We are on the eve of a landslide in the financial sector. In the next few years, the prevailing structure of the industry will be challenged by a new infrastructural and economic model that is dominated by platforms, a trend known as platformisation.[1]
This trend is the impetus of the My Financial Data-project recently initiated by the Sustainable Finance Lab.[2] We will investigate the possibilities and deterrents of setting up a platform for financial data.
In this series of blogs we will consider platformisation and its implications for the financial sector and for society as a whole. This first blog discusses the current role of the platform economy in the financial sector and the transformation it can bring. The role of incumbent players is set against the new kids on the block: BigTech and FinTech.[3] Developments in the sector raise important questions about privacy, data security, regulation, stability and competition, amongst others, which provide the fuel for the upcoming blogs in this series.
How is the platform economy entering the financial sector?
Economic and social interactions are reshaped by platforms in all parts of the economy, but so far the platform economy has only gained a toehold in the financial sector. The most notable developments towards a platform economy have been in payment services.[4] Services such as PayPal or Apple Pay remain largely dependent on bank accounts or credit cards issued by incumbent players.[5] Lending activity by FinTechs has seen steady growth in recent years but remains small as a proportion of overall credit.[6]
Despite its current small position, change is imminent and the first signs of platformisation are evident. Facebook has announced that it will soon launch its own coin, the Libra. European regulators have opened up access to financial data with the revised Payment Services Directive (PSD2).[7] Chinese players such as Alibaba and Tencent have already fully integrated financial services with social media or e-commerce platforms (table 1). BigTech and FinTech are experimenting with lending products and partnerships with incumbent financial institutions are numerous.
Table 1: Selected financial activities of BigTech firms[8]
| Alibaba | Tencent | Mercado Libre | |||
| Payments | AliPay/AntFinancial (largers mobile payments platform in China) | Tenpay (#2 mobile payments platform in China) | Google Pay – layers over existing card network | Messenger Pay – layers over existing card network | Mercado Pago |
| Lending and short-term credit | MYBank (SME lending for rural areas and online merchants) | WeBank (personal micro-loans) | Collaboration with Lending Club | Pilot in collaboration with Clearbanc | Mercado Crédito (small loans to retail and SME clients |
| Current accounts | Offered through MYBank | Offered through WeBank | n/a | n/a | n/a |
| Asset management | Yu`e Bao (world’s largest MMF) | License to offer mutual funds | n/a | n/a | Pilots ongoing in 2018 |
| Insurance | 60% stake in Cathay Insurance China, founding stake in Zhong An Insurance | Online insurance service in life and property insurance | Insurance on Google Compare (discontinued) | n/a | Pilots ongoing in 2018 |
What is driving the change?
All of this is no surprise. The potential value in big data and advanced data analytics is larger in the financial sector than anywhere else.[9] Artificial Intelligence (AI) and Machine Learning (ML) unlock the value of the ever greater volumes of data collected from consumers. With the result that data privacy and the responsible use of algorithms have been identified as important competencies for future success in finance.[10]
Another driver of change can be found in the implementation of PSD2 in the EU and Open Banking legislation in the UK. This opening up of banking data is intended to increase competition and innovation in the financial sector. Paradoxically, this legislation might result in less competition if BigTech or other players are able very quickly to assume a dominant position. The network effects that occur with larger user bases have a tendency to natural monopolies in the platform economy. Developments in financial regulation and privacy and antitrust-law are key determinants of the way platformisation takes shape in the financial sector.[11]
What is going to change?
For a glimpse of the possibilities consider the FinTech space.[12] Data aggregation apps such as Yolt, Mint and Banked integrate financial accounts into a single point of access.[13] A sympathetic example of automated financial planning is the Budlr-app that seeks to prevent over-indebtedness by bundling monthly standing charges.[14] Insurance or bank account comparisons and recommendations such as those of the Consumentenbond, Pricewise and Independer can be raised to a new level with access to personal financial data.[15] Automated credit scoring results from Ant Financial and Mercado Libre suggest that large platforms are better at loss prediction than traditional credit bureaus.[16]
These emerging business models can lead to unbundling, – the process of breaking up banking activities into core functions. This has the positive effects of more choice and better tailored products. The high degree of specialization and automation in turn results in lower costs and offers more and better choices to clients.[17]
Who are the challengers? And what should incumbents do?
Developments in the financial sector have the potential to change the market unrecognizably in a short period of time. BigTech appears to have the best hand and may come out on top in this game. Their capabilities in AI and ML are unmatched and they leverage network effects in their existing platforms by linking financial data to existing data sets. And BigTechs have huge pools of cash as a war chest for entering the financial market.
In contrast, banks often suffer from legacy IT-systems that make it difficult to combine their own data sets.[18] Banks, falling under a stricter regulatory regime, may also be prohibited from doing so.[19] Putting existing data sets to work in the platform economy may seem to be a far cry. Solutions to this are provided by Neobanks, online-only banks that use AI and ML and have no legacy. Investor appetite for Neobanks is an indication of the potential of this type of bank.
FinTechs provide innovative services that are typically easy to scale. They may not, however, pose a large threat to the current market leaders. They do not possess large networks, customer bases or funds, and often depend on partnerships with banks or BigTech.[20] The more promising FinTech innovations may quickly be taken over by either BigTechs or banks.
Incumbent financial services players need to consider how current strengths may provide future competitive advantage. They can build on ‘soft’ information based on relationships (personal interactions and trust). For example in corporate finance and investment banking. Despite financial crises, customers trust their bank more than other institutions to securely manage their data.[21] The existing customer base forms an ideal starting point to define a new role in the platform era. They better find it sooner rather than later.
What’s next?
In the next blog we investigate the mechanics of the platform economy. Where does the claim “Data is the new oil” come from? How did we get from the cozy sharing platforms from the early days of the internet to the imposing and all present corporate platforms of today? What are the processes that drive the platform economy? Those and other questions will be explored.
This blog is written in collaboration with Cormac Petit.
[1] Van Dijck, J., Poell, T., De Waal, M. (2018). The Platform Society; Public values in a connective world, Oxford University Press, see page 4 for definitions of ‘platform’ and ‘platformisation’.
[2] The My Financial Data project is one of the ‘working tables’ which is part of a broader Finance and the Common Good programme. Socires and the Sustainable Finance Lab are together investigating our European tradition of consensus and dialogue in search of alternatives for the increasingly dominant neoclassical, Anglo-Saxon economic model.
[3] BigTech is a name used to describe the four or five multinational online service or computer and software companies that dominate cyberspace: Google, Amazon, Facebook, Apple, occasionally Microsoft and more recently including Alibaba. Financial Technology, better known under the term ‘fintech’, describes a business that aims at providing financial services by making use of software and modern technology. The definition of ‘Fintech’ is obtained via Fintech Weekly.
[4] See ‘DNB (2019) BigTech Companies Increasingly active in European payment markets, DNBulletin’ and ‘BoE (2019) Future of Finance; Review on the outlook for the UK financial system: What it means for the bank of England’.
[5] BIS (2019). III. Big tech in finance: opportunities and risks, BIS Annual Economic Report, chapter III.
[6] FSB (2019). FinTech and market structure in financial services: Market developments and potential financial stability implications, FSB Report.
[7] For a short explanation of PSD2 see https://www.dnb.nl/en/payments/psd2/index.jsp.
[8] Table obtained from ‘FSB (2019) FinTech and market structure in financial services: Market developments and potential financial stability implications’. The original table also includes Baidu, Amazon, Apple, Samsung, Microsoft and Vodafone.
[9] McKinsey & Company (2019). Beyond the Buzz: Harnessing machine learning in payments, McKinsey & Company paper.
[10] BoE (2019). Future of Finance; Review on the outlook for the UK financial system: What it means for the bank of England, BoE Report.
[11] BIS (2019). III. Big tech in finance: opportunities and risks, BIS Annual Economic Report, chapter III.
[12] The applications of the platform economy to the financial sector are described in detail in ‘MIT (2018) Transitioning from services to platforms: The financial services industry’.
[13] The websites of the apps mentioned are https://www.mint.com/, https://banked.com/ and https://www.yolt.com/.
[14] For more information about this app, see https://www.budlr.nl/.
[15] The websites of the initiatives mentioned are https://www.consumentenbond.nl/test, https://www.pricewise.nl/ and https://www.independer.nl/.
[16] BIS (2019). BigTech and the changing structure of financial indermediation, BIS Working Paper, no 779.
[17] Ramsden, D. (2019). Embracing fintech, Speech at Innovate Financial Summit.
[18] BIS (2019). III. Big tech in finance: opportunities and risks, BIS Annual Economic Report, chapter III.
[19] See the current conflict in the Netherlands between ABN AMRO Bank and the Dutch Data Protection Authority: https://nos.nl/artikel/2292036-abn-amro-stopt-onder-druk-privacy-waakhond-met-inzien-betaalgegevens.html.
[20] Exceptions to this rule exist. Adyen, for instance, has a market capitalisation of roughly € 20 billion and counts some of the largest platforms in the world as its customers.
[21] Cagemini (2017). The Currency of Trust: Why banks and insurers must make customer data safer and more secure, Capgemini Report.
