Platform Banking vs Traditional Banking Models

Platform banking is a game-changer in the financial industry, offering a more innovative and customer-centric approach compared to traditional banking models.

Traditional banking models are often rigid and inflexible, with a focus on generating profits for shareholders rather than serving customers' needs.

One key difference between platform banking and traditional banking is the way data is used. In traditional banking, data is often siloed and used for internal purposes, whereas platform banking utilizes data to create a seamless customer experience.

This shift in focus is a major advantage of platform banking, allowing customers to access a range of financial services and products through a single interface.

Platform banking is an innovative approach to banking that leverages technology, APIs, and open architecture to create a connected ecosystem of financial services.

It's essentially a digital marketplace owned and operated by a bank or another entity that provides banking and possibly nonbanking services. This platform enables customers to access a wide range of financial products and services through a unified interface.

A bank transforms into a platform that offers various financial products and services, collaborating with fintech companies, developers, and partners to provide customers with a seamless, integrated experience.

Platform banking goes beyond traditional banking services, enabling financial institutions to expand their offerings beyond core banking services and bring together various value-added services such as payments, lending, investments, and more under one roof.

Through APIs, platform banking facilitates secure and controlled access to a bank's data and functionality, enabling third-party developers to integrate their applications and services with the bank's platform.

This integration fosters collaboration between banks and fintech companies, leading to greater innovation, customer-centric solutions, and a competitive advantage in the financial services market.

Platform banking can also include nonbanking services, such as helping customers buy homeowner's insurance, house maintenance services, or even furniture on the bank's platform.

One example of platform banking is Paytm, an Indian e-commerce payment system that has evolved from a single-service entity to a platform that enables customers to buy airline, bus, and movie tickets, reserve hotels, and rent cars from other providers.

Traditional banking is being disrupted by platform banking, which is driven by various events and developments. Banks will need to choose the best platform banking strategy to prepare for and capitalize on its opportunities.

Banks will likely adopt one of three platform strategies based on their business, organizational, and technological maturity and goals: merchant or marketplace owner, marketplace partner, or utility provider. Each of these strategies requires a different level of commitment and will have a different level of impact.

Banks may find it more beneficial to pursue a marketplace owner or marketplace partner role, as becoming a utility provider is unlikely to be a viable business model. This is because it would relegate banks to a mere service provider with low margins and no control over the customer relationship.

Traditional banking is a well-established system where banks provide basic financial services directly to their customers through physical branches, ATMs, and online platforms.

Banks will need to adapt to the changing landscape by adopting platform banking strategies, which will help them prepare for and capitalize on new opportunities.

There are three platform strategies that banks can consider: becoming a merchant or marketplace owner, a marketplace partner, or a utility provider.

Each of these strategies requires a different level of commitment and will have a varying level of revolutionary impact on the bank's business.

Becoming a utility provider is unlikely to be a viable business model, as it relegates banks to a mere service provider with low margins and no control over the customer relationship.

Here are the three platform strategies in more detail:

CBW Bank, a small bank in Kansas, has successfully transformed itself by adopting a platform banking strategy, using technological transformations to their advantage.

Traditional banking is often limited to offering services directly, but platform banking takes a different approach. It provides a wider range of specialized services from third-party partners, enhancing the customer experience.

One of the key differences between traditional and platform banking is their business model. Traditional banking operates on a vertical business model, whereas platform banking adopts a collaborative business model.

Platform banking encourages innovation and agility through collaborations with fintech, embracing new technologies and innovations. This is in contrast to traditional banking, which may struggle to keep up with the latest advancements.

Traditional banking may struggle to cater to underserved populations, whereas platform banking fosters financial inclusion through partnerships with fintech.

The revenue streams of traditional and platform banking also differ. Traditional banking primarily generates revenue from core banking products, whereas platform banking offers diversified revenue streams through third-party collaborations.

Here's a summary of the key differences between traditional and platform banking:

Platform banking offers a range of benefits and features, including the ability to access multiple bank accounts in one place, making it easier to manage finances and track spending.

With platform banking, you can connect multiple bank accounts, credit cards, and loans to one dashboard, providing a comprehensive view of your financial situation.

This can help reduce the risk of overspending and missed payments by keeping all accounts in one place.

Platform banking often includes features such as budgeting tools, allowing users to set financial goals and track progress.

These tools can also provide alerts and notifications when transactions exceed a certain amount or when bills are due.

By consolidating accounts, platform banking can also help reduce fees and charges associated with multiple bank accounts.

Additionally, platform banking often offers integration with popular budgeting and accounting software, making it easier to manage finances and stay organized.

This can be especially helpful for small business owners or individuals with complex financial situations.

The digital transformation journey to platform banking is a challenging but necessary step for banks to stay competitive. Assuming a leadership position in the platform banking industry will not only generate new income streams, but also improve client experience and operational efficiency.

Platform banking is becoming a reality, and banks must act now to capitalize on this opportunity. Banks can embark on a seamless journey towards full digital transformation with the right expertise.

Sitech has deep expertise in enabling banks to build the foundation for platform banking in a manageable and significant manner. This takes into account a bank's existing technological environment as well as its planned future environment.

Banks can use this expertise to build new business models and penetrate new markets, facilitating growth and improving client experience.

Platform banking offers a cost-effective solution for banks, allowing them to avoid the costs associated with developing all services in-house.

By leveraging the expertise of external partners, banks can achieve better pricing for customers and gain a competitive advantage in the marketplace.

The modular architecture of platform banking enables scalability and adaptability, making it easy for banks to add or remove services based on market needs and customer preferences.

This flexibility ensures that platform banking remains relevant and responsive to changing trends and customer needs.

Building a modern technology infrastructure is vital for digital platforms, including a robust API for a superior customer experience and seamless integration of service providers.

Platform banking offers numerous benefits, but it also comes with its own set of challenges and risks.

Operational complexity is a significant challenge, requiring effective coordination and collaboration to manage a diverse ecosystem of partners and services. Banks must invest in robust operational processes, relationship management, and support systems to ensure seamless communication and a consistent customer experience.

Regulatory compliance and governance are also major concerns, with the interconnected nature of platform banking raising complex regulatory issues. Compliance in multiple jurisdictions can be challenging and requires continuous monitoring and adherence to changing regulatory requirements.

Integration issues can arise when integrating different systems, APIs, and services from different partners, requiring seamless interoperability to provide a smooth experience for customers.

Platform banking is a complex system that requires effective coordination and collaboration to manage a diverse ecosystem of partners and services.

Operational complexity is a significant challenge, as banks must invest in robust operational processes, relationship management, and support systems to ensure seamless communication and a consistent customer experience across the platform.

Regulatory compliance and governance are also major concerns, as the interconnected nature of platform banking raises complex regulatory issues that banks must comply with.

Compliance in multiple jurisdictions can be challenging and requires continuous monitoring and adherence to changing regulatory requirements.

Integration issues are another technical challenge that banks face, as they need to ensure seamless interoperability to provide a smooth experience for their customers.

Compatibility issues, different data formats, and API discrepancies can arise and must be resolved to enable efficient collaboration.

Sharing of customer data between buyers and sellers is integral to platforms, which raises new risks and privacy considerations.

Third-party relationships expose banks to various forms of operational risk, including information misuse and theft, system failures, business disruptions, legal disputes, and regulatory noncompliance.

Platform banking also raises new regulatory compliance questions, such as who is responsible for fraud or transaction failure/misposting on a platform.

Comparing BaaS and Open Banking can be a bit confusing, but let's break it down simply. Both concepts enable businesses to leverage finance data and tools, giving them the power to implement innovative ideas. However, they differ in their approach and benefits.

BaaS, or Banking-as-a-Service, allows companies to access and utilize finance data and tools, while Open Banking empowers consumers to share their financial data securely with third-party providers. The difference lies in who has control over the data.

The global revenue from BaaS services is expected to rise significantly, but the article doesn't provide specific numbers for Open Banking. On the other hand, Open Banking is a consumer-centric approach, which can be a major advantage for businesses looking to tap into this growing market.

However, both BaaS and Open Banking require substantial reengineering of current core banking applications architecture and infrastructure. This is a significant challenge that businesses need to be aware of before adopting either approach.

The future of banking is looking bright, with platform banking at the forefront. The global digital banking platform market is expected to grow at a CAGR of 20.5% from 2022 to 2030, according to a report by Grand View Research.

Platform banking is all about transformation, and we're seeing traditional banks innovate, partner with fintech startups, and redesign their offerings. This disruption is fostering healthy competition that benefits consumers through innovative services and competitive pricing.

Banking platforms are becoming more agile and modular, offering a wide range of services via open APIs. This seamless integration is leading to a rich ecosystem of interconnected financial solutions.

New technologies like blockchain, artificial intelligence, and decentralized finance (DeFi) are playing a critical role in shaping the future of platform banking. These innovations will enable faster, more secure, and highly personalized financial experiences for customers.

As the regulatory framework adapts to the growing importance of banking as a platform, consumers can look forward to a future where financial services are connected, accessible, and tailored to their individual needs.

Here are some key benefits of platform banking:

Platform banking is an innovative approach that's gaining traction in the banking industry. By moving banking services to a subscription-based platform, banks can focus on customer personalization and improving the overall banking experience.

Banks like Legence Bank and Live Oak Bank are already embracing this approach, offering on-demand services over the web. This allows for fast and secure process approvals, freeing up resources for more personalized customer experiences.

Innovations like Banking as a Platform (BaaP) are opening up new opportunities for banks to become tech-savvy and improve their operations. Banks like Wells Fargo, DBS Bank, CBW Bank, FIDOR Bank, JB Financial group, and others are exploring this space.

Here are some examples of banks that are already using platform banking:

Let's take a look at some real-life examples of banks that have successfully implemented Banking as a Platform (BaaP) strategies.

Legence Bank, a small bank in Illinois, partnered with CSI to provide their customers with a 360-degree view of banking experience, making it more affordable than big multinational banks.

DBS Bank, a global leader in the banking sector, has a remarkable track record of using API technology platforms to improve its service, reducing customer acquisition costs, and enhancing customer experience.

JB Financial Group, based in South Korea, was the first Asian bank to integrate its banking platforms with the help of a third-party tech firm, resulting in improved customer experience and reduced customer acquisition costs.

FIDOR Bank, a neobank in Germany, built its banking platform from scratch in 2015, providing customers with a unique experience and driving customer acquisition costs down to €5.

Wells Fargo, a San-Francisco based banking giant, was one of the pioneers in using banking as a platform, reducing customer acquisition costs and enhancing customer experience.

Here are some examples of banks that have successfully implemented Banking as a Platform (BaaP) strategies:

These examples demonstrate how banks can use BaaP strategies to improve customer experience, reduce costs, and stay competitive in the market.

CBW Bank is a small bank headquartered in Weir, Kansas, that has transformed itself by using technological transformations to its advantage.

They won the Celent Model Bank 2017 Award for Banking as a Platform for the best use of APIs.

CBW Bank faced challenges in implementing a digital model, including a lack of API support for account configuration and limited options for embedding compliance.

They overcame these challenges by building a digital platform with a single API, which acted as an integration point for other APIs.

The use of Banking as a Platform with the help of Yantra technologies has been instrumental in CBW Bank's success.

CBW Bank's digital model has given them greater control and flexibility to accommodate third-party solutions without compromising security.

Platform banking as a Service is a key component of the platform banking model. It involves delivering banking infrastructure and services to third-party distributors, allowing them to provide innovative propositions without obtaining a banking license.

To succeed in platform banking as a Service, banks must select the right marketplace, customers, and partners. This includes identifying partners on multiple dimensions, such as product selection and quality, ability to serve customers seamlessly, risk profile, financial strength, and brand reputation.

Achieving scale is typically an imperative for success in platform banking, and financial resilience is crucial to withstand obstacles until the optimal level of scale is achieved.

Banking as a Service, or BaaS, is a model that allows non-banking enterprises to tap into established financial infrastructure.

By integrating with banks, these entities can provide innovative and specialized financial propositions to their customers.

The bank provides non-banks with seamless access to its core banking functions, including account management, payments processing, and compliance.

This integration enables non-banks to accelerate their time to market and reduce the complexity of building and maintaining their own financial systems.

Non-banks don't need to obtain a banking license to offer financial services, thanks to the BaaS model.

As a Service is a key aspect of Platform Banking, allowing third-party companies to offer banking services through their applications or platforms by leveraging existing banking infrastructure. This approach is often referred to as Banking as a Service, or BaaS for short.

Banking as a Service enables companies to integrate core banking functionalities, such as account creation, transaction processing, card issuance, and payment processing, into their own applications. This is done using APIs provided by banks or financial institutions.

The key benefits of Banking as a Service include enabling companies to enhance their product offerings without having to build the banking infrastructure themselves. This can be a significant cost savings and a major advantage in terms of speed to market.

Here are the main differences between Banking as a Service and Platform Banking:

By understanding the differences between Banking as a Service and Platform Banking, companies can make informed decisions about how to integrate banking services into their own applications.