After my blog yesterday, about banks having to move from being control freaks in a proprietary operation building everything to becoming collaborative partners in an open marketplace curating everything, I was asked: “how do you make money out of curation?”
It’s a good question, as marketplace curators make money very differently from proprietary product providers. This is the core of how a banks' thinking has to change, as I often say that banks in ten years will make zero profit from the products they provide today. Today, retail banks make money from margin on savings and loans, from cross-selling to deposit account holders and from fees and charges for overdrafts and borrowings. This will disappear in the next decade as traditional revenue streams are squeezed by specialist digital providers of these products and services.
A good example of this squeeze is Zopa. Zopa are now 12 years old and expanding their footprint into full service banking as they apply for a full banking license. Right now, they are the most mature peer-to-peer lender in the world – they were the first – and provide a significant amount of UK lending. It is also doubling year-on-year. For example, in February 2016 Zopa blogged:
Zopa lent £530 million in 2015, and has now lent over £1.2 billion in total. By loan volume we are the largest peer-to-peer lender in the UK and in August 2015 we became the first UK P2P lender to reach the £1 billion lent milestone.
Today, their website states that they have lent more than £2.38 billion to UK consumers. Zopa are doubling their lending year-on-year, and the peer-to-peer loans market in the UK is growing rapidly with cumulative levels of lending at almost £8.5 billion, originating in excess of £1 billion during the first three months of 2017. Considering that unsecured borrowing in the UK increased by £23 billion in 2016, peer-to-peer lenders are starting to make major inroads into this traditionally core market for banks, nearing a twenty percent market share.
If robo advisors, peer-to-peer lenders and payments focused start-ups take the margin from all of these traditional core banking areas, how do banks make money? They don’t make money from their traditional products. As mentioned, if banks make no money from their current products and services, how will they make money?
From curation … but the core of their curation structure involves two key components.
First, the bank has millions of customers, billions of capital and centuries of history. By recognising that the bank has this strength of position today and that they may lose this position tomorrow, the bank has to rapidly pivot from being an integrated vertical value chain of tightly coupled proprietary products to an open marketplace platform of loosely coupled partners. As blogged here regularly, that’s a tough ask.
However, if they can do this, they become the curator of choice for their customers. A customer does not want to select from hundreds of start-up companies they have no idea about. They want their trusted bank partner to do it. The bank has the history and trust to select these partners and, of course, they can charge a premium for curating these partners on behalf of their customers. That’s what Amazon does, and the tough ask for a bank to change is illustrated well by the Amazon versus Wal*Mart war:
Walmart was also hesitant to let outside sellers list their wares on Walmart.com. This “marketplace” idea generates half of Amazon’s unit sales. It also creates a prodigious amount of unseen internal conflict, since Amazon employees have to compete with third-party sellers who are pursuing the same buyers. But the company tolerates and even encourages the tension because choice and price competition are good for customers. Wal-Mart, accustomed to dominating its relationship with brands and showing its entire assortment in its massive stores, was reluctant to foster such competition, and it didn’t have the technological chops to support an expansive marketplace. Instead of focusing on increasing online selection, Wal-Mart kept building supercenters—more than 700 from 2010 to 2016 in the U.S. alone. Walmart.com only started adding third-party sellers in 2015, and though it now has more than 40 million products in its marketplace—Toms canvas shoes, Rebecca Minkoff satchels, and other stuff it doesn’t sell in stores—the number is small compared with the 350 million or so items available on Amazon.
This is the denial process that many banks are caught up in. They continue to invest in super branches and bells and whistles on their internally built apps, rather than encouraging co-creation and curation of pedigree partners. There is a limited time to move into this process however. Zopa and their brethren won’t want to partner with every bank. So the curation and co-creation process to move from a controlled value chain bank to an open financial marketplace platform is limited. This is one critical change to banks and bank culture.
For a bank that gets the co-creation and curation culture, the second part is making money. If no money is made from traditional products and services, as credit and savings and investment moves to their co-creation partners, then a bank has to make money from new capabilities and services. This will be by a strategy of using machine learning about their customers financial lifestyle and habits to gain a far deeper knowledge of their customers, integrating financial data with contextual and social data.
In this case, a bank has to become a much better advisor and analytical firm, knowing more about their customers’ needs by being a cognitively active partner with the customer, predictively and proactively supporting their needs and recommending partners in context. The fact that they can provide incredibly personalised digital advice and support is something customers would pay for, as are their value adding information services about the customer's financial lifestyle.
I guess I’m describing a radically different beast to today’s financial services firms. Tomorrow’s big financial firms will offer their own products and services in open competition with third party products and services on their own platforms to their own customers. They will win customers business by being the preferred provider through their trust, service and convenience, or will lose business based upon price, cost and appropriateness. However, as any marketplace platform firms knows, even when you lose, you win, because you have the customers trust in your platform above all others, thanks to your deep data analytics and knowledge of their needs.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...