Digital platforms are transforming financial services from output to outcome economies, argues Paolo Sironi – and the financial sector needs to keep up
In the 21st century, digital platforms control the world, affecting consumer behaviour and transforming corporate strategies by provoking substantial change in stakeholder value across entire industries.
Removing frictions within active digital ecosystems allows platforms to create value-generating interactions among participants. Traditional firms usually trade in products that deliver certain results and focus on quantifying outputs, such as discrete sales figures or quantities. Platforms, on the other hand, place the distribution of products on the periphery of corporate strategy. Instead, they focus on generating outcomes through hyper-personalised client journeys.
To succeed in platform economies, firms must overcome the complexities of monetising while trading in the results themselves on open digital ecosystems. Placing final users front-and-centre of business action is necessary, but might not be enough. In particular, the emergence of outcome economies exposes financial institutions to the weaknesses of consolidated revenue-generating mechanisms.
A business metamorphosis
Banking performance was traditionally driven by interest rate margins and fee-based models, and centred on product distribution channels – outputs. However, new economic, social and digital norms are changing this business architecture. Interest rate margins and product fees are evaporating, and the value chain – based on the intermediation of financial products – is losing its grip.
To generate sustainable business value in this environment, banks, insurers and fintechs need a new strategic anchor that centres on a new understanding of the relationship between clients, financial markets and technology. This strategic anchor should be based on financial market transparency. When looking at the core elements of financial decision-making, we cannot just look at information about risk and return – we must go deeper and examine humanity’s difficult relationship with fundamental uncertainty. This will encourage financial institutions and regulators to redefine business roles, economic perspectives and social purposes.
The advent of ‘outcome economies’ will transform business culture. Sustainable business performance is no longer based on linear relationships between manufacturers, distributors and consumers.
The economic levers now lie in the ability to engage users continuously through digital technology. Innovators must think in a non-linear way, utilising their new understanding of users’ needs. They must master artificial intelligence and big data analytics to win users’ trust, based on the transparent contextualisation of frictionless experiences at convenient prices. The way goods and services are conceived, designed, produced and distributed in outcome economies abandons the norm of incremental changes in distribution channel efficiency. Instead, it involves redesigning traditional value chains and ecosystem interactions around holistic user experiences and engagement.
From products to results
Did you take an Uber for your morning commute? You booked that on a digital platform. Did you read about my book Banks and Fintech on Platform Economies on LinkedIn while slacking on the job? You found it on a social media platform. Was it delivered to your doorstep by Amazon Prime in less than 24 hours? You ordered it on an e-commerce platform.
Output economies correspond to industries that are configured in the form of linear value chains. Added value is accumulated at every step of the process in an incremental fashion, resulting in the final cost to the consumer. These linear value chains are then optimised via manufacturing and logistic decisions based on analytics, with a focus on discrete sales figures or quantities. For example, BMW’s core challenge might be to sell 100,000 private vehicles in the year ahead. Traditional financial institutions operate in output economies – their core challenge might be to sell US$100m of assets under management.
Outcome economies, in contrast, correspond to business decisions that focus on a deeper understanding of users’ needs. They are based on imagining alternative and personalised ways of achieving desired results. They essentially trade in the results themselves – the users’ experiences. For example, carshare company ShareNow’s strategic mission is to allow a certain number of people in Berlin to commute point-to-point. The core challenge shifts from tracking the production units of cars to enabling the highest number of people to travel. The automotive industry value chain disintegrates, and the interaction with final users is reorganised to focus on perceived benefits along the user’s journey.
In this climate, the aim of financial services is to help clients achieve their financial goals. The outcome is what matters and sets the renumeration scheme, while the individual products become commoditised components of a trusted adviser’s mechanism (for example deposits, mortgages or home insurance). As the overall client experience changes, the monetisation shifts from products to holistic relationships.
The motivational gap
Reinventing an industry in this way is complex. It requires the adoption of unconventional innovation strategies that turn traditional business architectures and organisations inside-out. While the incumbents lagged in user experience and fintech start-ups were able to besiege them, they were not wholly conquered – because the fintechs also did not understand that the essence of platform economies is the shift from outputs to outcomes. In particular, fintechs did not understand the ‘pull-push’ motivational gap that creates stickiness in client behaviours, which only outcome economies can properly address.
Digital is a ‘pull’ technology (a demand-side technology), while many financial services operate as ‘push’ marketplaces, leveraging human relationships to succeed. Insurance, for example, is largely an offer-driven industry. This is due to the information asymmetries that permeate the consumption models of financial services, based on the relationship with final clients, irrespective of wealth, age and financial literacy.
People exhibit cognitive biases when it comes to using money, and do not behave the same when dealing with financial services as they do in the world of consumption, where they have more ways to assess value for money. Banks and insurance companies sell products, but clients buy relationships to help them make financial decisions. Banking with a financial institution or a digital alternative is based on trust.
The ‘pull-push’ motivational gap is narrower in the field of symmetrical products (such as paying and borrowing), whose value clients can more easily understand. It widens in the distribution of asymmetrical products (such as investment funds and life insurance), which are sold more than bought.
Effecting change
The real question becomes how to leverage a demand-driven technology to transform an offer-driven industry. Digitisation streamlines processes in financial services, and it is necessary to create a data-driven institution – but this is not sufficient on its own, because it can only address the demand-driven part of the business. It is also necessary to data-enable clients and help them learn to self-direct. This will lead to the emergence of planning tools that focus on continuous ‘outcome verification’ and ‘advisory communication’, which integrate – or even replace – human interactions.
In the absence of ‘fear of missing out’ distortions (such as Bitcoin trading), only truly self-directed clients are comfortable enough to ‘pull’ financial offers directly from the shelves of digital marketplaces – and they are not the majority. This is why the growth of first movers, as in the early days of robo-advisers, was initially promising, but then faltered. Their business design did not sufficiently address the motivational aspects that would engage normal users, beyond those who were already accustomed to investing as part of output economies.
Paolo Sironi is global research leader in banking and financial markets at IBM Consulting. He is the author of Banks and Fintech on Platform Economies: Contextual and Conscious Banking
