Banking’s brave new platform world
Never has the need been greater to add meaning to capitalism beyond just optimising shareholder value. The global financial crisis and the fourth industrial revolution (4IR) are shifting thinking from the Milton Friedman type of capitalism to showing “a positive contribution to society”, to quote Larry Fink, perhaps the most important institutional investor today.
Professor Michael Porter of Harvard Business School aims to redefine capitalism through widening business’s competitive strategy to benefit staff, communities, the environment and wider society in an integrated way. Examples include the way Walmart has optimised its value chain to reduce greenhouse-gas emissions, and Coca-Cola has cut water consumption.
Amid shareholder and social media activism, these examples of corporate America renewing its business models make perfect sense, but this thinking doesn’t go far enough for these companies to remain globally competitive.
For advice on not just redefining but reinventing capitalism, one should perhaps look at the Massachusetts Institute of Technology, which has become a leading proponent of business strategy around “platform” thinking.
MIT economists refer to Amazon, Apple, Google, Microsoft and Facebook — the five largest companies in the world by market capitalisation — as platforms, rather than Big Tech companies.
As opposed to “pipeline” businesses, which aim to control a supply chain producing goods and services for selected customer segments, the platform business creates value by efficiently connecting producers with consumers.
The actual value is created externally to the platform, which only monetises a fraction of the value and often only from one side, either from producers or consumers, but seldom both. A hallmark of these platforms is the positive network effect, also called demand-side economy of scale, where the value of the ecosystem increases non line arly with the number of participants.
As with Facebook, LinkedIn or WhatsApp, the more participants a platform has, the more useful it becomes.
Perhaps the most interesting aspect is how platforms set out to create value for users often without knowing how to monetise value for themselves.
This certainly was the case with Google, not just on search but also Android, Gmail, Google Maps and YouTube. Still to this day Google’s search function, Gmail and satellite and street image mapping services are free. Facebook followed a similar journey.
This free service has allowed them to become the two leading global media providers in which consumption is free, but producers (companies) pay a premium for access to their data.
Technology (and platforms) unlock the potential to create significant value at a fraction of the cost of delivering it. A focus on maximising the total value created across producer and consumer opens up a wide range of material opportunities for businesses willing to think this way.
The ultra-competitive space of entrylevel banking may seem like an unusual place to apply this thinking, but network effects are exactly what you need to serve extremely price-sensitive customers in a sustainable way.
On a typical month at FNB we process around 4-million e-Wallet sends of an average value of R550, totalling more than R2bn of payments. The typical recipient is extremely cost sensitive and if they have been paid R500, they expect to receive exactly R500 and not, say, R495.
So how does FNB supply this service for free? The answer lies in who pays — the sender. Most senders are on a bundle product, so they don’t literally pay directly either, but the point is we can provide a service to both sender and recipient and still obtain some margin.
We launched the E-Wallet Extra account last year that upgrades the many millions of mobile wallet recipients into a Fica compliant bank account with a card. From next month this will be renamed the Easy Zero account. The pricing, as the name says, is basically zero if you conduct it like the e Wallet, but you can also make electronic payments and purchase airtime.
Is this sustainable? Again, the answer lies in how our platform uses a multisided network to extract some margin from acquirers and sellers to allow us at least to fund the marginal product cost, while we count on the longer-term value of the client relationships to make it meaningful for us.
The World Bank said last year that SA’s banking market has shortcomings in terms of meeting the needs of lowerincome customers, but I would argue the products and services in the market are exceptionally competitive.
We are often asked if the new fintech banks, or companies such as Amazon, Google, Facebook, Alibaba and Tencent, are going to take over our market (of financial services).
We have been preparing for that for perhaps a decade. We understand the disruptive business models they use and we have in many ways emulated them (whether deliberately or not), focusing on improving value by building ecosystems or networks that result in shared value between our customers, many other parties and ourselves. In the 4IR world probably nothing less will survive, with the ultimate beneficiary being the consumer.
Technology (and platforms) unlock the potential to create value