Today’s book is a must-read for CEOs, business leaders, regulators, fintech entrepreneurs, wealth managers, behavioural finance researchers and professionals working at financial technology companies. It offers an accessible grasp of the rapidly evolving outcome economy and a view of the future of the industry. We welcome the author of“Banks and Fintech on Platform Economies: Contextual and Conscious Banking “ Paolo Sironi
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Wed, Oct 26, 2022 8:35PM • 1:02:08
platform, banks, banking, client, products, book, fintech, people, ecosystem, elements, understand, work, industry, business, consumption, consumers, important, essence, economy, problem
Aidan McCullen, Paolo Sironi
Aidan McCullen 00:00
The the innovation show exists to bring you content that you may not hear elsewhere so you can make better decisions, whether it be in your personal life or in your organisation. And it’s thanks to our sponsors Zai, boldly transforming the future of financial services with a suite of embedded products and services, empowering businesses to manage multiple payment workflows and new phones with ease. You can check out Zai at Hello zai.com Let’s get into today’s episode. Today’s book is a must read for business leaders, CEOs, regulators, FinTech entrepreneurs, wealth managers, behavioural finance researchers and professionals working at financial technology companies. It offers an accessible grasp of the rapidly evolving outcome economy, and the view about the future of the industry. Let me share a little excerpt to whet your whistle and get you prepared for today’s episode. Financial services are experiencing a near collapse of their traditional value chain, which is cornering the industry into own sustainable business models looking for hyperscale. This often conflicts with the size of the jurisdictions in which they operate, the constraints imposed by regulations and the low elasticity of demand and persistently low interest rate environments. Technology has been largely seen as an opportunity to march ahead of the progressive evaporation of revenues yet. Our guest asks, is this sustainable? It is a pleasure to welcome the man who penned those words, and so many other illuminating ones. Besides that, the author of banks and fintech on platform economies, it is a great pleasure to welcome Paulo Sironi.
Paolo Sironi 01:58
Thanks. Aidan. I’m happy to be here with your audience.
Aidan McCullen 02:01
It’s great to have you man, I was telling you off air I got so much from this book, you know, when you hear think you know, something, you’re kind of going Yeah, I got that. And then you read your book, and you go now I absolutely got it. I learned so much from it. And we have limited time together. So I want to dive right in. I thought we’d start with where you talk about how the whole business architecture of the world has been open ended in the shift to the Fourth Industrial Revolution, which you say is essentially a platform revolution. And I’ll take a quote here to tee you up. And please bring this whichever way you like you say, there is a key difference between the third and the fourth revolutions that sets the ladder apart. Essentially, traditional businesses are being progressively transformed inside out in a significant shift of business focus, from outputs to outcomes. In addition, exponential technologies are putting platform economics on steroids, to excel on outcome economies, using all means to make the Fourth Industrial Revolution, our platform revolution. Currently, the most valuable firms on the planet are all platforms. What a way to start into the book, and please, Paulo bring this whichever way you like,
Paolo Sironi 03:24
Thanks. That’s effectively the opening. One of the opening messages, which he’s to explain why the platform economies, the ecosystem, platform economies and becoming so important in our the realisation of the value of FinTech innovation. And but before delving into into the platform discussion, I think that you mentioned something equally important at the very beginning, you basically said that there is a problem in degeneration of value of current business models of our industry that unfortunately, without recognising that Fintech is trying to replicate. So one key element of this book is to help everybody to really understand what value truly is. So that the binary understanding value, they can digitise value and so they really understand the change of mindset, they need to apply to the digital innovation to make sure that that new value or hidden value that they have to digitise comes to the surface. And the reason why the value is such an important topic is because we all know that the average of the banking institutions worthwhile when it comes to the price to book ratio sits well below one when a company has a price to book ratio below one it means is this one value for shareholders is like a distressed company. So that already indicates the fact that the way banks operate does not conform anymore with the macroeconomic conditions under which they are engaging with them. summers. So the problem really is inside the construct of banking and the economy more than the fact that technology is pushing them to change. So why therefore, they need to really understand value in order to box out from these constrained financial performance situation? Well, for two reasons, first of all, because they cannot price their products inside that very low interest rate environment, high cost of capital a fairly commoditized, their product channels, and the longer so they are invited to allow consumers that sit outside that the industry engagement there, or FinTech or big tech or other platform players, and in a way that they can eliminate the frictions by leveraging the banking solution. And that creates new value, new value in the way people are allowed to interact, and basically share among themselves. So So banking becomes a key capability to unlock these new value that sits outside the banking industry that all of a sudden comes to the surface like if you will not be able to trust and execute your payments very faster, Amazon will not exist as it exists today. But on the other side, that there will always be banks. And actually, I would say they will always be bankers, when Bill Gates said that people need banking, not banks, and he was partially right. So partially wrong, because people see the bankers because of some things and reasons that we might discuss later on about the real nature of the information asymmetry. So they pull and push motivation like APA that does not allow most of us to set that like themselves on a digital banking solution. Therefore, there is a hidden value in the banking relationship. So bankers look into people that has been forgotten because of the facility capability these units of banks to sell in the past, especially before the financial crisis. Now, as that word is gone, by recognising these hidden valley in the relationship, and bankers in FinTech will understand how to invest in order to bring that value to the surfaces so that people instead of paying for the products, being unaware of how they pay for the relationship, they can pay transparency for the relationship, that means they pay for accessing the bank and platform. But again, if the data organise value, they cannot pay for that. So you see, at the end, that the core message of this book is to give you the means to understand what value is so that you know how to unlock new value with contextual banking platform strategies, or unlock hidden value with conscious banking and platform strategies.
Aidan McCullen 07:45
I love how you describe in the book I was crediting you because English is not your native tongue.
Paolo Sironi 07:52
The accent betrays me, you did
Aidan McCullen 07:54
such a great job. And I mean, let’s share the depth of research. This goes right back to 1994.
Paolo Sironi 08:01
So in essence, because I graduated in Economics and Business Administration in 1994. And the professor, they brought me to graduation, I was teaching banking and financial markets. And the core of his lectures was the asymmetry of information. And I confess, though I graduated with full marks, I did not understand it. And the reason I did not understand it is because it was not explained correctly. But it took me more than 20 years of professional work and research to understand that the essence of it and if you’d like to share the provocatively with a very qualified audience, I was invited by Blackrock in 2019, to open some of their investor conferences. And in London, I like a few billions, a few 100 Billions of assets under management in front of me. And when I open the the conference, I said, you know why your clients don’t understand finance. So said because there’s nothing to understand, now very provocatively. But in essence, it means that the structure of financial markets is fundamental uncertainty. Everything that we’ve been doing so far bank, as I’ve been doing so far is an attempt to if you like, help people to make decisions facing uncertainty, the problem is that we started believing that we had enough information to forecast or predict the future which is not true, there is a reason why at some point that the system collapses, the market breaks that people get dissatisfied that not individualism and so forth. So now by restarting from the consistent micro foundations of financial markets, which are biological micro foundations and their biological because markets don’t exist in nature, they are produced of human beings, so their biology element and biological element. We are therefore capable to identify what really makes the information assimilate in banking now, the whole essay List of platforms is to eliminate frictions, right. So they eliminate the for lack intermediaries. So they allow people to trade by themselves so that they are more symmetrical in trading, they don’t need somebody else intermediate, which is the biggest friction in banking is the symmetry of information. So the site is some pretend to know, but they don’t in some believe they don’t know, but they may know enough to be suspicious. So by reconciling these two elements, you allow people to send the right themselves on a digital solution in a way that the industry focuses on what really matters. So FinTech innovation makes sense when it is plugged into the relationship that bankers wants to generate with a client or equally relevant, you basically allow data to be deployed on the most symmetrical plays like payment and part of credit in a contextualised way. So that people have to go through the process of buying or getting the money they need, without the huge hassle that they have to go to today for onboarding, discussing their qualify, they can be sincerely simplify much more compared to what we are experiencing today in our daily lives.
Aidan McCullen 11:08
So that’s a key point, I just want to reinforce that the information as symmetry is an absolute key point that I took from from that first chapter as well. The other one was the difference between output outcome and output economy. So this concept is really important to understand. Parallel, I thought we’d share if you’re okay with this, the graph where you show the four different types of platforms, because this was another one of those moments where you show the information so well, and then you describe it so well. So this is the Boondall, value chain, digital ecosystem platforms and value constellations, single value chains and digital value chains. Perhaps we’ll share that and maybe you’ll speak to the diagram, would that be okay?
Paolo Sironi 11:52
Yes, first of all, I guess, people need to understand, which is the terrain for their operations. And so they have to have a clear understanding of the difference between platforms, and ecosystems, and how platforms and ecosystems that intersect, because there is where the fourth industrial revolution will shape our capability to consume not only industrial products, but also banking products or financial products. And so, you see, the industry typically, is born. And most of the industries are born like linear industries linear value chain, so you have the manufacturers, you have the assemblers. And you have the distributors that go to the final consumers, right, so it goes this way. So a linear value chain that works like this is not a platform, because people are box inside the set of operations, one after the other would value accrues from moving a product to the next level, right? So the price goes up because the cost has been added. And it’s not an ecosystem, because people cannot just change the product the way they want. They need to interact in very defined ways. So the bank is typically linear value chain, a manufacturer of cars, in automotive companies, typically a linear value chain. But it can be that these linear value chains becomes a digital value chains. So in essence, they become platforms, but it doesn’t modify the linearity of their business construct them. For example, you might decide as a bank that on one side, you create products. And on the other side, that you have to distribute those products. And so the people they want to buy the products needs to talk to your salespeople in order to understand if your products are fit for purpose, and maybe they are not sure so they talk to the salespeople of another banker in order to understand if they will, manager products are good enough, and so on, so forth. So in the end, there will be a multiplicity of institutions around the finance client with a multiplicity of intermediaries, which are the sellers of the product, that every time is to provide information. Now, there are companies for example of funds that creates the platform so that the buyers or products don’t shop around, they go on the platform, they find the information they need them or the organisers, standardise them with the compliance elements, if you like that on display, and so they can consume. Now, it is a platform because on that platform, the semaine intermediaries, but in the end there is always if you like a consumption, that becomes very lean. So you just replace the intermediary with it digitally, the plate now that generates value, but there’s much more value that can be generated when you interact as an ecosystem. Now, we said there’s a single value chain is not a platform, it’s a political system. And there’s a digital value chain is a platform is not an ecosystem. So before we go to the base, which is a platform and ecosystem we want to see deserve the chance. So Woody is that a an industry that is not the platform but work as an ecosystem? Well, that’s a bundled value chain. That means that will be bundled together different values coming from partners or people or providers that operate in a nearby environment, that example will be privatised within the City of London. So the City of London is an ecosystem, there will be many people that can participate in the private equity bill from lawyers to chief financial officers, you can hide for purpose or marketing specialist investment specialists was the fourth. So the private equity company bundles all of these elements of value in a bespoke way, every time they make a deal. So it is an ecosystem because they saw the value outside the industry perimeter. But every time they’ve to redo the process, it is not the like people contribute the freely so that it does have an agreement that they need to sit and discuss. So it’s very cumbersome, right is very tedious. In a sense, it takes time. Now when people are free to operate and contributing, and they use a digital medium to do that as a venue for them. So shared value, that is an ecosystem platform or a value constellation. So that means many people can equally make themselves available and participate in your consumption of the value is a click away, put it this way. So now you understand that the combinations of that value generation can be a high order of magnitude compared to those that you can find that into a linear value chain. And that’s why you can get a higher level of personalization or customization, they may attract a variety of individuals that otherwise will not be recognising themselves entirely in the value chain. But there they can all find, if you like their perspective and their interest. Now the fourth industrial revolution, that brings up platforms, to the extent of ecosystems, orchestration is an ecosystem platform type of a competitive landscape. So that is the rain, where all industries have to fight for time. So both banks and fintech need to understand that the essence of ecosystem platforms because if they can get there successfully, they will have a dominant position that can box out from the existing conundrum. So they can be relevant going forward while they’re in the century, otherwise, they might be confined and that for this time to oblivion,
Aidan McCullen 17:41
let’s give an example Paulo perhaps at this time, one of the one of the things you talk about is okay, you know what to do. That’s kind of the easy part. The hard part is the shift in mindset, the mindset shift from a leadership team, which oftentimes means letting go of the ways you used to do things are some of the value that used to capture in the past needs to change when you move to a platform or an open, or a constellation, for example, you give a couple of examples in the book, one was the difference between share now, and BMW. And the other example is the magnificent example that I loved, which was, you talked about the time, Steve Jobs and Apple suddenly got it, he got the difference between a linear production model and an open platform well, sometimes open sometimes close and knowing when to open when to close
Paolo Sironi 18:39
versus open si requires careful governance, right? So because it’s too much openness, sometimes create a negative network effects. So therefore, you need to know how to close it to curate the platform, and vice versa, right. So that makes it very complex and difficult. But that’s where the value is, if if it’s easy, there’s nobody, right.
Aidan McCullen 18:59
And let’s come back to that, because actually, the mental model I had there was like a DJ mixing, you know, and they’re tweaking, opening and closing different parts of the system. Because that oversight on that regulation, as you say, is really, really important to make sure that you don’t favour one side over the other and you know, where to close and where to capture value. And maybe we’ll talk about Facebook as an example in a while. But I’d love you to share maybe a couple of examples. So I’ll throw some at your pillow and you take whichever one you want. One was the difference between MS DOS and the telephone. The other was share now and BMW and the other that I really loved was, as we mentioned there, apples realisation of moving to a platform what iOS and iTunes.
Paolo Sironi 19:46
And I will start from the one off automotive, because it gives us if you like, more simplicity, and it’s more immediate for people to grasp in the explanation of outcome versus our quota. While the one off Bill Gates versus the Steve Jobs if you like. So Windows versus Apple could be positioned to explain more the concept of opening, right, so becoming a platform or not. But the essence is the output economy versus the outcome economy. So what is the difference between these two, which underscores the success on ecosystem platforms, they operate on outcome economies, they think about a month in automotive company like BMW BMW typically works as a linear value chain in the output economy. That means that the beginning of the year, they decided that they have a certain car to produce, and they want to sell a certain number of cars of quantities. So everything is focused, in order to maximise the selling of individual outputs, those numbers of cars. And we’ll get back to this after because it’s important. But BMW can also decide that to compete in the fourth industrial revolution, by running a car sharing platform. So what is the difference? The difference is that they may recognise that in the end, what consumers want to do is to go from at least the majority from A to B by driving the car themselves. And not everybody wants to have a fancy car percent. So now, in the sharing economy, what happens is that the asset that is less important because people don’t buy the asset, so they don’t buy the car, it doesn’t mean that the asset that disappears, somebody still has to produce a car, and the car sharing platform is to own the cars to make them available. But the final user does not buy the car. So what they find is or cares is that the experience, so the way they are engaged the in going from A to be with a cash sharing solution is good enough. Now there’s a fundamental element here that comes to play. So what they pay for is very different. So the monetization shakes out of the product into the experience, or, as we might want to, say, attempt to discuss into the engagement model. But there’s another element that that made us here, if you’re not locked into buying a car, that maybe you thought would be good for you. But after a couple of drives, you realise it’s not your car, typically, you cannot give it back right or sell it immediately. So you stick with that car for a while, in case you’re not happy with your cashiering experience is a moment for you to off board and onboard the onto the front app. Right. So the if you like capability of consumers to move around is much higher, so there’s less stickiness, so you really need to excel in consumer and client engagement with a good enough experience to keep them attached to you in terms of the consumption of your final solution. So it changes the way you position the value from the assets into the whole experience into services, what are the taxes, what is about banking, typically, banks are also linear value chains that so they operate the output economy, the asset managers think about the large banking group or create the some financial products and maybe they source from some corporate issuing their bonds or equities. And then there will be somebody that assembles those elements, check into compliance, and maybe they are wealth managers, and they talk to the client, certainly using a network of individual advisors, and then the clients buy them. So you see, they decide at the beginning of the year, if this is the process, I want to set 1 billion assets under management of a certain Monetary Fund. So what happens is that the focus is selling that Monetary Fund. And the remuneration comes from the embedded fees of those monetary funds, which are a percentage, the number of basis points of the asset under management. But what happens is that some banks are realising that as these embedded fees are squeezed, think about passive investing in the US is a Race to Zero prices. Now, the value needs to come somewhere else, which is the engagement of the client. So if you like the relationship, so when a bank decides to operate the outcome economy not in the output, they decided to help their clients fulfil it goals being an individual people families so that all enterprises are looking to fulfil their personal and their financial or the business goals. Now of course, they consume products, they will be assets, which are the individual investment funds that individual bonds. But what happens as in the cash sharing example is that the accumulation will shift out of the product into the experience which is now called the client fee. Now, if you don’t understand these shifts, they’re of the nature of the fees that you don’t understand how to create the business model that conforms with the essence of the outcome economy. And if you don’t understand that you cannot win on the platform economy. So you will miss out the Fourth Industrial Revolution. And that requires the strong mindset shift that because all the incentives inside the financial institutions are shaped around that the product silos is that define everything from business architectures into the the hierarchies inside the organisation into the branding in front of the client. But the outcome economy requires it to work not vertically, but horizontally holistically around the client. And so that is the key essence. And if you like, we can also engage into a different example, a secondary example, to explain exactly why that mindset shift is so complex for banks, looking at the way they define their incentives inside organisations.
Aidan McCullen 25:52
I want to really signpost this next example because this is an example. Everybody knows Apple, everybody knows Apple is a trillion dollar business. But it wasn’t always that way. It was a struggling business. At one stage, people forget that. And it was also a linear business. You mentioned there, the difference between Microsoft and Apple, for example, back then Microsoft have since got their act together. But I thought we’d give a real example of the mindset shift that Steve Jobs had to move from linear to exponential, I think
Paolo Sironi 26:23
there’s something as it happens as you move from linear value chains to ecosystem platforms, as we move from output economies towards African economies. And an example of these other faces is the fate of Microsoft, and Apple at the beginning that they were both trying Bill Gates and Steve Jobs to make it happen. And I would say that Steve Jobs said that a much better product, well designed, professional oriented, everybody recognise the value of the first Macintosh. The difference, however, is that while Steve Jobs constrained the creation of value inside the Macintosh, even by asking them, the developers to pay for accessing the technical capabilities that to develop Macintosh compliant software, Bill Gates care that about the open the openness of visa solutions. So basically, he made the Microsoft as he built it for IBM compatible to the IBM machine, and then allow all of the basically software providers to develop a Microsoft the compliant software that could go on any machine not just at the end, but also other machines. So became the de facto, the standards of the Sunnah growing exponentially personal computer business and so became what it became that Steve Jobs was as Mark chap, right. So I think he had a moment of self reflection. And when he came back in early 2000, with the creation of iTunes, to power the part that he changed strategy, because he opened up the order to be consumed also on Windows operating models and, and therefore opened up the possibility of external parties to consumer elements that otherwise would have been previously confined to the 100% Taliban oriented Apple users. And by doing so, he started basically attracting a humongous volume of interactions on the iTunes that became his platform for the engagement of consumers starting from the consumption of music when he was controlling the financial checkpoints. And on top of this one, as he plugged that into the iPhone, a lot of people moved into their phone right with the new iPhone experience. But there they had that the Apple Store, which is if you like the evolution at this point of the attune experience where everybody could basically develop their software right and plug it onto the Apple store in a way that innovation was coming faster. So they don’t have to create all the products by himself right as he tried to control in the past before he had a high level of control. Then he reduced the level of control he kept all about the security for like the privacy and basically having a good product that is also important that he changed the the fate of Apple to become the first company in the world that to eat the trillion dollar market on Wall Street. So So in essence, not only banks have to shift from output, the products to African economies understanding the consumption of the relationship model, but also the need to open up for you in a way that they become an open platform to enrich the advisory process that provides clients what they need. And so the clients find them what they are looking for, without having to be guided through. So strictly inside that the existing pipelines, of course, making sure that everything is wrapped up with the consistent regulatory framework. So if you like these two elements that will we said before, of cash share, cash sharing, and this one of Apple of their police story are two elements that needs to be properly understood by a bank who was in FinTech as well, if they want to excel on the platform economy,
Aidan McCullen 30:41
it’s probably a good time to explain those. So there’s different types of platforms there. So you alluded to this with Apple. So there’s developmental platforms, there’s transactional platforms, and then there’s hybrid platforms as well. And in the context of banking, there’s banking as a service. And then there’s also banking as a platform. So I’d love if you’d bring those together in the light of what we just talked about from Apple,
Paolo Sironi 31:06
but most of the banks and fintech complex economies that discusses the interactions with the final consumers, right. So it’s not much about the way the individual developers interact in order to create the final product. But the principles are basically the same. And at the same time, it discusses the transaction element of the platform’s wall where consumers are buying and selling, with, with other companies on the system, as well as solutions where you have both sides of the equation. So on the one side, you provide the developers the capability to contribute. And on the other side, they provide the consumers the capability to interact. And a typical example is Facebook, because Facebook may allow consumers to transact and what do they transact the likes, right. So they shared content in order to be paid that reward that with the alike mechanism. And of course, that triggers a different monetization of the marketing. But at the same time, they opened up the underlying technical platform for other complementary to develop an ad there, if you like solutions, or individual elements of value and interactions inside the Facebook app, an example would be the gaming, right that was so popular that clicks on the on the Facebook app some some years ago. That, of course, is not free of risks. So Apple, Facebook might not have understood consistently how to open and close the development platforms as you might have allow the developers to access too much information to move it out of the platform that then trigger the set of scandals on how some of these providers of technical solutions used or abused their the information about the DDP the user. So governance is always a key element on the platform. But in essence, there are multiple levels, on how you can open up your investor definition to interact with complimentary errs and developers and that users and consumers or providers that on top of that in order to enrich the value generation in front of your ecosystem of reference, which is made up of providers as well as final consumers
Aidan McCullen 33:30
are, you’ve alluded there to trust, and we’ll come to trust in a moment. But I love the way you apply all your knowledge throughout here for bankers, for people working in fintechs. And those who don’t as well, because oftentimes, there’s confusion in legacy organisations, they think a digital strategy or digital transformation is innovation. And they’re very, very different things. And you say, both linear and nonlinear businesses have to address innovation and technology, development and transaction platforms just do it differently, especially on digital, using new technology is not necessarily the same as fostering innovation. I’d love you to explain what you mean here because the difference is absolutely essential to understand. The
Paolo Sironi 34:17
problem is a business problem is not a technological problem. Okay. Let me say first of all, what I’ve been seeing, I’ve been travelling for the last years, especially before the pandemic, of course, meeting hundreds or 1000s of entrepreneurs, colleagues or clients worldwide. And I’d say we can divide the world into three macro areas without forgetting anyone say that digital technology was born in the United States of America, the Silicon Valley 15 years ago or so, of course, China’s becoming very competitive and in developing technology, but largely speaking, go back 15 years, digital technology and the social media platforms that are born there. In Europe is where a lot of regulation is born. And it’s important. The European Commission wants to harmonise the Capital Markets Union at the same time protected the final consumers and investors regulation is not always perfect. But that is important to make sure that the system isn’t abused. But the real beneficiaries of FinTech innovation so far live in Asia Pacific, in particular, in India and China, because their the business models are poor. So you see, my role here has always been to understand those business models, which is a starting point, knowing that what works in Bandung China may not work in Bavaria, Germany, see how technology now can scale a business model. So it does start from technology, knowing that what artificial intelligence can do today cannot do 10 years ago, but then keep everything inside the regulatory framework, because you need to make sure he punches the scrap there, but it’d be sustained innovation, right? So things that matter to increase the value of the all economic ecosystem and that operates around the euro, your company. So the business model is a starting point that technology’s just the mean to fulfil that business model. So the problem is that many bankers thought that they had to learn technology, of course, they have to, it’s important. But once they do that, the issue is that this is still very shy in the redefinition of their business models to comply with the new macroeconomic conditions, they have to operate that into. And that is the most complex mindset shift because in essence, learning what technology is about that can be done, you have to apply yourself. But accepting a new business model is a redefinition of the way you see yourself and the way the incentives are defined inside the organisation. So we mentioned that the the automotive business right, so I want to give you another example that compares automotive with banks starting from this realisation. All of the FinTech entrepreneurs I met most of them came to me explaining how they were unbundling financial services. And I think this is a mistake that many FinTech enterpreneurs state, so the idea that they could break banks, the reason why they can break banks, I was told them is because they can break them as they’re already broken. That means banks already work in as disjointed entities we said before that are centred around the types of products. Creating a different set of silos is from KYC, to antimony laundry to client engagement to branding, and so on, so forth. But the problem here is on the outcome economy, which is an ecosystem platform economy has to lead Bandol bank all of these in a way that the experiencer and engagement model makes sense. So even though you start very simple, you really need to have as enterpreneur in mind, the essence of bundling back, not the value of unbundling, because that’s not real value, there’s just a starting point. But bundling back means that you cannot bundle back into verticals, you need to operate horizontally. And that’s where the problem occurs. Now, I’ll give you an example. The manufacturer of cars operates in a way that you have those that created the virus components of a car, for example, the steering wheel, or the navi system, then you have the assembler that typically is the cab company that puts everything on the chassis produces the car that is given to a car dealer. And what kind of data does is that it personalises the car in front of the client. So according to your level of wealth, you can hyper personalise your car, you can get the tiptronic you want. And if you like you can get the leather of the backseat done by an Italian artisan out of Florence. That’s a magnificent, okay. But when you do this, as a consumer, you don’t see everything that happened before you pay in only in price for all of the customization elements that are given to you by the Tabular. And once you get it and pay for it, you take the car and you go from A to B in your journey. Now what happens to banking is that they don’t really work this way. Now, also banking is manufacturers could be fund manager. So it could be the bankers that create your bank account, your credit card, your insurance product that your wealth management solution, so on so forth. And you need all of these products to go from A to B but they are given to you in a disjointed way to give an example. So most of us have a bank account that we need the bank account or maybe we don’t need the bank account, we need the FinTech solution that may be equivalent. But after you have a bank account that you’re not signed all in going from may have been a financial life, right. So even if the payment method, so maybe you get a credit card, and again, you know, you might start talking to different division of the bank, right, so a different process you need to apply so forth. And maybe you will work with a bank, that is what advances you get a mobile wallet, that’s it. But then it is not enough, you might have some money, you want to invest that. So you are basically needed to buy some financial products, you talk to another division of the bank that operates with different KYC process sets of rules and regulations, staff, or maybe not, maybe the robo advisors are gonna rob advisor, or maybe you also need insurance for your children’s education. So it took two division of the bank to do all these now, you will never fulfil that with the single product that in terms of resolving your financial product, right. So you need more of that to go together. And they need to be personalised for you the same when you buy the car, right. So you choose the level of personalization go to your wealth, and you get all together. And they work out to go from A to B. But banks are pretending that you’re satisfied by buying a car without the steering wheel, because they give you the bank account that they don’t think that then tomorrow, you might also need an investment product. So it’s like this giant mechanism. Now working horizontally instead means that all of these individual products and opportunities are in front of the client by what the client pays for is an all in price to access, the possibility of getting the solutions on boarded so that they can make the next step in their journey to go from A to B clearly is more difficult to stretch a bit accounts because these needs don’t happen at the same time in many cases. So they happen through time. But that’s why the engagement model is so important for the bank. So you need to pay to get into the engagement model where you basically start providing the opportunities as they need come through or as you can discuss with the client the opportunity, basically to identify different means that they might have seen but we could be good for for their financial life or for the success of their enterprise. Now, this means that you’re not paying individual bankers to be at the top of the individual product lines, you’re paying the relationship managers, or the platform access that goes and shops around that individual products. So basically greater the access according to the welfare and the needs of the individual client, that change of monetization is a change of incentives. So it’s a change of careers. That makes it very difficult, but not doing so constrains the banker into a business model that is a set of articles which are divided that will not enable them to be sustainable in terms of economic sustainability. Looking at the fourth industrial revolution, the high level of uncertainty, the macroeconomic conditions, so and so forth, changing those incentives instead allows banks to redefine themselves as platforms, and learn how to succeed with banking as a service, or banking as a platform type of architectures towards conventional banking or conscious banking platform strategies.
Aidan McCullen 43:12
It is such a big problem that isn’t a part of that change of incentives. It goes to any industry i i served a long time in the media industry, and in digital transformation, essentially and business model transformation. And the sales teams couldn’t get their head around why you weren’t trying to force a revenue stream too early. Because the whole idea of let it build, let it bubble up letter create, and then figure out where you’re going to make the money. That is something that many many legacy organisations really, really struggle with. And then they don’t have the patience to let it allow and let it monitor it etc. Which as you say in the book takes a totally different skill set. And then to bring this to something you talk about with your your collaborator and the former guests in the show Brett King is it means a totally different skill set in a bank for example, you need behavioural engineers, you need to know behavioural science, you need to know customer behaviour, all this kind of thing becomes really important. And I’ll give you a little quote here. I’d love it to expand on this. You said the common enablers in all innovation scenarios are the changes in the generation and perception of value. Therefore, researching how clients effectively perceive value is essential to identify the most effective techniques to digitise any industries. But this is a big problem in those industries that need digitization is they don’t understand this, looking for value, see where it comes and as you talk about later on the book. The value didn’t come in places like Facebook early, it took a long time for it to generate and then to identify By the way, the value was
Paolo Sironi 45:01
somehow corrupted to that. Yes. So the essence of banking, that is an industry that trades fundamental uncertainty is to generate trust with customers to make a decision for their financial future. Trust that, however, is not easy to build, that can be easily destroyed them. Now, understanding what trust really means, allows you to understand where value comes from. And if you identify that you can ignite the positive network effects on your own ecosystem platform. Ambition, so so to me, that element of value is very important. And I can give you a telling example, about what happens if you don’t identify value at the very beginning and where the value really is. Because you might destroy your opportunities, your treasured investments, because we take too long without that understanding, or you can accelerate everything and basically to replace all your competitors. And they do so by bringing a personal example, that intersector the history of Amazon and Jeff Bezos. Now I do that with their carefulness and all of those that have already read the book know that I clearly explain why it is not so easy to move. An example from E commerce, to banking as our psychology as human beings works differently when we interact the financial product problem compared to a consumption ecommerce problem. But this one is really telling it and also Jeff Bezos was ingenious enough to understand it in his own industry. And therefore bankers, they need to know that this is even more important for them, so they need to get it right now. So the FinTech entrepreneurs, now this data is a personal story, because in the 1990s, I said they gave it away to the in economics of this administration, I started working as a quantitative risk management, risk manager in investment banking. I also helped my brother to build this startup, they wanted to be the Amazon of Italy identified laugh at me, because we had the best products in the world to sell on the internet. We had Italian fashion, furniture, food and travel. What could go wrong with that as lik web design was super cool look like a real supermarket or or shopping mall. And we had innovative at the time and payment mechanism that the bank was providing us with. We didn’t sell anything very little. Okay, didn’t fly. So we’ll just say disaster was an interesting experience. And my, my brother, if you like, drive for innovation, which was amazing and inspiring to me. But it didn’t work. And I understood the among the many mistakes that we made that there was one there was quintessential. When I heard that a few years later, in all the interview of Jeff Bezos, from the days when Jeff Bezos launched Amazon now I’m older than you might not remember, at the very beginning, Amazon was primarily a place where it could buy and sell books, right? So books were the main product on Amazon. And the journalist asked Jeff Bezos, what is Amazon? So Jeff Bezos looked at him with the spirited eyes and said that Amazon is not a distribution channel of books on the internet. I did this I found and you might be doing that too. Like the question in a moment becomes is a bank is a FinTech distribution channel of products on digital on mobile technology. So now to explain why Amazon was not a distribution channel of books and the internet. Then, Jeff Bezos continued saying that the publishers were sending him letters complaining that he did not understand marketing, and now call him stupid. The reason is, because he was allowing users to post positive and negative reviews, but the publishers were saying just allow them to post positive reviews. So we can sell more. But they said they don’t understand that because they are not the publishers my client, okay. I’m not the distribution channel have their books on my internet website. My clients have users. And the problem here is that they use as my onboarding Amazon but as they cannot take a policy loan, his book in their hand is Malbec. Lou as I usually do, when they actually pick one book from from the chef’s during the interview, they may not be really motivated to act and to transact, okay, they cannot ask somebody, they’re nearby if they read the book, you know, they their opinion, so on and so forth. So then he said that positive and negative reviews are needed that to create the trust. So that transparency generates trust for people to make a consumption on Amazon, and basically said that, as I’m not the distribution channel of books, my role is to advise the clients on which is the best book to buy. So I need to find the technical mechanism that enables me to provide that advice to resolve the motivational gap between a push industry in the pool economy, people are capable of self directing themselves. So of course, I also discuss the fact that positive and negative reviews can be abused. So there has to be a regulation in place, right. So that’s always part of my, my, my thinking, literature and business proposition, that that is the essence of the element, you’re not a distribution channel, you’re an advisor mechanism. And then he continued that, and then it was all a moment for me said that, you know, what, only after a result, the problem, I use other analytics, to invite clients to do further to do more. So now, this is what has been happening in banking, that is reflected in my literature and the way build up the bank innovation quadrant, we all talked about data driven banking, so the possibility of learning from data model by the client and position the opportunities in front of the client. But there’s one element that is way more important that precedes data driven banking, which is data enabling clients. So first of all, you need to enable clients and to be comfortable in sell directly themselves, knowing that the essence is fundamental uncertainty. So it’s not about just information is the engagement is the relationship model that needs to be supported by this technology. Only after you can use all the power of the data that you have in house, outside your house in the open banking framework, the open panel framework in order to further enrich the client experience on the platform economy. But you need to recognise as a banker in FinTech that you cannot be configured as a distribution channel of products, but you need to become a trusted adviser for your client journeys. And from that comes a lot of consequences, the changes in the organisation the changes in JSON, the incentive mechanisms, the changes in the way the products themselves are created. And therefore, the Enable shift from output to outcome economies on the ecosystem platform revolution.
Aidan McCullen 52:58
Well, sad man, and I’m gonna then build on that because we’re very clearly talking about trust now and we’re going to focus on trust for a little while, Paulo and I thought we’d shift to something you say. So we just want to emphasise what you’re saying there because there’s a little quote you say in the book, the emphasis of digital platforms should not be on digitising products. But digitising relationships when it comes to financial services, for example, because there’s treasure in those relationships, because we’re all biassed, we’re all oftentimes fearful, going into those relationships when it comes to managing our money. And there’s trust in the system that is often overlooked. And that is a key point from this element of trust. But let’s build on it Polo. Because if I asked the audience to think about different platforms than they think about WhatsApp, or YouTube or Facebook or LinkedIn, or Snapchat, etc. Now, think about where you actually contribute to that. And how trustworthy do you feel about that? And Pilar mentioned this earlier on, there has been abuse of that power that comes from the data that they hold in those systems and Paulo tells us in the book, access to new platforms is often free in order to learn in as many participants as possible to create network effects. Unfortunately, it then becomes difficult to ask clients to abandon freemium models without offering something truly relevant in return incurring the risk of deteriorating trust. Therefore, the monetization of nonlinear businesses requires lateral thinking to discover yet unknown ways to retain value on entire ecosystem dynamics. collecting data about all user interactions is a precondition. user behaviour must be analysed, understood, and then modelled. So the process first is to find value and then to monetize it in a trustworthy and transparent way, again, polo, a very difficult voyage for many, many companies, particularly legacy organisations who were used to linear thinking
Paolo Sironi 55:10
to that gives us a chance of introducing the concept of contextual banking platform strategies, and the problem of operating those strategies in a way that you retain value to pay for your efforts. And it’s a story about misunderstanding of the value generation with open banking and open finance and because, in essence, the reason why banks are getting get contextualise there is because they have an opportunity as Brad King, my teacher said to eliminate friction in an alternative user ecosystem. So a client journey then happens outside the banking definition. So what we basically do is that you allow a third party provider of services, being a FinTech, a big tech or somebody else to consume your financial services capability, these this example is payments, in order for them to eliminate the friction in user engagement to make sure that clients are more inclined to continue the journey to consume their products, so on and so forth. Now, what happens, however, is that the moment that you, as a user, consume something, without the friction, at the very beginning, you might be very pleased because it compared to a previous experience, you’re like, Oh, this is easier is one click to pay right there. And you check up on Amazon, so let me use it. But after you get used to that, you assume that’s really free, right. So you may not pay for that, you assume that becomes a standard, which puts a problem on the model that the only sees up in banking going up in finance as a consumption model of individual API calls, because they may not be capable of pricing it sufficiently at the very end that the closer the price in front of the client, they will have to discount the fact that that is a Race to Zero prices. So that has to be considered the standard. So those platform providers at some point will be inclined to replace European banking capability, right, by building their own open banking, opportunity or their own. You know, some like shopping malls are now creating their banking, charter, so on and so forth. So now, that means that the since the very beginning, when you operate it to make sure that the information inside your core banking is available to external participants through API’s on the open banking or open finance economy. The consumption through those API’s is just a starting point. But the final value will soon be recognised on the oil ecosystem interplay and not in the elimination of the friction at the very beginning. So that shift very fast. So that is the reason why some banks now are really thinking to orchestrate that those external ecosystems in order to be capable of capturing the full value, which is an ecosystem value that comes from the interaction among the people more than focusing on and monetizing solely on the consumption of the API’s. So they already think about how to make sure that anytime soon as that consumption is basically squeezed in terms of margins, because of the rest of zero prices, they still be, they will still be profitable, and retain value from their investments because they can access the value on the full ecosystem. So either they’re orchestrated those ecosystem platforms, or they sign up more logical partnership agreements with those providers to make sure that they can also participate into the platform Interplay not only to the individual transactional elements, and those instead that they don’t recognise, the ISA may be constrained that in their capability to build the return on investment, and in most cases will be unsatisfied because they might not see if you like the recognition in terms of market consumption and the willingness to pay for their consumption, as much as they thought that the beginning of their open banking and open finance journey. So that it is the value that is unlocked on the ecosystem interplay, the one that we have to chase strategically in the end, if we decided to embark into a contextual banking journey by building a banking as a service or opening gambit API’s to the consumption of external parties working with them in partnering to basically accident value or orchestrating that ecosystem directly. And that’s my suggestion to bankers and fintech that want to get down the road.
Aidan McCullen 59:57
There was so many more questions I had free Fire I have lists and lists of questions here, by the way, for those people watching us or listening to us, you were only on chapter two of the book. And I actually kind of skipped the introduction because the introduction itself has so much nuggets of knowledge. It’s a magnificent book to really get your head around this. If you work in the bank. If you work in FinTech either reach out to Palo Alto, get them to do a talk or workshop for your team or buy a copy of the book for your entire team, pilot for those people who do want to reach you, where can they find you?
Paolo Sironi 1:00:31
I’m very active on social media and particularly on LinkedIn so they can connect the data can share thoughts openly with the community. They can check my work on my website, the PC roni.com. All the links to Amazon for accessing this new resource are banks FinTech and plasma economies. Or they can reach out to the IBM channels. And the Global Research Leader of IBM Institute for business value in that can get financial markets and so I produce all the research they do of IBM. So there’s another opportunity to meet with clients and with interested parties.
Aidan McCullen 1:01:13
It’s been absolutely fascinating. And reading the book has been fascinating had so many lightbulb moments. It’s been an absolute pleasure author of banks, and fintech on platform economies. Paulo Cerrone, thank you for joining us. My pleasure. Ah, what a magnificent way to short episode for my liking. But it was a pleasure to have him hopefully we’ll have him again in the future. We only got a little bit into that book, magnificent learnings from the author of banks and fintech on platform economies Paulo Cerrone, all made possible by our sponsors Zai, boldly transforming the future of financial services with a suite of embedded products and services, enabling businesses to manage multiple payment workflows, and move funds with ease. Checkout Zai and Hello ze.com See you very soon.