Banks and Fintech on Platform Economies

Contextual and Conscious Banking

Paolo Sironi

• Publisher: Wiley
• Year: 2021
• Print ISBN: 9781119756972
• eBook ISBN: 9781119756996
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Discover the future of the financial services industry with this insightful new resource on Contextual and Conscious Banking

In Banks and Fintech on Platform Economies: Contextual and Conscious Banking, accomplished fintech professional and author Paolo Sironi delivers an insightful examination of how platform theory, born outside of financial services, will make its way inside banking and financial markets to radically transform the way firms do business.

You'll learn why the financial services industry must master the necessary shift of focus from selling business outputs to selling client outcomes. You'll also discover how to steer the industry towards new forms of digital transformation underpinned by Contextual Banking and Conscious Banking platform strategies that will benefit stakeholders of all kinds.

This important book:

• Describes the shift in mindset necessary to help banks strengthen and extend the reach of their Banking-as-a-Service and Banking-as-a-Platform operations.
• Shows how a renewed interpretation of fundamental uncertainty inspires the usage of exponential technologies to achieve architectural resilience, and open the reference theory to spring new business models centered on clients' and ecosystems' antifragility.
• Financial services industry can break-out from a narrow space of value-generation to reclaim top spot against bigtech contenders, enjoying greater flexibility and adaptability at lower digital costs

Perfect for CEOs, business leaders, regulators, fintech entrepreneurs, wealth managers, behavioral finance researchers and professionals working at financial technology companies, Banks and Fintech on Platform Economies will also earn a place in the libraries of bankers seeking a firm grasp of the rapidly evolving outcome economy and a view about the future of the industry.

PART One
Foundations of Platform Theory

SUMMARY OF PART ONE

Part One presents the aspects of platform theory that are essential elements for banks and fintech competing on platform economies.

First, the Fourth Industrial Revolution is based on the digital transformation of entire industries from output economies to outcome economies. This corresponds to a shift from product-centric revenue mechanisms to the monetisation on client journeys, as they attempt to fulfill personal, business, or financial needs.

Second, successful non-banking platforms addressed the trust advantage as a key motivational aspect that invites users to engage in value-generating interactions across entire ecosystems. Financial services are already asked to address the trust issue in the aftermath of the Global Financial Crisis. Trust is core to their business, even more than any other industry.

Third, platform openness is a competitive advantage because it accelerates innovation and promotes network effects. Open banking and open finance regulation and competition are asking banks and fintech to find new ways to monetise on open ecosystems.

Fourth, transparency is the core principle of successful platform governance to remain open − whenever and wherever it is needed − and trusted. Financial Market Transparency emerges as the new positive theory that helps banks and fintech to transform their business models generating value that clients are willing to pay for accessing it.

The characteristics of output economies, the trust advantage, the dynamic level of openness, and the transparency principles are the foundations of platform theory that are needed to better understand how to reinvent financial services in the Part Two of this book.

CHAPTER 1
Platform Essentials on Outcome Economies

We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before. We do not yet know just how it will unfold, but one thing is clear: the response to it must be integrated and comprehensive, involving all stakeholders of the global polity, from the public and private sectors to academia and civil society.

— Klaus Schwab, executive chairman, World Economic Forum [1]

The fourth industrial revolution is about platforms and exponential technologies, which interact to reorganise entire ecosystems made up of companies, citizens, and public institutions. Overall, customers always seem to appreciate the same, frictionless experiences at convenient prices. This is what platforms do best but that is only the surface. Letting the reality of network effects emerge through technology, they shift the foundations of entire industries from outputs to outcome economies, and deeply transform the way users perceive value and demand for services. However, the transformation to outcome economies is a more complex endeavour for financial services because of regulatory constraints, and the biological unveiling of core information asymmetries. The latter shadow the generation and perception of value across human interactions, as well as on digital. This recognition is the starting point for revisiting platform theory in the context of banking and financial markets, and investigating the sustainable evolution of prevailing business models to harvest higher business value.

1.1 INTRODUCTION

The first industrial revolution started in Great Britain around the 1770s with the adoption of mechanised spinning, which was made possible by high rates of growth in steam power and iron production. The term “industrial revolution” was coined by the French envoy Louis-Guillaume Otto in a 1799 letter announcing that France had entered the race to industrialise. It marked a major turning point in the history of humanity and labour since homo sapiens started domesticating animals and plants. It affected almost every aspect of human life, laying the groundwork for the emergence of capitalism. According to Landes [2], the standard of living for the general population began to increase consistently for the first time in history, opening an era of progressive per-capita economic growth. At that time, industries were machine- and labour-intensive, servicing a growing population of consumers in multiple countries in a very linear fashion: from producers to consumers. A recession followed the economic boom in 1830s, when the market for energy-enabled innovations matured. Neither the increasing popularity of locomotives and steamships, nor the appearance of the electrical telegraph were powerful enough conditions to justify high rates of economic expansion.

One century after the industrial revolution started, rapid economic growth surged again in the 1870s. The late 1800s were characterised by rapid standardisation of production processes, identified as the second industrial revolution or the “technological revolution”. Widespread deployment of electrical grids and new steel-making processes allowed the mass production of consumer goods. Serial manufacturing of machine tools and their interchangeable parts further streamlined production processes with the orchestration of more effective assembly lines. The enormous expansion of rail and telegraph lines allowed an unprecedented movement of people. The epicentres were in the United States, Germany, Great Britain, France, Japan, and Italy. Social tensions and financial turmoil were not absent, such as the Wall Street Crash in 1929. The First World War was followed by the devastating Second World War, leading to a new world order.

Almost two centuries after the industrial revolution began, a third phase of exceptional growth started around the 1960s. The third industrial revolution originated with the mass adoption of computers and digital record-keeping. This “computing revolution” is epitomised by the shift from mechanical and analogue electronic technology to digital electronics, which transformed not only production techniques but also business processes. The invention of the first transistor at Bell Labs in 1947 was followed by a relentless rate of growth in computing power. According to Moore's law, coined in 1965, the number of transistors in a dense integrated circuit will have doubled every year for a decade. Moore's empirical predictions, then revised to doubling every two years in 1975, seemed accurate for many decades until around 2010, when the semiconductor advance started slowing below the predicted pace. However, the advent of the internet laid the groundwork for a new paradigm shift. By 2016, half of the world's population was connected, and cloud computing made data increasingly accessible.

In the late 1990s, Austrian-born business writer Peter Drucker, who advised top corporations in post-war America, said that “culture eats strategy for breakfast”. Drucker never meant to say that strategy is unimportant, rather, that an empowering culture is the most powerful enabler to organisational success. A few years later, venture-capitalist Marc Andreessen wrote that “software is eating the world” in an article in the Wall Street Journal [3]. Andreessen was witnessing, then participating in, the exponential growth of American companies like Google, Apple, and Amazon, soon followed by Facebook, Twitter, and the Chinese Tencent and Alibaba. Yet, winners-take-all success is not just about “software” but novel forms of personal and business interactions, and alternative ways of working and collaborating, which “digital platforms” enable at an unprecedented pace through exponential technologies. Currently, a new breed of entrepreneurs is orchestrating digital platforms to challenge traditional industries. They connect individuals and organisations on mobile technology so that they can interact in ways not otherwise possible, launching non-linear increases in utility and value across borderless communities of providers and consumers. They revolutionise the way industrial products and services are conceived, designed, produced, and distributed.

Klaus Schwab, executive chairman of the World Economic Forum, named this new phase of extensive transformation the fourth industrial revolution [1]. This is largely a “data revolution”, underpinned by internet ubiquity and scale deployment of artificial intelligence. The data revolution overlaps with the last stages of the computing revolution, as the fifth generation of wireless technology (5G) becomes mainstream and quantum computing matures. However, there is a key difference between the third and the fourth revolutions that sets the latter apart. Essentially, traditional businesses are being progressively transformed inside-out in a significant shift of business focus from outputs to outcomes. Exponential technologies are putting platform economics on steroids to excel on outcome economies, using all means to make the fourth revolution a platform revolution.

Currently, the most valuable firms on the planet are platforms. The total market capitalisation of the five largest US stocks accounted for nearly 20% of the S&P 500 index at the beginning of 2021 (Figure 1.1), and they are all platforms (i.e., Apple, Microsoft, Alphabet, Amazon, and Facebook). Similarly, Alibaba and Tencent are the most valuable companies in Asia.

It is now clear that “platforms are eating the world”.

1.2 PLATFORMS AND ECOSYSTEMS

Platforms are not at all a modern phenomenon, although digital technology is forcing a winner-takes-all advantage. The telephone network is one such example.

FIGURE 1.1 Composition of the S&P 500, early 2020

Alexander Graham Bell patented the first telephone device in 1876 to transmit vocal or other sounds “telegraphically” for the conduct of business and trade. He founded American Bell Telephone in 1885 to operate local networks. He rebranded it American Telephone & Telegraph (AT&T) in 1899 to operate long-distance services to run the US monopoly on telecom operations in the early 1900s. Initially, telephones were leased in pairs to subscribers, who had to arrange with telegraph contractors to deploy a line between them (e.g., one phone for their home, and one for their shop). Users who wanted to speak to different stores and suppliers would set up multiple pairs of telephones until switchboards were introduced. As the telephone system grew, its value extended beyond the initial one-sided dimension to create a multi-sided platform, enabling billions of people to talk around the world. Clearly, while telephone networks were connecting only individual pairs of users, or small clusters, exponential value could not be generated. However, as more users started to onboard, more people wanted to connect to a telephone line for very different purposes ranging from residential use to long-distance business calls. Adding users did not add ...

Table of contents

• Cover
• Table of Contents
• Title Page
• Copyright
• Forewords
• About the Author
• Disclaimer
• Introduction
• PART One: Foundations of Platform Theory
• PART Two: Reinventing Financial Services
• PART Three: Leading Platform Strategies
• Concluding Remarks
• Bibliography
• Index
• End User License Agreement