Over the weekend, I read a really interesting article
from Seth Rosenberg, former Product Lead for the Facebook Messenger developer platform. In the piece, Rosenberg shares some of his learning during his time overseeing Messenger’s growth from 200 million users to 1 Billion in just two years. One key piece of wisdom from the post stood out above the rest:
Platforms are nothing more than a trusted contract between 2+ parties to allow for specialization and shared resources. Any successful platform requires trust, and trust is best ensured through aligned incentives. When you’re building a platform, a huge amount of work will go into understanding the incentives and scenarios (both success and failure), and designing a lasting system, including product + policy + enforcement, that optimizes for the best outcome.
For executives building and supporting API platforms for banking and other financial services, Rosenberg’s excellent articulation of platform strategy is often no where in sight. There are many factors for this breakdown: quickly evolving API ecosystem, the sometimes awkward meshing of legacy FIs (financial institutions) and fintechs, and most frequently, the inability to understand the incentives of platform partners.
In the world of consumer tech, API platform partnerships have been well-established as a necessary, but not sufficient cost of doing platform business and serving consumers well. Even then, the results can vary greatly (see lackluster performance of Facebook Messenger’s bot platform
). FIs, specifically banks, are wading into this new world without the benefit of years spent operating multi-sided API platforms and managing and aligning external incentives.
Add in the fact that open API platforms are FIs’ best chance to maintain long-term relevancy in a less-than-friendly consumer environment and these platform initiatives become mission critical. For many fintechs, investing in API platforms is an opportunity to attain legitimacy and build sustainable business models, reducing customer acquisition costs that have doomed so many upstarts in the past. In order for both FIs and fintechs to take advantage of this paradigm shift towards platforms and data networks, a new “ecosystem-first” mentality must emerge, focused more on value creation (and less on rent-seeking).
Why “Customer Choice” Worked
In August 2016, I predicted that PayPal’s new partnership mentality dubbed “Customer Choice
” would pay off because the traditional financial services and commerce landscape had fundamentally changed. The reason this strategy has worked is that PayPal realized that data networks, partnerships and a customer-first mindset were the future as I wrote in Give A To Get A Lot
While PayPal’s take rate will decrease in the short term as a VDEP partner, PayPal will be able to create better commerce experiences for consumers wherever they are. This will allow PayPal to build consumer-pleasing experiences, both in-store and on mobile, that will (in theory) significantly increase transaction volume and revenues on its platform.
Consumers have more choices than ever before to decide who to bank with and where to shop. The story of the internet’s rise and dominance of multiple industries, especially in the smartphone era, has been one of consumer surplus. The days of FIs rent-seeking and retailers owning the customer relationship by default are coming to an end.
In the EU, PSD2
(second Payment Services Directive) was instituted in 2015 for sole purpose of removing banks’ monopoly on customer data, making it available to third-parties via highly secured data transfers. While this will require major investment in new payments and data infrastructure by 2018 (the directive’s deadline), it is forcing European banks to move beyond their walled data gardens and allow for improved customer experience and more transparency.
It’s understandable to see the investment in open API platforms and secure data-sharing as an unnecessary change in a system that isn’t broken. But the writing is on the wall, FIs can no longer rely solely on internal initiatives and inefficient customer acquisition to maintain and grow their customer relationships. It was the use of those same tactics in the new internet economy that have created the conditions for market disruption (not from fintechs, but the market itself) that FIs now face. The most viable way forward now is data partnerships for value-maxizimation that benefits all three parties (consumers, partners, and platform s— in that order).
The Next Wave for Financial Technology is Here
Interestingly enough, it was Visa and Mastercard who saw the new wave of data partnerships first and capitalized on it, just as the two card networks did with charge cards decades ago
. Unlocking additional financial services and value for businesses and consumers has always been the most powerful network effect for Visa and Mastercard. With the launch of their respective VDEP
and MDES platforms, Visa and Mastercard built new digital rails for FIs and fintech to partner effectively across digital touchpoints for banking, payments and commerce.
These new technologies wouldn’t be nearly as impactful without a mutual understanding the trust is necessary and trust can only be built if every parties’ incentives are aligned for shared success. Ultimately, that has always been the lofty view of financial technology, though often not reached. This time it can be different and that will be good for all parties involved in financial technology.