With traditional models of banking breaking down, banks are transitioning to alternative ecosystem-driven business models. Rajashekara Maiya, VP, Global Head-Business Consulting-Finacle at Infosys, says these business models are the future of banking and are essential to increase customer engagement and retention.
Banking has changed tremendously in the last couple of decades but never has it seen so many things changing simultaneously, at such a rapid pace, as now. Â Customers are forcing innovation by demanding more; competition is coming from everywhere, and especially from outside the industry; in some countries, return on equity has trailed cost of equity for a while; price-to-book ratios have fallen below 1 in Europe as investors keep away, and cost pressures continue to mount. With traditional banking models breaking down, banks are transitioning to alternative ecosystem-driven business models.
The silver lining is that banks will have the financial resources to deploy new business models if credit demand holds up amid rising interest rates Even better, they will not need to waste time and money in conceptualizing those models, because many other industries have done it before them. Think media, hospitality, transportation, eCommerce, travel, entertainment, and more.Â
Aggregator
An aggregator business aggregates demand by engaging consumers with various services.
It takes advantage of its access to consumers by playing the gatekeeper role, mediating their transactions with third-party providers.  Â
Companies follow this model scale by exploiting the learning effect, building on the insights from their customer data to improve the experience, which leads to better engagement and even more data. As more consumers come on board, providers also follow, to create a virtuous “network effect†cycle.Â
Some of the best-known aggregators include the tech biggies, such as Facebook, Amazon, Netflix, Apple, and Google. But there are also incumbents in traditional businesses that have successfully adopted this model. Here, we look at the sports and fitness company Nike and what banks can learn from its aggregator model.  Â
Nike has built a connected ecosystem by partnering with the likes of Spotify, iTunes, iWatch, and WeChat; the ecosystem connects to consumers through multiple touchpoints, such as TrainingClub, Nike WeChat, and Nike Instore connect. The platform enables Nike to capture rich data, ranging from sizes, fits, profiles, activity, preferences, etc., to make the right product and service recommendations to users.Â
What banks can learn from the experience of Nike and other aggregators is encapsulated in the actions of DBS Bank. DBS is aggregating its customers’ additional service requirements and fulfilling them by embedding its services in several apps and also creating marketplaces for things like used cars, insurance, real estate, and travel. Â
Integrators
Integrators manage interactions between production and consumption ecosystems.
On the supply/production side, an integrator aggregates product provisioning APIs across the production ecosystem, and on the demand/consumption side, it integrates across distribution environments (websites, apps, and other digital services) in the consumption ecosystem.Â
An integrator, such as a logistics business, can use data from the consumption and production ecosystems to orchestrate the movement of physical goods. Integrators may also bundle multiple services from the production ecosystem and act as a one-stop distribution point across a diverse and modular ecosystem.Â
Like aggregators, integrators also benefit from the learning effect, which increases as more distribution partners generate more aggregated demand data, leading to superior matchmaking and analytics, and in turn, to greater participation of both production and distribution partners. They also enjoy a cross-sided network effect that occurs when there is an increase in distribution partners’ participation, which increases their (the integrators’) distribution potential, attracts more production partners, and increases available supply at the integrators to attract even more distribution partners.Â
Amadeus is an example of an integrator from the travel industry. The company’s global distribution system monetizes transaction activity by charging for ticket distribution and booking management. It also monetizes its data by selling anonymized analytical insights to partners looking for industry information.Â
In the financial world, an integrator that comes to mind is Galileo, an API exchange enabling one-stop digital banking, card issuing, and payment processing for fintech firms through capabilities like account set-up, funding, direct deposit, bill pay, point-of-sale authorization, etc. Galileo charges an onboarding fee for each account and practices consumption-based pricing for various services and APIs.
Banks can choose to work with the likes of Galileo or create their integrator marketplaces, just like ICICI, which has more than 500 APIs for its own and partner services.Â
See More: How Open APIs Support Innovation and Change in Banking
Infrastructure Provider
The infrastructure provider model is based on providing core production infrastructure, standards, information services, and data assets to inform, coordinate, and support the production activities of businesses.
These providers coordinate the activities of ecosystem firms across a core production process towards a common production output.
Jabil InControl provides operations management and decision support infrastructure for helping firms to manage supply chain events and diagnose risks. The infrastructure provides visibility, collaboration, risk management, and diagnostics to customers. It provides a central infrastructure across the entire supplier ecosystem by onboarding all actors across the customer’s supplier ecosystem.
Banking has also made progress in adopting this model. There is Stater, a utility created by ABN Amro for offering mortgage processing services to other lenders. Another example is IBBIC, an Indian banks’ consortium offering blockchain-based infrastructure for trade finance processing.Â
Specialist service providers
Specialist service providers offer one or more specialized capabilities to address a specific use case in a specific part of a value chain.
The capability linked to a specific function – identity management or healthcare diagnostics – may be licensed to third-party ecosystem members or embedded within any of the other three business model categories.Â
Capabilities may be offered through a capability-as-a-service model, as APIs or licensable technology modules to product developers or as a service to end-users. For example, Twilio, a cloud communications capability provider enables developers to integrate communications services into their products through API integration.
Financial institutions can adapt this example to extend a specialized capability, such as KYC, to build a bigger service, that can be applied in diverse use cases. An example here is OneConnect, an identity management capability from PingAn, which is not only used within financial services but also in scenarios, such as airport security monitoring.
What next?
Banks know that the future belongs to digital-first, ecosystem-driven business models. Every bank is considering adopting more than one model; the most prominent banks will likely look at all options. The choice depends on individual context, strengths, and limitations. That said, it is improbable that a bank will get it right in one try; more likely, it will need to experiment with some options, take them to market, and work continually to improve and scale the models it will pursue in the future. Â
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