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The platform economy is revolutionising the $50bn global deposits business. By separating the product provider and financial point of sale, banks can now choose whether they want to collect deposits for financing or offer deposits as a product, without one depending on the other. While the deposits business has not always been perceived as one of the most innovative areas of banking, it is now leading the charge towards a better connected and more functional industry. This is bringing massive benefits to customers and institutions alike.
This innovation is being driven by the growing number of banks who are either using platforms or becoming platforms themselves and embracing the model. This enables banks to interact with and offer their products to customers of other financial institutions, improving access to certain market segments, increasing their overall reach, and allowing them to benefit from economies of scale. In turn, this improves the efficiency of transactions between banks and their customers and is opening the market up to new players.
Lower interest costs thanks to connecting to the platform
At roughly 40 percent of the balance sheet total of European banks, customer deposits are a key source of funding. Savings deposits also account for roughly one-third of the total private assets of all customers worldwide, acting as an important anchor product through which banks can strengthen their relationship with existing customers, and acquire new ones. Deposits, therefore, fulfil two functions at once: they’re a popular product amongst customers and an important source of funding for the banks.
In the past, banks could only collect customer deposits for financing if they had their own infrastructure and customer access. Furthermore, banks only offered their customers savings products, if they could place the customer’s money on their balance sheet without creating high costs or imbalances.
Under the platform model, however, banks that want to collect deposits can gain access to millions of savers via the many point-of-sale partners offered by a platform. Access to this additional funding source is highly attractive to banks; by increasing the size of the addressable market for their deposit products, banks reduce their interest costs and diversify their funding mix.
Furthermore, the platform economy breaks down geographic borders in the deposit business. Banks can collect retail deposits in overseas countries, without needing to establish their own infrastructure there. This has obvious benefits for UK banks facing the uncertainty of Brexit. Banks looking to take deposits can reach out to various point of sale partners across countries, using the same infrastructure for a standardised, unified process.
By using an open banking platform and offering the deposit products of third parties, banks can become the central financial point of sale for their customers, without customers needing to open another account. Private banks can also give customers competitive interest rates by offering third bank deposits, comprehensively taking care of all customer needs from a single source.
Open banking opens the market to non-banks
The platform model is also making waves beyond the banking sector by giving non-banks the tools to access the deposits market. In the future, account information services, comparison portals, and ecommerce companies will all be able to safely and securely offer their customers deposit products through the platform, despite not being banks themselves.
The benefits of this will be felt by everyone. The likes of Amazon and Compare The Market will be empowered to position themselves as a central point of contact for their customers’ needs, while banks will be able to reach a much bigger pool of potential customers. However, the real winner of this will ultimately be customers, who will find it much easier to access a broader range of products in a more competitive market.