I have written before on this blog on how banking, especially retail banking could move to a platform model, allowing other services to be built on top of them. The idea is to let other services develop by themselves (using a set of predetermined APIs to your digital platform) on top of your existing offer. Depending on how the relationship is set between the platform and the services, it can become a source of revenue for the platform.
It may appear as a counterintuitive idea to banks, fearing the commoditization of their business but as proven for example by Apple with the Iphone App ecosystem, being a platform is a successful strategy (in 2011 Apple announced it had paid out 2.5 billion dollars to its developers – their 70% cut)
More relevant for banks, it is a strategy already used in their capital market division, notably by their prime brokerage offering. Prime brokerage is a “bundled package of services offered by investment banks and securities firms to hedge funds and other professional investors needing the ability to borrow securities and cash to be able to invest on a netted basis and achieve an absolute return.” In more details a Prime Broker can provide the following services to a Hedge Fund:
– Office Space (including necessary connections to the street)
– Consulting Services (establishment of the fund, etc.)
– Capital Introduction (putting hedge funds in touch with potential investors)
– Global Custody and Securities Lending (operating as an extended Back Office, sometimes including portfolio accounting)
– Financing (how most Prime Brokers actually makes money)
Basically, a hedge fund would plug itself to a Prime Broker platform to operate, shaving off the cost and difficulty of setting the platform itself. The Prime Broker is compensated by the hedge funds on its platform, through the financing it provides and or service fees. Prime Brokerage is an important offering for investment bank, as shown by JPMorgan recent expansion strategy.
A very similar setup could be envisioned for a retail banking platform. Startups, pursuing various strategies (niche banking, focus on lending etc), would leverage an existing infrastructure providing core banking functionalities. The underlying bank would benefit from an important aggregated asset base, whereas the services companies would be free to focus more on customer experience, acquisitions etc. It would be relatively similar to the relationship between Banksimple and its partner banks, though on an industrialized basis.