Neobank. The word alone is enough to strike fear into the heart of any financial institution — no matter the size. With online-only industry disruptors like Simple, Moven, and SoFi encroaching on market share, it’s easy to view this age of digitized dealings with dread. But there is a silver lining.
It’s true that traditional banking business models are giving way to banking as a platform (BaaP), a model that incumbents will need to navigate in order to remain competitive. But, it’s also giving community banks and credit unions a chance to leverage technology to better serve account holders and become leaders in a rapidly changing industry.
A tale of two business models
To understand banking as a platform (and BaaP’s meaning for the financial services industry), let’s first take a quick look at pipeline and platform business models.
In the pipeline model, businesses retain maximum control over resources and assets, owning every aspect of the product creation and distribution process. Traditional banking business models generally rely on this linear, value-chain structure.
A platform structure, or product platforming, is a business model based on connection rather than control. Companies like Airbnb and Uber have used this model seamlessly, creating scalable, cost-effective growth that connects consumers directly to the services they need.
The Harvard Business Review points out that while platforms in a digital banking sense are fairly new, the platform business model and the networks they create have existed even before the advent of the internet. What was once a brick-and-mortar mall is now Amazon. What was once a print newspaper is now Facebook. The key difference is that, now, consumers can create value on their own through digital infrastructures.
The rise of banking as a platform
Like platform models, technology’s interplay in the financial services industry is nothing new. According to Forbes, fintech entered the picture sometime in the 1950s with the invention of credit cards, transforming money from a physical entity into an idea. Next came ATMs, then electronic stock trading, and then the internet and e-commerce business models in the 1990s. “These five decades of developments have created a financial technology infrastructure which most people never think about, but use almost every day.”
Cut to 2019 after decades of digital transformation. With the smartphone reigning supreme, this longstanding symbiotic relationship between the financial industry and technology has naturally lent itself to the rise of startups that position banking as a service offered exclusively on a digital platform. “Smartphones, broadband internet, the 24/7 availability of commerce and financial data, and social networks have made us organize ourselves very differently than in the past. The Millennial generation, weaned on this new paradigm, now have completely different expectations than their parents or grandparents of communication and commerce,” says The Financial Brand.
As the delivery of financial services becomes increasingly digitized, Ernst & Young posits that traditional financial institutions “will have to embrace the platform-based business model, either as an active participant on others’ platforms, or on platforms of their own.”
So, about those neobanks...
In 2014, the Harvard Business Review asked if retail bank branches would survive in the digital world. They surmised that physical branch locations would still be an important component of a consumer’s overall banking experience. Almost five years later, we can see they were right.
A 2018 Consumer Banking Insights Study, commissioned by Kasasa and conducted by The Harris Poll, found that 56% of consumers are concerned about limited branches and ATM locations when deciding to switch to a community financial institution, while 22% cited technology as a concern. Furthermore, the study found that while online-only neobanks are gaining popularity, they still have a lot of catching up to do to surpass community banks and credit unions as a viable banking option in the minds of consumers.
Community financial institutions can widen their lead even more by delivering both online banking and physical accessibility in a way that neobanks simply can’t. After all, what are roots without branches? Citing Apple’s products and app partnerships as proof that business models don’t have to be an either/or scenario, the Harvard Business Review says, “...firms needn’t be only a pipeline or a platform; they can be both. While plenty of pure pipeline businesses are still highly competitive, when platforms enter the same marketplace, the platforms virtually always win.”
Capitalizing on the age of digital disruption
History is rife with industry incumbents who, resisting change, have become obsolete during times of disruption (cough, Blockbuster, cough). Financial services companies are trying their hardest not to let that happen to them. Ernst & Young says, “Fast-moving banks have already started taking steps toward the platform strategy and building their own platforms...some are establishing FinTech divisions with the skill sets needed to develop software for these platforms.”
Megabanks may be able to design their own technology to remain competitive within this new era, but community financial institutions have the benefit of working with partners who can facilitate innovation. Kasasa is empowering community banks and credit unions to not only join but become a leader in the digital space. Through innovative technology, like the Kasasa Loan® that features a personalized dashboard app, financial institutions can better serve consumers and meet them where they are.
With technology and the role it plays in our lives only growing, community financial institutions are in a unique position to use the banking as a platform model to give consumers the best of both worlds — a network of highly innovative products and services, along with the trustworthiness of a longstanding institution.