Digital Banks Increasingly Embrace a Platform Business Model

Banking always has been considered an industry with a great deal of customer loyalty — to the point where people are famously more likely to divorce than change their bank. But this loyalty is eroding fast, thanks to an explosion of fintech challengers. Customers are no longer confined to a single bank that offers a menu consisting only of products entirely designed, developed, marketed and underwritten by the bank itself. Today, they have at their finger tips a broad variety of financial apps that are quick and easy to start using. Many of these aim to be the best in class solution for a specific problem that consumers have, rather than to offer a full menu of products — and as a result, they often can innovate faster and create more compelling solutions.

Photo: Kailash Mittal, 2015 CGAP Photo Contest
Photo: Kailash Mittal, 2015 CGAP Photo Contest

More choice is a good thing for customers anywhere, including in developing economies. Progress on financial inclusion so far has been broad, but shallow. The e-money wallets that have been so successful in driving global uptake of formal financial accounts typically offer only a very limited range of payments services. While individual partnerships between banks and mobile money operators have occasionally resulted in additional services (e.g., M-Shwari), these have so far failed to close the gaps on savings, credit or insurance. Hence the growing emergence of fintech products is largely a welcome phenomenon that will help us deepen financial access.

But having more options than ever before, customers also face a new set of challenges — finding and comparing new products, trusting unknown providers and managing their finances through multiple interfaces, contracts, credentials and support channels. These challenges can lead to stress, mistakes and fraud that undermine the benefits for consumers.

In this context, we see that rather than competing with challengers, financial services providers around the world increasingly find value in partnering with them and brokering their products in online marketplaces — essentially, bringing the convenience of the grocery store to financial services. For example, digital challenger banks like Revolut (United Kingdom) and N26 (Germany) have been able to partner with leading financial services providers in several product categories.

Going a step further, players like Starling Bank (United Kingdom) and Fidor Bank (Germany) offer customers a handful of third-party providers in each category. And on the extreme end, “super-apps” like Alipay (China) and WeChat (China) offer their customers access to thousands of products from hundreds of financial services providers in a single digital ecosystem.

These are variations on a model we call “marketplace banking.” What they have in common is that they give their customers access to products by third-party providers, strengthening their offering while avoiding the costs of competing with established providers. This frees up resources to invest in the part of the business that differentiates them and adds value for consumers.

Types of Marketplace Banking

Four types of digital banks -
Source: Digital Banks: How Can They Deepen Financial Inclusion? (CGAP 2020)

A marketplace model can create advantages for all sides of the banking relationship. The banks can retain customer stickiness and reduce the risk of disintermediation while also diversifying their revenue with commissions or revenue-sharing paid by product partners. Third-party providers gain instant access to a large customer base at low cost, which is important since nearly all tend to struggle with the cost and scale of customer acquisition. Meanwhile, customers enjoy single-point access to a broad range of innovative products and services, with the reassurance that these have been vetted by their main banking provider.

The business model may evolve further over time, with banks generating more of their value (and revenue) by serving as trusted intermediaries between their customers and a growing ecosystem of third-party products. In this capacity, banks are likely to go beyond the curation of services in the ecosystem to offer personalized financial advice and solutions, as well as related nonfinancial services like tax management.

Digital Banking: How Can They Deepen Financial Inclusion?
Take a deeper look at BaaS and other digital banking models in the Digital Banks: How Can They Deepen Financial Inclusion? (CGAP 2020) slide deck.

If mobile money providers were to embrace a marketplace approach, it would accelerate the diversification of financial products available to customers. For the providers themselves, it would offer the fastest and least risky way to double down on digital financial services, grab market share, create customer stickiness and diversify revenue streams. There are a billion mobile money wallets in developing countries that could be made far more relevant, more frequently used and more profitable by a digital marketplace approach to banking.

This strategic play is open not only to banks and mobile money providers but to others as well, notably the big tech platforms and other large digital consumer companies — many of whom are already active in financial services. However, they may consider another emerging banking model to make that pivot into banking easy: banking-as-a-service. We talk more about this in another post.


Reading Deck

This slide deck sheds light on the digitization of banking and analyzes the connection of three new business models to financial inclusion: fully digital retail banks, marketplace banks and banking-as-a-service.

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