Platform vs. linear models in B2B financial services
The platform economy eats classical businesses for breakfast.
Marketplaces are everywhere in our daily life. It’s been the case for some time. Humans have used physical markets to trade for thousands of years and have now embraced the digital version of it on the internet. The smartphone acted as a steroid to bring all of us consumers on app stores and digital marketplaces. Interestingly, this ultra-rapid shift has not occurred in the B2B space. Are some industries immune to the revolution? Or is it coming? Let’s consider B2B financial services.
A continuous rise of platforms, but at a glacial pace
Stock trading was first executed in the 15th century on a peculiar platform, “at the Beurse*”, a coffee house in Bruges, Belgium. In the 1980’s, stock trading was also an early adopter of electronics. I remember contributing in 1998 to the launch of Clearnet in Paris, a clearinghouse that connects banks who need to exchange margin calls. But for the last 25 years, almost nothing has changed. Admittedly, BlackRock turned its Portfolio Management System Aladdin into a digital data platform. Some fintech founders invest time and money to make the B2B platform economy a reality, but it comes to the industry at glacial speed. Why?
My best guess is that the reason lies at the heart of the innovation model: Airbnb, Kickstarter, Vinted, Uber, and the likes were invented and developed with little capital, little regulation and in a decentralized way by innovators focused on a use case before expanding it. In B2B financial services, one needs access to C-Level decision-makers, as well as human and financial capital. As far as I know, there are few intrapreneurs in established firms, therefore few promoters of disruptive services. Fintech founders, no matter how smart their ideas, face all these limits and a harsher one: the “end-of-POC cliff”, when a great idea, successfully proven, cannot find its way into production. This dead-end greatly impedes innovation.
The conditions to unlock this untapped value
For the last two years, I’ve read most reports on this topic and discussed it at length with several strategy consultants. The three thought leaders in my opinion are OliverWyman, McKinsey and CapGemini. All three expect the rise of “ecosystems orchestrators”, “OpenX”, “greenfield builts”. Still, for the past two years, no platform has emerged.
I bet that it is only a question of time. Cloud technologies can now meet banking security standards. APIs are getting more common. Hundreds of fintechs are ready to embrace the model. The cautiousness of incumbents, usually regulated companies, is a clear impediment. In the latest OpenX report, fintechs say process barriers and culture of banks are the greatest challenges they face
A glimpse into the future
Assuming that an open platform model will eventually rise, what would it look like?
In my opinion, it will be cloud-based. After a year of using a public cloud and its portfolio of micro-services, I am certain that there is no going back to traditional in-house IT or innovation.
1: APIs will become the norm. IT teams struggle to implement this small piece of code on legacy systems, but they will eventually get there
2: It will be a PlatformS economy: Olivier Wyman warned me of the “winner takes it all” pattern (cf. Facebook vs. Google+). It is true that there has been some concentration in trading and clearing platforms, but it remains an oligopoly, not a monopoly. I am of the opinion that the new B2B financial services economy will be a collection of interconnected platforms, who cooperate more than they compete. This two-level interconnection of the ecosystems is the main key to unlock value at scale for the industry
3: Open innovation: in Europe, five years ago, Open Banking was a mere concept. But then the Payment Services Directive (PSD2) reshuffled all cards and now even traditional banks propose multiple account aggregation and external fintech services. My educated guess is that B2B clients and fintechs are ready for this revolution.
(*) which led to the term “Bourse” and “Boerse” in French and German respectively.