{"id":2189,"date":"2017-01-26T06:43:20","date_gmt":"2017-01-26T14:43:20","guid":{"rendered":""},"modified":"2023-05-31T16:17:59","modified_gmt":"2023-05-31T23:17:59","slug":"banking-as-a-digital-platform","status":"publish","type":"post","link":"https:\/\/cm-edgetun.pages.dev\/en-us\/industry\/blog\/financial-services\/2017\/01\/26\/banking-as-a-digital-platform\/","title":{"rendered":"Banking as a Digital Platform"},"content":{"rendered":"

Thanks to a recommendation from a colleague, I\u2019ve been reading Platform Revolution: How Networked Markets Are Transforming the Economy–And How to Make Them Work for You<\/a> by Geoffrey G. Parker, Marshall W. Van Alstyne, and Sangeet Paul Choudary, which has gotten me to thinking about how the concepts the authors discuss apply to digital transformation in the banking industry.<\/p>\n

One of the key ideas in Platform Revolution<\/em> is that by matching buyers and sellers, platforms allow their operators to earn returns on assets that they don\u2019t actually own, such as the way AirBnB earns revenue from property it doesn\u2019t own. For banks, this idea is not new. Indeed, although modern banking institutions have become large and complex, the core function of a bank has not changed: to match holders of idle capital with borrowers of that capital. Borrowing short to lend long has been the business model of banks since the Early Renaissance.<\/p>\n

In exchange for taking on the liquidity risk inherent to this type of maturity matching, the bank derives its most essential revenue stream via the spread between lending and borrowing rates. To protect the public\u2019s explicit (via deposit insurance) and implicit (via moral hazard) risk exposure, public institutions place regulatory burdens upon banks and in exchange for meeting those requirements bestow upon firms the coveted banking license, which conveys a level of public trust that non-bank competitors cannot match.<\/p>\n

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The income earned from the spread between borrowing and lending rates financed the creation of a diverse set of products, services, and lines of business. Then around 2008, everything started to change. One by one, the monolithic set of banking services which were once inextricably tied to one another came under assault both by substitutes and by complements. Don\u2019t like your bank\u2019s lending terms? Try a substitute, like SoFi or LendingClub. Can\u2019t manage your budget easily through your bank\u2019s website? Try a complement, like Mint. Not wealthy enough to qualify for an advisor? Try Betterment.<\/p>\n

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The old regulatory barriers that had kept competitors at bay no longer seemed to work. Some bank competitors emerged that simply did not care about regulation and intentionally sought to thwart it, such as bitcoin and the payment ecosystem that built up around it. Others began offering the large (and growing) accredited investor community the ability to loan money to individual borrowers through marketplace lending platforms. Rather than coming to banks\u2019 aid with new types of protections, regulators having been badly burned in the 2008 Global Financial Crisis have thus far in fact encouraged competitors with measures such as PSD2, UK Open Banking, and the US OCC\u2019s proposed fintech charter. Unbundling of banking services have become yet another tool for the prudential regulator to employ in combating moral hazard.<\/p>\n

Thus should banks consider the move toward unbundling irreversible. What remains is the need to understand how to best approach unbundling in order to thrive in the platform economy. Within the context of Microsoft\u2019s Digital Transformation Model, four areas of focus come to mind:<\/p>\n