The marketplace model, where a merchant offers products and services from a range of providers including its own, is by no means new. It is one of the oldest and most established forms of trading – we still refer to ´market towns´ that trace their root. Amazon, ebay and Alibaba claim to be the world´s largest marketplaces and for many people are the first port of call to buy most products. In banking too, the marketplace concept has been tried before – in 2001 by Bradford & Bingley, offering theirs and others´ banking products to deliver ´what´s best for you, not for u. After a period in hiding, it now appears to be back on trend.
The traditional Design / Manufacture / Distribute operating model still favoured by most banks goes against this current thinking. Banks conceive ideas for products that they feel their customers need, create them and then sell them. This keeps most if not all of the ´supply chain´ in-house, with banks retaining control and profit on the way. Contrast this with today´s marketplaces – few of whom design, create or own any of what they sell – whether this is retail products from Amazon, accommodation from AirBnB, or taxi rides from Uber. Netflix is increasingly creating and refining entertainment content, but revenue comes predominantly still from its subscription services. The world has moved on. Banks must too.
These BigTech firms that dominate the ´shared economy´ are now the most valuable companies in the world. The GAFA firms (Google, Apple, Facebook, Amazon) either have banking licences or are planning to acquire one, though to date few have moved into Financial Services in a big way . Amazon does offer loans to Amazon Marketplace sellers, and is in talks to offer bank accounts and credit cards using established partners. This is just the beginning.
BigTech´s reticence to go further is rational. Firstly, the capital required to run a bank in the traditional sense is unattractive to the cash-rich, acquisitive and capital-light BigTech elite. Secondly, the regulatory burden of operating a financial services provider is both a burden and anathema to these firms that operate in loosely regulated, largely self-governed markets.
How does a banking marketplace work? It is simple. It works in the same way a traditional market operates – the stalls may all sell tomatoes, those offering better quality may be able to charge more, but for the same product the lowest price (or most trusted seller) will generally win the business. For financial services, it is an aggregator of products and services with similar characteristics (an instant access savings account for example) presented to the customer as a set of competing offers. This approach offers transparency, choice and better pricing. Customers of traditional banks will claim that this combination of features is both missing and overdue.
A marketplace by its nature generates a level of competition. Once one product or seller does well, others enter the market either to capitalise on their predecessor´s success or attempt further improve on their offer to capture market share. For challenger banks and new entrants to the Financial Services sector, the marketplace offers possible the best chance of a level playing field. The UK government, with its recent Open Banking standards framework to increase competition in the banking sector, will be encouraged by Starling and Monzo (both newly established challenger banks) who have recently launched marketplace offerings.
The ´lowest-priced, most-trusted´ formula by which most products offered on marketplaces are selected gives new providers a better chance of winning new business, particularly in commodity products such as credit cards, savings accounts and general insurance . Lidl and Aldi represent good examples in the highly competitive UK retail sector. They are new to the market (challengers in the UK), offer transparency, choice and lower pricing and on commodity products, and have demonstrated that brand is less important than value. They have disrupted the market previously controlled by the Big 4. The UK´s Big 4 banks should take note.
Not only is the traditional bank operating model under threat, but its business model is too. Banks make money by charging fees for products and services, and through Net Interest Income – the difference between the interest they pay on credit balances and that charged on loans. Both income sources are dying as customers expect more services for free (and object more vocally for being charged for items their bank could have helped them avoid) and the previously rich seam of revenue on the interest rate spread is under attack from newer entrants with lower costs of operation and the UK´s current low interest rate economy.
Instead, the new bank business model is based on shared value. This requires the provider to create value for the customer, for example through saving them money on foreign exchange fees, by switching to a lower cost energy provider, or recovering their overcharged Pay-As-You-Go travel costs. The value created passes to the customer, and the provider takes a referral fee from the beneficiary firm (the energy provider to whom the customer has switched, for example) or a share of the value created.
The new model also places a high value on monetising data, either by charging for its use or by reselling it to others to use. This is becoming harder to achieve, as concerns over privacy, claims on ownership, and regulation around purpose of use dampen enthusiasm almost before this new revenue stream has gathered pace. However, as Google with its omnipresence in search, or Facebook with its dominance of social channels can attest, the platform that controls most data holds most value. Amazon and Netflix have also shown their mastery of data with their constantly refined offerings based on customer preference. Banks by contrast have lagged in their sophisticated use of data to make products more relevant for customers.
This concentration of power in platforms could mean that marketplaces become like utilities, there is room for more than one but not all will be able to participate profitably. The risk for the slow moving traditional banks is that they bear the cost of operating the ´plumbing´ of the banking infrastructure, but are left with few value-added services to generate the profit.
Are banks ready for the change? Some are, others will need to change or risk becoming spectators. Two key themes are driving transformation in the distribution of financial services. First is the marketplace itself – offering a digital shop window for the best products and services on offer, irrespective of who supplies them, curated in a single place for customer convenience. The second is the ecosystem model, where banks use partners and their services either to offer direct to the customer, or to help the bank to make the offer themselves. Both are new skills for banks to master, and present possibly the greatest challenge of all to be successful – a change of mindset.
Moving from the traditional ´owner / operator´ role under the Design / Manufacture / Distribute model, where a bank would have full control, to the more fluid marketplace or ecosystem where the bank offers a platform for distribution is a significant leap for bank employees. In the marketplace, the customer is now in control. The skills required to adapt are not those that banks have historically attracted or developed.
The real key to delivering a successful marketplace offering and ecosystem model is creating the right culture. Putting the value to the customer before the value to the bank – best for you, not for us – is essential. Developing mutually beneficial partnerships with external providers based on common goals, trust and respect, appreciation of each others´ capabilities (not simply underlining the scale and clout that one has over the other) are fundamental to a productive business relationship. Letting go is important too. Being able to entrust another partner´s ability to deliver a service to the customer who visited your site, and do this to the same level of quality that you would expect to deliver to, requires a deep level of trust and symbiosis.
The answer for banks lies beyond technology, products, data, processes. It is in changing the core DNA of how a bank deals with its value chain. Simple to set out, more difficult to execute. The brave are working towards this model now. The more fearful may regret not having made the same move while they still could.