Banking 3.0 – Strategies for Banks to Become an Open Platform

January 28, 2020


Visa recently surprised the banking world with its $5.3B acquisition of Plaid, a fintech startup that allows applications to connect with customers’ bank accounts easily and instantly. This is by far the second biggest acquisition Visa has ever made after it paid $14B for Visa Europe in 2015. It also marks an important shift in Visa’s strategy towards becoming an “Open Platform.”

Visa seems to be shifting its strategy significantly from partnering with banks to expand its card networks to partnering with startups to facilitate money movement through both card and also non-card payments (digital channels). The shift comes at an important juncture. While Visa’s payment value had been growing at a steady rate in the last decade, the rate has dropped below 10% in the past two years. Card penetration in emerging economies remains sluggish with penetration in a majority of Southeast Asian countries remaining well below 10%. Consumers are leapfrogging cards to other methods of payments, such as mobile wallets, altogether. Where mobile wallets are nascent, governments have pushed initiatives to facilitate low-cost interbank transfer (such as Thailand’s Promptpay), limiting the role of cards even more. Finding a new growth driver is mission-critical for card networks.

With Plaid on-board, Visa can pursue its Open Platform strategy at full speed. Currently, Plaid allows 2,600+ app developers to connect to users’ bank accounts easily. But, together with Visa, Plaid can utilize Visa’s network and infrastructure to offer new capabilities, such as cross-border money movements or fund distributions and collections, to those developers from the get-go. Fintech partners can connect to, interact with, and create and exchange value with each other through Visa’s network. In return, Visa stands to get large transaction flows from the 200+ million customer accounts that are powered by Plaid.

The popularity of Plaid highlights startups’ growing demand to add financial services to their product offerings. Software-as-a-service (SaaS) companies can monetize by offering financial services, serving as a new revenue stream with zero customer acquisition cost and creating a moat around the business. Fintech is no longer a primary business model, but also a secondary business model for startups (think of it as an ingredient to the main dish). Japan’s largest e-commerce site Rakuten, for example, has 40% of its revenue from financial services. Another example is Shopify, a website that helps small businesses set up e-commerce stores, which has more than half of its revenue from payment processing.

This is an emerging opportunity not only for startups but also for banks who can leverage those startups as a new distribution channel, apart from bank branches and digital banking apps. There are three strategies that banks can pursue to capitalize and capture a piece of this pie:

1) A Closed Ecosystem: Banks directly integrate with startups to offer financial products on third-party platforms. An example of this is Grab Thailand which offers Grab Wallet powered by KBank. In this model, banks would have to dedicate its resources to do the heavy lifting work of allowing its legacy system to communicate with third-parties’ systems. Since most banks still employ complex centralized technical infrastructure, changing such systems to allow external access is not easy and may result in unintended consequences. Due to the significant requirements of both time and resources, banks are generally selective of the partners, prioritizing by the scale of the partners, thus, early-stage companies often get relatively low priorities.

2) An Open Ecosystem: On the other end of the spectrum, banks can turn itself into an Open Platform, changing its centralized system into microservices that can interact with one another through application programming interfaces (APIs). Third-parties can then build and test their software on top of the banks’ infrastructure easily without the risk of messing up the banks’ centralized systems. Adopting this Open Platform strategy is not a difficult decision, but one that requires a strong commitment from the bank’s management and a complete overhaul of the banks’ monolithic legacy system (e.g., mainframe); this ‘transformation’ process can take years.

3) A Semi-Open Ecosystem: There exists a middle ground, a model that banks can adopt as they slowly progress towards an Open Platform. Banks can work with startups that act as middlemen between banks and other startups. These middlemen – so-called ‘core wrappers’ –  are doing the heavy lifting work of connecting with banks through APIs, wrap the integrations within its platform, and open its platform to other third parties to build or offer financial services to end customers.

This is where Plaid comes in. We can think of Plaid as Amazon for e-commerce. Before Amazon, merchants had to do everything from inventory storage, packaging, distribution, to return handling and customer support. With Amazon, those issues are taken care of, and merchants can focus on their core activities and what they’re good at. In the same way, Plaid acts as a middleman between banks and startups, providing a one-stop-platform for bank account access to third-party apps.

Many other startups are considered Core Wrappers for a variety of financial use cases. Stripe allows developers to process online payments and money transfers from a customer’s bank account into a merchant’s bank. Nium (previously Instarem) allows corporations and SMEs to send money cross-border, spend money through Nium-issued prepaid cards, and collect money from counterparty abroad. Synapse offers end-to-end banking services to app developers, eliminating the need for startups to identify bank partners and initiate one-to-one integration with the bank. Startups can easily offer financial services on its app by just plugging into Synapse.

Software is rapidly changing how financial services are offered. We are transitioning into the Banking 3.0 era where financial services are no longer sold in a physical bank branch (Banking 1.0) or mobile banking app (Banking 2.0) but are offered and sold through third-party platforms. Financial service is no longer a standalone service, but it’s being abstracted away and served to the customers in a digital-native way, wherever they are, and in a way that they are used to, instant and seamless.

Author: Nattariya (Nat) Wittayatanaseth

Editors: Woraphot Kingkawkantong, Vitavin Ittipanuvat

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