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Analyst interview: Banking as a Marketplace: Opportunities and Threats

Retail Banking Analyst Daoud Fakhri has been working on our Banking as a Marketplace: Opportunities and Threats report. Here, we ask him about the key findings of his research, how the industry is changing, and how banks need to respond.

What is marketplace banking and why is it a gamechanger?

Marketplace banks produce a limited number of in-house products, and instead rely on third parties to provide the bulk of their products. This approach is being made possible through the use of open APIs, which allow third-party services to be fully integrated into a bank’s systems and user interface.

Regulators in the EU and the UK are leading the way in forcing banks to open up their systems to third parties in order to promote competition and innovation, and new entrants are at the forefront. Marketplace banking is great for them as they can focus their limited resources on creating a single product – usually a current account – and just outsource the rest to give their customers seamless access to the best products from across the entire market. The cost and time savings associated with this model are potentially huge.

Which providers are leading the way with marketplace banking?

N26, based in Germany, is a first mover in this area. It has partnered with TransferWise to let customers make foreign currency transfers, and with vaamo to make investments, all from within its mobile app. In both cases, N26 has opted for co-branding, using the “Powered by TransferWise/vaamo” formulation. It earns money from these partnerships, receiving, for example, monthly fees and annual management charges from users of its vaamo-powered investment service.

In the UK, new entrant Starling Bank has recently launched the beta version of its current account, the only product it will build in-house. It has a Marketplace Platform, through which it will give its customers access to external products ranging from P2P loans to investments, and like N26 it has partnered with TransferWise. In the longer term, it plans to offer customers a choice of multiple products in each sector, and to partner with companies in the retail and lifestyle sectors. It is clearly hoping to embed itself into its customers’ lives beyond the financial sphere.

What do banks thinking about adopting this strategy need to consider?

Marketplace banking offers many benefits, not just for challengers but for incumbents. Even the biggest and best resourced banks cannot realistically hope to offer market-leading products across their entire range, and a marketplace strategy will allow them to quickly and cheaply substitute superior offerings from third parties. It is also an ideal way to convert fintech providers from rivals into allies by bringing them inside the tent.

Banks that want to use a marketplace approach need to consider several factors. They must decide which products should remain in-house and which should be outsourced, establish the criteria by which partners are selected, and decide the extent to which customer data (a valuable commodity) should be shared with third parties. Other factors include branding strategy – should partner products be white labeled, co-branded, or retain their original branding – and whether the host bank should make product recommendations or leave product selection entirely to their customers.

For more on marketplace banking, please read our report Banking as a Marketplace: Opportunities and Threats, which is now available on the GlobalData Report Store.

By Daoud Fakhri, Prinicipal Retail Banking Analyst

To get in touch please contact pr@globaldata.com. Have something to say on this topic? Join our LinkedIn group: Retail Banking Insights.