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Coin Labs Weekly: Banking Platforms, Data Networks and Incentives

Welcome to issue 3 of the Coin Labs Weekly! You can find previous issues here. Each issue will contai
Don Richard
Coin Labs Weekly: Banking Platforms, Data Networks and Incentives
By Don Richard • Issue #3 • View online
Welcome to issue 3 of the Coin Labs Weekly! You can find previous issues here. Each issue will contain my weekly article, my 5 favorite payments and mobile commerce reads from the past week, and a past Coin Labs article that I think you’ll enjoy. If you enjoy the newsletter, please forward this email to 5 of your colleagues and friends!

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:
After the Visa deal, it’s clear that PayPal’s mobile opportunity lies in partnerships through VDEP that will bring its technology (core PayPal, Braintree and Venmo) in-store where 92% of total retail purchases are still happening. PayPal will also be able to leverage its technology (Braintree) on websites and apps where Visa commerce technology is accepted. PayPal will have automatic access to the 14,500 financial institutions on the VDEP network. Paypal now has access to a treasure trove of data. *This is very important*.
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.
Though there is no U.S. equivalent for PSD2, U.S. FIs, fintechs and the Consumer Financial Protection Bureau are carefully watching the performance of PSD2. However, that CFPB’s stance on the issue may be mute if the current White House Administration takes action against the CFPB, as has been threatened.
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.
This Week's Top 5 Fintech/Commerce Reads
Alipay is just the latest Chinese payments player looking to make a deeper push abroad. Ant Financial has agreed to pay $1.2 billion for the U.S. money-transfer service MoneyGram International Inc. And China UnionPay Co. is working with U.S. payments networks to develop international standards for mobile payments
Plainly there is no cause to be Pollyannaish. It’s sensible to be wary of acquisitions and potential overreach. And there may be specific cases that cross the line and should be reined in. Over all though, the kind of competition we see among Apple, Amazon, Alphabet, Facebook and Microsoft tends to sort things out naturally and brutally.
The ultimate goal, explains Empower’s founder Warren Hogarth, is to have Empower be able to fully replace your bank’s app.
There’s evidence here that spending is shifting from tangible goods to virtual ones such as education and online pursuits. But the gains in these areas come nowhere near the spending increase on financial services. And while some of that increase can be spun positively – Americans have lots more financial assets to be managed! – it has been an awfully big increase. 
Before the wheels even stop on the runway, I can talk, text or video anyone in the world. When you compare that to the cross-border payment experience, historically, depending on the originator and beneficiary and where the two locations are, we haven’t been able to say when the payment was going to arrive, how much it was going to cost, we couldn’t confirm when the beneficiary got the funds and it could take days depending on where those two end points are. The client experience we have historically delivered is not up to the standards of today’s technology.
Coin Labs Vault
Here’s a tip for Walmart folks trying to make serious go at Amazon: focus on providing a differentiated and highly valuable mobile commerce experience for consumer demographics that Amazon hasn’t penetrated. That would be folks at the the low end (overserved by current offerings), who have an internet access via smartphones (typically Android), but not PC. These folks are already more likely to shop at Walmart over Target given their proximity to Walmart stores.

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Don Richard

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