In BCG’s article “Borges’ Map,” Philip Evans and Patrick Forth argue that business architecture has itself become a strategic variable. Technology may be used to optimize and create competitive advantage within a business model. But real success stems from an organization’s ability to reinvent its business model or adapt to the opportunities provided by both technology and the ubiquitous availability of digitized information that can be generated, mined, analyzed, and used at low cost.
In this world, stacked business architecture will be the dominant structure, and four distinct, viable business models are emerging within it: traditional oligopolist, infrastructure organization, platform, and user community.
What will this mean for the future of the banking industry?
Traditional Oligopolist. Companies following this business model have a competitive advantage in environments where uncertainty is high but not incalculable and where economies of scale are significant but not overwhelming. Their advantage stems from continuous improvement in core products and processes as well as from investments in sustaining the advantages of scale. The successful traditional oligopolists will continue to control a large part of the value chain.
Current incumbent banks, whose number one priority is to keep their offerings relevant for customers, are naturally positioned for this space. When they lose access to the customer, these banks will have to become the new winners’ best partners at the customer interface to avoid losing platform scale. Partnering with future winners will also allow them to gain share on volumes. Margins will come under pressure as products are commoditized, and some products will even become unsustainable for the majority of integrated banks that fail to reach the scale required.
Overall, the model of traditional oligopolists will become less relevant.
Infrastructure Organization. This type of company will be found at the bottom of the stack, where scale matters most and uncertainty is lowest. Scale and efficiency are key here, and IT providers, utilities, and global product players, such as credit card companies, will continue to prevail. Several products currently manufactured by banks will migrate into this space, especially in the capital markets business; consider foreign exchange trading, for example. Infrastructure organizations will therefore both partner and compete with traditional oligopolists.
Platform. Organizations using this business model provide services to communities and allow them to scale as a result of the network effect of serving a large number of users. This creates a winner-take-all environment with monopolistic structures. The value of these platforms must be sustained by continuous innovation and reinvention. Unlike traditional monopolies, which are protected by barriers to entry created by the immense investments in infrastructure—such as cables, pipelines, or railroad tracks—that are needed to form a traditional network, these new networks are generated by users’ decisions. And as users’ views and needs evolve, the new fragile monopolies can lose scale as quickly as they gain it.
Some traditional banks, including BBVA and Citibank, are exploring the platform approach—for example by opening their applications programming to benefit from external innovation. As the value of physical distribution networks erodes, more banks might want to explore options to create new digital platforms. With access to customer data, an understanding of customers’ needs, and the sheer scale of their customer base, banks have the assets that are essential for building a platform.
The bank as an app store in the center of an ecosystem might become a business model for the future.
User Community. Consumers, professionals, and small entrepreneurs will gather in communities at the top layer of the stack, consuming services and products offered by companies in the layers below. They flourish in environments that have high uncertainty and weak economies of scale. Members of these communities innovate to build solutions that are better than the ones provided by companies in the other layers. They build on platforms, and their costs of failure are low; the main investment is the creator’s time—and the upside is large when they hit it right. Innovative solutions can scale quickly and create global businesses within months.
This potential to scale quickly in the user community space is what attracts venture capital to fintechs and other startups. Though some banks are building disruptive business models independently—creating venture capital funds to fuel external innovation that they can internalize or using hackathons to create new digital solutions for their customers—this space is largely untapped by banks today.
The detailed structure of future banking is, of course, unclear. As the stacks architecture continues to evolve, however, banks will need to know which model to employ given their circumstances and then excel in its execution.