to author a book, Amazon will guide you through the whole process, so the only thing that you have to worry about is actually the writing.
And Salesforce is my third example. Less known perhaps than Kindle and Airbnb, but they are the market leader in customer relationship management software.
They were able to outperform Microsoft, SAP and Oracle, not because their 'product' was so much better, but because they partnered with third parties, who built additional solutions onto the Salesforce chassis.
Docusign, for example, was quick to add their e-signature solution to the Salesforce marketplace, which allowed customers to seamlessly move from pipeline management to contract sign-offs, without having to switch between different infrastructure.
Platform businesses are all similar in that they create a market place that allows other businesses to increase their distribution, reduce costs/friction and/or reduce business risks.
And the platform provider often benefits most of all.
By providing a 'generic' infrastructure, which others can use for their own purposes, they are able to create highly scaleable businesses, where marginal costs reduce significantly for each additional customer that is added to their platform.
Airbnb for example, now has a valuation that matches the whole hotel industry, which is remarkable when you consider they don't own a single hotel.
So it shouldn't be a surprise that many, perhaps even the majority of today's most valuable companies, are in fact platform businesses.
Alibaba, Facebook, Netflix, Amazon, Google, Salesforce, Airbnb....are just some of the names that spring to mind.
It therefore makes logical sense that Standard Bank is exploring platform banking.
In fact, it would be commercial suicide not to, because the entity that monopolises that space first, is going to become incredibly hard to dislodge.
What Could Platform Banking Look Like?
Well, in simple terms, I think it could be anything that shows some or all of the characteristics that Mckinsey have suggested define a platform business.
Airbnb is certainly software-based, it match-makes, it works across multiple jurisdictions, its marginal cost absolutely tends towards zero and the network effect is what generates it's growth.
As for combinatorial innovation (I had to look up what that meant), you can associate that with the augmentation of several scaling trends or technologies. Airbnb would not be Airbnb without digital cameras, mobile devices, cloud, machine learning and a host of big-data management tools.
For platform banking services, I could therefore imagine the following are on the Standard Bank ideas board...
1. Standard Bank lets businesses build or offer a wide range of products and services within their own ecosystem.
Imagine for example, you want to buy a house. How would the journey improve if you could do everything you need to do in terms of researching, pricing, surveying, insuring, moving, borrowing and legalising with one bank hosted platform.
Initially, this might still be disjointed, with a variety of bank approved providers being offered up, perhaps with significant discounts if you decide to use Standard Bank for your mortgage.
Over time this would be improved with all of the different actors, being able to access common data sets, reducing the overall amount of form filling and reducing the risk of fraud for all parties.
Eventually, you could imagine a savvy FinTech, working in partnership with Standard Bank, building a standalone software-as-a-service offering that automates the majority of the house buying steps, and ultimately aims to offer the fastest and cheapest all-in conveyancing package on the market.
(If you want a great example of a housing-related platform business, then check out the US firm Zillow to see how by starting with a pricing took, they have created a rich marketplace for buyers, sellers and related service providers.)
2. Standard Bank opens up a wide variety of plug-and-play services for partner businesses to use as they wish.
Here you could imagine you are a standard bank customer but you decide to take out insurance with a competitor.
Wouldn't it be nice if that competitor could pull your KYC data from Standard Bank to make a less frictional onboard. In this case Standard Bank isn't your cash custodian; they become your data custodian, and offer you a simple app to 'sell' your data to the third party. In this case the transaction isn't the bit's and bytes that represent cash, but rather the bit's and byte's that represent your profile or persona.
Another alternative could be where a car dealer decides to offer it's own in-house financing, therefore standing as principle with a client, rather than acting as an agent to a bank.
They are unlikely to take on the cost of developing an appropriate credit scoring and funding model, but why should they if this service (calculation) could be provided by Standard Bank?
Perhaps the service can be automated so smaller dealerships can calculate the capital, liquidity and insurance they would require to run the financing offering, with a (say) 90% probability of being profitable in normal market conditions?
3. Businesses with large networks start to offer Standard Bank Products directly to their customers
Another platform player Standard Bank could support would be the $1.5billion startup Deel.
Deel's solution helps companies almost instantly onboard unlimited numbers of employees and contractors, from anywhere in the world whilst still ensuring they are legally compliant.
As Deel are also a platform business, I'm certain they would welcome any number of Standard Bank offerings that benefit their own community of employers and employees, especially if they could be quickly integrated within Deel's own ecosystem.
Sounds Like Paradise. Will It Work?
The opportunities are vast.
There are hundreds if not thousands of benefits that a platform play could bring to Standard Bank, its customers and indeed society at large.
And if they find the right offerings, they improve their potential to scale, with falling marginal costs, improved customer satisfaction, less disintermediation, better brand presence, more diversity and the more regular ability to create adjacent opportunities.
Having said all that, it's no slam-dunk that this strategy will actually work?
Well for four very big reasons.
1. This is a highly competitive space.
This is not a new space or even a particularly new idea, so expect it to get incredibly congested incredibly quickly.
There are plenty of players promising banking executive teams that they can provide the technology, consulting or implementation services to get these ecosystems of the ground.
So we have to assume the executives of all the major banks are having very similar conversations.
The reality is they have no choice but to try something like this as if they don't, they will continue to see their market shares being eroded by nimbler, more focused Fintechs and/or face the possibility of losing out to other platform providers.
Plus, the banks don't just face competition in this space from each other. They may have good distribution, but when compared to the Telco's and Tech companies, it's inconsequential in terms of reach.
So they all need to play, but I suspect that the network effect will mean there can only be one or two dominant players, as we see in other network-driven markets (e.g. LinkedIn for business, Tik Tok for catchy video, youtube for longer form content etc. etc.)
2. There will be collateral damage.
For platforms to work, banks will have to accept that they will cannibalise their existing product offerings.
For example, to truly be a platform, they will obviously open up opportunities for competitors to steal market share in some of their core product offerings.
This will in theory be offset by the platform revenues and scaling opportunities, but I've never met a banker who'll gladly give up margin or market share, even where it's for the greater good, without a fight.
This is particularly so in banks which are product-aligned, instead of customer-focused (i.e. all incumbent banks!).
Just as the Marriott was never going to get board approval to build Airbnb, I'm curious to see how Standard Bank will placate the many stakeholders who care about the current vertical product revenue streams.
3. Standard Bank Will Have To Learn To Fail To Succeed.
Those top companies I mentioned earlier (Google, Amazon, Airbnb, Salesforce, Tesla etc.) are masters at hiring the best, failing the fastest and experimenting the most.
They pump billions into hiring the best technologists to build the best technologies to create the best client offerings, often framed under some higher-order purpose, like organising the worlds information or making sustainable transport common-place.
And much of that massive monthly cash-outflow doesn't even lead to a viable product, which is fine when the investors, board and exco are comfortable that the one-in-twenty success will pay for the 19 failures and believe passionately that the two events are co-dependent (i.e. you have to fail to succeed).
This model is not something that is a-typical for those that play in the banking sphere and it is therefore not going to be easy to gain acceptance.
Can Standard Bank convince its board, its customers, its shareholders and its regulators, that paying more money, to fail more often, is the path to sustainable future profits and improved returns on capital?
And will their regulators accept this can be done in a safe way, which doesn't increase systemic risks.
If I was a regulator I'd want to protect the status quo and would naturally be pensive towards how kyc, aml, popia, basel and a gazillion other regulations will be managed in this new world of open, eco-friendly finance.
4. Will Institutional Investors Accept The New Profit Models?
If you look at these mega-companies, driving outlandish valuations because of their platform models, they often have a very similar profit problem.
They don't make any.
But this doesn't matter for your hyper-growth, mega-trend following, purpose-first, tech-savvy investors.
They for example, loved Amazon, believing in it so much they could wait 20-odd years before seeing the first-ever profits.
And they believe that data is the new oil and that just because it doesn't sit on the balance sheet, doesn't mean it shouldn't be part of the share-price valuation.
And so they are comfortable forgoing dividends on the basis that the capital appreciation will far outweigh the opportunity cost of a nice sensible coupon paying banking stock.
I don't think people that invest in bank stocks see the world in the same way, so to do this right there must be some risk of asset reallocations. If Standard Bank is too aggressive, they may see some of their current investors bail, pushing down their share price for a protracted period.
On the other hand, if they are not aggressive enough, they'll lose the immense opportunity, which is I believe, there for the taking.
Perhaps a little, but my point is this...
Tech companies have build platform businesses to date, not banks.
Tech companies have the right culture, motives, risk appetites and supportive shareholders to take on these types of bets.
Tech companies have a track record of showing how to get to market in months, not years.
Banking culture, on the other hand, is vastly different and heavily entrenched.
They find it hard enough to develop slightly client-centric products and services, let alone creating huge open eco-systems.
So there will have to be some incredible leadership to encourage thousands of predominantly control minded risk and process managers with accounting and actuarial science backgrounds to become something that they've never trained to be.....
Can Standard Bank make this leap?
I don't know if any bank can..., but I did ask Lungisa to share his views on Standard Banks latest announcements and to talk about the threats and opportunities he believes must be managed.
So, if you want to hear what he had to say click here.