External Resource Management

What is truly unique to platforms is how they use external resources. Indeed, in a traditional business model, companies use their internal resources to produce goods and services with features based on market research. Platforms, on the other hand, do not own or control any resources. Instead, they are marketplaces allowing participants not only to offer their resources to other participants seeking them, but also to act as both “producer” and “consumer” of value at different points in time. For instance, on Airbnb, any apartment owner (producer) can offer their apartment (value) to an individual seeking to rent it (consumer). And while on holiday abroad, the very same flat owner can now seek to rent an apartment. With frictionless access and supply/demand at play, consumers have access to more products and services. As the community of consumers on the platform grows, feedback mechanisms (e.g. ratings) act as a filter, ensuring that the best products and services remain.

Network Effects

One key feature to explain the success of platforms is the existence of network effects. Airbnb is a prime example of such effects. The more people join the platform as guests, the more apartment owners are incentivized to become hosts, therefore bringing more competition and pushing prices down. Lower prices, in turn, attract more guests until large-scale market adoption. This is a classic case of positive network effects, since both sides of the platform keep growing as they reinforce each other (positive feedback loops). A negative network effect is a negative feedback loop, whereby as more users leave a platform, more users follow through. For instance, at the height of the Blackberry’s success, complacency combined with the emergence of the iPhone convinced some users to abandon Blackberry, triggering more users to do the same.

Bank and Platform: A Not-So-New Phenomenon at First

At its core, a bank is a platform, connecting providers of capital (lenders) with receivers (borrowers). However, instead of letting market forces drive the terms of engagement (rate), banks decided to set the terms themselves. As new products and services – as well as new lines of business – were added, banks grew with an inward focus on tightly knit processes, procedures and policies, ensuring not only the ownership of the value creation but also its full control. Over time, as technology became more sophisticated, banks started to outsource part of this value creation to third parties (“procurement”), with the aim of reducing and controlling costs. But, by and large, banks are about control.

The Absence of Network Effect

While ATMs are a prime example of how a large branch network can capture more deposits, they are also the only one. In the current organizational architecture, clients do not extract more value from their bank as the number of clients grows, as banks capture that increase.

Weak Competitive Environment

Incentives to innovate are often related to the intensity of the local market. In the UK, where a handful of banks control 80% of the market share, it is not surprising that innovation has a hard time taking off, despite banks’ best efforts. Market shares are stable and there is no incentive to start a “war” with competitors. It is therefore also unsurprising that banks fail to truly revamp their client experience with the millennial generation in mind, now the largest segment in the western world.

This generation has grown up with Facebook, a social network with a user interface second to none. They never experienced computer freezing. Whatever they want, they do under their own terms. When banks refer to the digitization of their offering, they are in fact digitizing the client experience for the parents of the millennials.

Failure to Understand the Nature of Innovation

Innovation labs/centres have emerged, often as a me-too strategy, with inadequate senior management reporting lines, insufficient financial resources and unrealistic key performance indicators (KPIs) (and their frequencies). Moreover, virtually no one in these labs has start-up experience, therefore failing to bring agility and in-depth cultural awareness when dealing with start-ups, leading to slow reaction, poor communication and tedious start-up onboarding processes with time-consuming operational and legal burdens.

Strategic Considerations

At a high level, three discussions need to take place:

• The vision and core focus of the firm.
  • The vision of the firm is probably one of the most difficult conversations to have. Wealth management being an “old-fashioned” industry, it is tempting to continue defining the firm with an old mindset and customer profiles in mind, stressing company values, tailored wealth management solutions and specific market segments. The next generation of wealth are millennials, used to 24/7 availability, social networks, interconnectivity and interoperability, and with expectations of how, when and where products and services are consumed that are different from the previous generations of clients.
  • Defining the core focus is critical and requires a hard and honest look, as some wealth management firms are more likely to control the entire value chain. As we explained earlier, the value now resides within data, hence firms should look at each stage of the value chain and analyse whether it could build a sustainable and cumulative competitive advantage through data. Risk management is the most obvious function meeting the criteria for all firms, but other functions are firm-specific. Once the core asset is identified, it should then stand at the heart of the platform and new technologies and application programming interfaces (APIs) should be built on top of it, not integrated with it. Indeed, as consumer needs and technology evolve, the firm wants to maintain its agility by keeping the core asset(s) technology-neutral.
• The degree of openness.
  • Successful platforms are truly open, allowing any producer and consumer of services to join them. Three scenarios could be envisioned:
    • Little openness, where the firm is passive in its strategy and partners with any third parties qualifying for its APIs, with the risk of being disintermediated.
    • Firm-wide openness, where the firm actively seeks to create an ecosystem of APIs by actively opening up its (anonymized) data at all stages of the value chain, therefore creating its own app store with third-party apps complementing its existing service offerings and/or providing more efficient alternatives to existing internal processes (e.g. know your customer – KYC and artificial intelligence – AI). Apple’s iPhone and its app store is a perfect example.
    • Industry-wide openness, where all wealth management firms cooperate on a common standard in APIs for their industry. Google’s Android is a case in point – this operating system and apps are now used by numerous brands and phone devices.
• The rules of engagement.
  • For a platform to be successful, any participant should be able to join easily. As the number of third-party solutions increases, so do the interactions which generate data and therefore value on the platform. However, some third parties may be of poor quality and destroy value in the process. If not quickly identified, these solutions can harm the platform and proper curation and rules of engagement are therefore essential. As mainstream platforms, wealth management platforms should rely on their own community of users for review and ratings.

Cultural Considerations

As wealth management firms are about to enter a new era, self-awareness of senior management will be a decisive success factor. In the end, nobody knows what the right thing to do is, until it is tested and proven. Therefore, a culture of experimentation and tactical bets is necessary to discover what works specifically for a firm. Failing fast and often should be the mantra of each wealth management firm when embracing the unknown.

Security Considerations

Cyber security deserves a chapter on its own. Identity theft remains a risk whenever a client shares his or her bank account credentials with a third party. Strong customer authentication is therefore critical, as well as secured communication.