What can banks learn from Tinder?
The API economy is here to stay. Fintech entrepreneurs know it. Banks’ CEOs know it. And of course, the Amazons and Facebooks know it too. What many people do not seem to foresee yet is the precise way in which such new collaborative ecosystems will crystallise and, even more importantly, how will they monetize it.
To address some of these topics, we have interviewed Leda Glyptis, a leading European banking innovator that has been working very closely with many of the different financial players involved in this new competitive digital arena. Today we have published the first part of this interview.
Let’s start with a short introduction. Could you tell us a little bit about you and your background?
Let’s say that I’ve sort of done everything the wrong way around. I started working as an academic in my 20s – my training is in political transformation and legitimacy. I worked briefly in defence and then joined a FinTech startup although we didn’t call them that then, and a few years later I joined a bank working in change management, innovation and IT transformation. So I have been dealing with the intersection between emerging tech, finance, and changing business and operating models for over a decade. This background has become very useful in a moment in which banks are obliged to reshape their operations if they want to keep up with the disruptive dynamics of the so-called digital –or API- economy.
When I think about API economy, the word collaboration pops up. Are banks still reluctant to establish new relationships with third partners?
First, banks already collaborate. We like to dismiss them as not being collaborative, but actually, they work with each other a lot. What they don’t like is creating dependencies. And for many reasons, including regulation, since systemic dependencies are perceived as a regulatory weakness.
But beyond that, banks fear that dependencies pose not only a challenge to their business model but a potential risk in their traditional operations. Just over a year ago the Sungard failover reminded banks of the dangers of depending on third party providers for service delivery.
And now, in this context, banks are being asked to engage in relationships with brand new third parties as a matter of course for the future.
But I guess that building everything by themselves is not an option for banks either…
Of course, the old culture of banks doing everything internally (also known as ‘not built here’ syndrome) is not viable anymore, particularly with margins being crushed and both regulators and customers creating a value narrative around re-usability.
It is important when thinking of this new set of relationships to realise that we are essentially putting the faith of one business in the hands of another. In today’s API economy, if a partner goes down, your business stops as well. If Facebook is down, Tinder is down, since Tinder didn’t build their own identity verification mechanism and rely on Facebook for what is a vital but non-differentiating service and share the foothold and the ecosystem magnification with Facebook.
Similarly, UBER did not create its own geolocation system and don’t take cash. So they have a series of dependencies that would be extremely difficult to digest if you are a bank.
As I can see, you –and many other innovators– are in constant contact with bankers, which usually attend conferences and forums. Does this imply that they are aware of all these coming changes?
Yes and no. Banks keep talking about the Kodak moment. Everyone has had at some point an innovation consultant saying: “ideas are great, execution is greater”. Kodak had figured out the advent of the digital camera, but they did not want to subvert their existing business model, and never went to market with it. End of story.
So many bankers find themselves in a similar situation right now. They look at all the various shapes that the future might take and nothing looks as cut and dried as the digital camera -actually, it did not look that cut and dried to Kodak either. But imagine you are a banker, you come to my keynote on APIs, and you go back to your desk, having to deal with hundreds of clients that need an answer today, decisions about regulatory issues that need an answer tomorrow, your forecast for next quarter, your numbers for next year…oh! and, by the way, you also need to reimagine your business for the next five to ten years with a radically different economic infrastructure, look at a few different technologies, and make an educated guess on which ones you need to invest in. It’s understandably not an easy position.
Of course, and this gets even harder when it comes to thinking of monetization. Do they really need to reinvent their revenue streams?
I’ll give you an example. If you think about corporate, commercial and institutional banking, clients pay for banking services, and it’s pretty transparent what you pay, but it’s not always clear what the activity you are paying for entails.
For instance, in institutional banking, quite a lot of activity consists of reporting.
The more you move towards an API infrastructure, the less the banks will physically do –If you put all the reporting activity in a fully connected system, either on a Blockchain or through an API layer on top of existing infrastructure, you automate this whole process–. So if you are my client and you have my API feed and I don’t produce reports anymore –i.e. I don’t have people updating information and sending it to you-, how long will it take you to expect –and demand– a cheaper service?
What about the retail side?
Here there is not an obvious relationship between what clients pay and the service they have access to since banking –in many countries- is theoretically free. But of course, there is no such thing as a free lunch. Poor people pay for it. People who have debt pay for it. People who have bad credit and default on their mortgages pay for it.
So, let’s say, you and I have free banking thanks to someone else’s bad luck or inability to manage their personal finance. It is not an ideal set up.
What if your bank now says that everyone will have to pay for their services because PSD2 –which gives you access to all sort of snazzy experiences- will decrease their margins. Will the customer be happy with the choice? Probably. Will they be happy to pay for the privilege? I don’t think so.
And does having customers that are less and less willing to pay for things complicate API monetization?
Definitely. And no one has come out and said clearly how they plan to monetize the relationships. There seem to be three models that are floating around. One is plumbing. Here the bank would have either the responsibility for security, the data, and the assets, so it would create the secure rails in which people can sell experiences. So, let’s say, I don’t put money on my Monzo account, but I plug the Monzo interface onto my HSBC account -which is not how it happens now- and then it’s Monzo and HSBC who decide how they share the pie. Although this is probably the simplest model, it will also probably the least profitable –since utilities are stable but they’re not profitable–.
The second model is the distribution one. Take a look at how the asset management world works. They create a portfolio, structure funds, and have distribution partners; some of them are online only, some have sales people, etc. This distribution arm/partner mentality is not endemic in the banking world. But once the economics of working with a distribution partner are understood, they can say I have the plumbing and then I will become a distribution partner -so I don’t look to build the digital experiences, but I create the channels for distribution, and then I have a secondary monetization layer.
The third layer is a producer one. So I go out there and I compete with Revolut, Monzo, Pariti, KreditKarma and so on. The more mature thinkers realise that there is no choice but to provide utility and managing distribution is a natural next step. Should they die to try their hand in production, they know that exclusive access to customers is a thing of the past. Particularly given the speed of change.
Collaboration and a hybrid business model seem inevitable. And yet, the way monetization will be structured hasn’t been worked out yet. And let’s face it: this is banking. How money is made has remained the unasked question but it is the main one.
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