Are platforms the new bank branches?

Andrew Cornell

Past Managing Editor, bluenotes

Here at bluenotes we’ve devoted considerable space to the debate around the future of banking and a dominant theme of this complex outlook is the concept of platforms.

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Is there going to be an Uber of banking? An Airbnb? Will Amazon become a bank? Will Alibaba establish its own financial system?

"Facebook and Google came in and just focused on engaging the user and capturing data.” - Choudary

Noted Australian fund manager Hamish Douglass of Magellan recently questioned the soundness of investing in banks over the next decade for precisely these reasons.

“Ultimately, technology and platforms are going to fundamentally undermine the competitive advantages of these big retail banks in the world,” he told The Australian Financial Review’s Vesna Poljak.

“The regulators have taken one slice out, platforms will take the next slice out.”

Platforms

Underlying the uncertainty is the nature of platform economics. Where once the branch ruled supreme, the future will be digital and platform based.

Branches worked because banks needed to harvest deposits from the community and lend out the money. They needed to be secure, the bank needed local knowledge. A physical branch network was the answer.

In a digital world, customers are no longer acquired physically. And that brings a seismic shift in the economics of financial services.

In the past many rivals had the brands, the networks and the products to attract customers. Where they competed was on price and costs.

Today the costs of manufacturing financial products have either plummeted – because of technology and process improvements – or are external – the price paid on funding markets.

The new challenge is the cost of acquiring customers and the answer is platforms: network efficiencies offer the potential to add multitudes of new customers at marginal extra cost.

Revolution

One of the global experts on platform economics is Sangeet Paul Choudary, co-author of Platform Revolution and the author of Platform Scale.

Sangeet was briefly in Australia and conducted a highly engaging session with the ANZ board - after which he explained how the platform revolution would play out in banking in a podcast with bluenotes.

What was particularly fascinating was not so much that platform economics is completely strange, rather it is intuitively familiar to us because our lives are already so dependent on platforms – we just haven’t realised how they underpin so much of what we do.

For me, having come from a traditional media background, Choudary was also fascinating in his thoughts on just how the catastrophe engulfing the industry has evolved.

“Media companies were super focused on content excellence and managing a large distribution network,” he said. “Facebook and Google came in and just focused on engaging the user and capturing data. What that's done is commoditise a lot of media companies.”

Choudary notes some traditional media companies – like the New York Times – have actually benefited from it (although they have also evolved considerably).

“They provide very unique and interesting content,” he said. “But the widest majority of media companies have become commoditied to some extent because they rely on Facebook and Google for distribution and Facebook and Google then control the monetisation.”

Banks are not dissimilar.

“If you think about banking from a similar perspective banks will always continue to be there in some form or the other,” Choudary said.

“The question really is whether they will be in a position of control to have a fairly profitable business model or whether it would be something Amazon for example does and banks just provide the commoditised inputs for it - in the form of loans, for example.”

It’s a confronting environment. Listen to our podcast above for the full discussion.

Andrew Cornell is managing editor at bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.