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It’s a Platform BOOM! PSD II drives platform banking

Platform Boom: This is the second article in the series of articles on the topic ”Payment Service Directive II (PSD II)”

Platform, is it the buzzword of the century? Perhaps, and even most likely. However, no spark, no fire. A buzz does not emerge from nothing. Some goes as far as to say that in 30 years, 50% of total S&P 500 revenues’ will stem from platform businesses¹. One should always be reluctant to the reliability of such impressive numbers in the future. But, the same bold prognosticator states that over the past 10 years, S&P 500 platform companies have increased net earnings 20 times as much as the overall average of S&P 500. The number of platform businesses are also growing. There is for sure some truth in the prediction.

Exponential growth of platform businesses among the S&P 500 Source: Business Collective, written by the CEO of Applico

Exponential growth of platform businesses among the S&P 500 Source: Business Collective, written by the CEO of Applico

PSD II is essentially the ultimate platform business model enabler in the financial industry. It will decentralise the power of the dominant large banks by making data easily portable and many services, like making transactions, accessible for third parties. In light of the impressive numbers of the profitability of platform businesses, there will be an obvious battle of becoming the platform in the future. This shows through the initiatives of creating a standard API for the PSD II to come.

The classics:

  • Uber, the world’s largest taxi company, owns no vehicles.
  • Facebook, the world’s most popular media owner, creates no content.
  • Alibaba, the most valuable retailer, has no inventory.
  • And Airbnb, the world’s largest accommodation provider, owns no real estate.

Next up?

Will we also add “Company X, the world’s largest bank, provides no credit”? Because with PSD II it is not necessary that the banks are the platform owners.

In the latest years the discussion has been circling around complying to the minimum requirements of PSD II. But the banks should not be overlooked! There are several banks, who have understood the value of the platform business. These actors are rather aiming for providing an API of all kinds of services within the bank. However, the ones outside the scope PSD II not necessary free of charge.

We have previously written about The Open Bank Project, who provides an Open Source API for bank integration. They are essentially building an App store for financial services. It is no bank, they are only building the platform. These solutions will grow with PSD II, and network effects will play out. When put in the hands of the bank’s customers, either companies or persons, a completely new industry of financial service will emerge.

Different Platform Business Models

Now, lets try to concretize the concept of platforms businesses. The two gentlemen Evan & Davids² define it as businesses that act as an intermediary and tie together two sets of different (but often related) actors. The two groups need each other and rely on the platform to act as an intermediator and facilitate transactions between them. In some sense, these platforms enable an exchange of value-creation that otherwise wouldn’t take place.

The companies we used as examples above have gone through extreme growth-phases. However, these powerful, positive growth dynamics makes monetization a complicated matter. The platform guru, Parker, means that monetizing an offering too early can be the death sentence for the platform since it creates friction in the growth. In contrast, not having a thought through plan for pricing makes you set for an unprofitable disaster.

So, how are companies attacking this problem?

One common method to overcome this hurdle is the strategy often called users first, monetisation later. This method were used by Instagram and Facebook in their early days. Meaning that the business focus on building a user base to a critical mass before initiating a monetisation. Another common tactic is taking a transaction fee of each intermediated service, thus taking a cut of the “whole” price.  Examples of this tactic would be Uber and Airbnb. The monetisation strategies of these platforms are many and are highly dependent of the which kind of service of product the platform intermediating.

It will be interesting to see which tactics will be the “winning-one” for the fintech platforms when PSD2 incepts. Keeping the monetisation strategy top-of-mind is important in order to leverage rapid growth when the bell rings.

The company behind the Open Source API is making money on an annual commercial license fee, maintenance and support. The App store’s success depends on an interdependent function of how many banks are integrated with the API (thus potential customers) and the number of apps. More banks will result more apps, and more apps will result in more banks.

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² Evans, David S., Two-Sided Market Definition (2009). ABA Section of Antitrust Law, Market Definition in Antitrust: Theory and Case Studies, Forthcoming. Available at SSRN:

Tomas SelldenIt’s a Platform BOOM! PSD II drives platform banking
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