Banking vs Embedded Banking Services

​“Alibaba has zero branches, it’s got no infrastructure. Despite that today it is doing everything a bank does: it raises money, it lends money, it does payments.” said Piyush Gupta, Chief Executive DBS Bank. 

While the media frenzy is on Fintechs, CEO of DBS may have a point: Banks might have overlooked  fast emerging partners that is also fast becoming new digital competitors. As of now, the obvious ones are:
1. Telecommunication Service Provider who have access to virtually every accountable citizen in the world through their use of mobile phones
​2. Large retailers raising their own capital and launching their own banking services, e.g. Walmart and potentially Starbucks
3. M-Commerce, E-Commerce giants taking advantage of mobile disruption to expand into virtually every territory, e.g. Alibaba and Amazon
 
Of particular interest to this article is how the rise of M-commerce giants have been seen as an imminent threat by bankers. Riding on the back of mobile phone and mobile data consumption growth, e-commerce is on an accelerated growth path. E-commerce players have been building digital capabilities and expanding beyond e-commerce itself. This threatens traditional business models. 

E-Commerce Business Model and Drivers

If the threat is anything real, then, this author believe that it is fundamentally a business model and platform/ecosystem warfare. 

E-commerce starting out from marketplace platform have been building out other platforms. It continues to do so at a speed and scale that was not possible with traditional business model.

Banks on the hand, continues to grapple with regulatory and business model limits. Any attempt to scale out and scale big is accompanied by heavy doses of regulatory oversight. It is a business model simply not suited to take on that of the e-commerce companies.

The business of Banking

Core Model: The more  deposits banks receive, the more interest they would have to pay to depositors. It becomes a liability. Hence, the need to lend out more to earn interest and repay depositors. Its a balancing act between deposits and loan. Growing non-interest bearing business is always a less risky and scalable option.

Value Proposition: Banks are regulated and deposits are guaranteed (to a certain extent) by government. Banks are better trusted institutions than e-commerce. Bankers can better advise about financial management.  

Go to Market for Retail Banking Services: Channel convenience for transaction services and competitively packaged rates for loans and deposits. One-stop financial services for both consumer and enterprises customers.

Challenge: 
Channel itself is seen as a unit cost of serving a customer not as a platform of growth or part of a profitable ecosystem. Customer value added is hardly the focus. Internal liquidity balancing and risk management became the ultimate end-goal in itself. This creates a risk-averse culture instead of innovation driven culture.

The business of large scale E-Commerce

Core Model: The more buyers buy from e-commerce marketplace, the more merchants would be attracted to sell; the more merchants selling, the more buyers are inclined to consider the marketplace.

Value Proposition:  The ability to purchase things and have it delivered to your doorstep at a click of a button, anytime anywhere. The ease for merchant to find a buyer and ship products is a boon.
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Embedded Banking Value Proposition: The marketplace platform and other complementary platforms enables one to get more done with his/her money. In other words, more bang for the buck.

Go to Market for Banking Services: Banking service Platform can be a standalone business platform and at the same time complement the entire e-commerce Ecosystem. 

Challenge
Time-to-market and scale is critical in a digital economy. In the e-commerce, the winner takes all, hence, being number one in every market is crucial. Such appetite for growth may lead to oversight in terms of security and prudent risk management.

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Bankers reaction to the threats from e-commerce players range from mild to severe: 
​1. Move in to the competitors turf, i.e. Setup their own e-Commerce engine
2. Consolidate and re-architecture the physical branch experience.
3. Promote more transaction through their existing channels by way of marketing, heavy discounting and loyalty rewards
4. Establish Partnership with other platform players, e.g. Apple, Media Company and Telco
5. Acquire synergistic Fintech startups; launch Fintech lab or accelerator hubs; launch Hackaton.