If you build it, the money will come
In the heyday of the dotcom era, I sat in a room with the CEO of a new venture created by a large bank and a utility company.
The “programme board” had senior management consultants from two different consultancies and included some senior personnel from both the bank and the utility firm. As CTO of the company chosen to build the solution, I was arguably the lowest in seniority.
The CEO, as ex-CEO of a big digital branding agency, got the kick-off meeting underway. His pitch was mesmerising, and his slides were enviable. This was then followed by similar presentations by the consultants. The idea was to create a huge marketplace for small and medium-sized businesses (SMBs). But after almost two hours of presentations, I still couldn’t understand how the venture would make money.
The team essentially planned to create a platform for SMEs to buy/sell products/services from each other, providing tools and content to help founders manage their businesses online. But where was the revenue coming from?
I put my hand up and asked, “Sorry if I missed it, but how does the venture make money?” The CEO immediately retorted, “You just worry about building this young man, then the money will come.” Well, less than 18 months later and a couple of hundred million pounds spent, the project was cancelled.
Fast forward to a few years ago and “the API economy”. Banks were being encouraged to build marketplaces of third-party apps to provide innovation to their customers. Even small banks were getting in on the act. The frontrunners were banks like Credit Agricole, Commonwealth Bank of Australia and neobank Fidor. However, others were quick to follow with impressive offerings from the likes of DBS, Saxo Bank and Deutsche Bank. Even I had led the development of the Temenos Marketplace in 2013, one of the first in the core banking space. But where are these banking marketplaces now? Which of them were able to monetise their investments?
Open banking came later and provided another nudge for institutions to start investing in “marketplaces” and “bank app stores”. But now, over a decade later, have any banks capitalised on their APIs?
The cost of creating these marketplaces, if done well, is not insignificant. It starts with developing APIs that can scale, are secure and can be monitored. Then there is the need to provide a testing environment for developers, a sandbox capability as well as good documentation available in a developer portal. For everything to be published, there needs to be bank validation/certification of the third-party solutions. On top of all this, a strong curation strategy is needed to find and recruit not just a good quantity of third parties, but also quality solutions. There’s no point in having a large directory of third-party apps that simply aren’t used by the bank’s customers.
It was the curation strategy that failed at most banks, especially small banks. Why would a third party want to write an app for a small credit union when it could write one for a large bank with millions of customers? And how could developers even know what the bank’s capabilities were?
From my own research and talking to a number of banks about their plans, I sensed déjà vu. “Build it and the money will come.” Sadly, this has proven not to be the case for the vast majority. Of course, there are exceptions. The likes of Deutsche Bank have monetised APIs and DBS has successfully innovated both internally and through third parties with its APIs.
So why bring this up now? Well, although quite a different proposition, we are seeing the number of Banking-as-a-Service (BaaS) players shrink through consolidation and failure – many simply haven’t made enough sales to continue without additional funding from investors.
This week, I’m not saying BaaS is all hype. Far from it. I am a strong advocate. What I am saying though is the companies that will succeed will be those with a strong growth strategy. The old sales model was to get a clear perspective of the addressable market opportunity – how to reach them and how to win and keep them. However, in BaaS, it has to be much more about partnerships than acquiring customers – that is, both parties should stand to gain from a shared business plan. Without this, we are back to a marketplace model of acquiring lots of “customers”, many of which will eventually fade and die without revenue. A BaaS provider needs their partners to be successful to earn their money. While the BaaS partner needs a platform that fits their needs at a cost cheaper than acquiring/building their own.
About the author
Dharmesh Mistry has been in banking for more than 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He is CEO of AskHomey, which focuses on the experience for households, and an investor and mentor in proptech and fintech.
Follow Dharmesh on Twitter @dharmeshmistry and LinkedIn.
Read all his “I’m just saying” musings here.
Thanks, perhaps it’s fitting that (UK) TSB have recently introduced their marketplace? Currently, at 1 day before my CASS completion date, my details are incorrect. Can I invoke Fred Goodwin’s “stick to the knitting” quote or the summary of Ford’s involvement in F1: “a day late and a dollar short”?