Is it time we start considering finance providers with platform business models to be competing more on the Big Techs league rather than the incumbent financial institutions’ one?
We think so. And the numbers support us.
Platform business models are making their way into finance. Today, 5 of the top 10 financial institutions by market cap are actually platforms. 10 years ago none were. Visa, Mastercard, Paypal… All of them are setting a precedent for what the future of finance will look like: digital.
The business model of new finance providers is similar to Big Techs
Finance is reinventing itself. Long gone are the days where banks were intimidating entities with complicated bureaucracy and little transparency. Today, finance providers – or at least the ones that have been thriving in the past 5 years – are transparent, easy to understand and, what is more important, convenient to use. They rely on technology to deliver their customer experience, and thanks to that, they can access markets faster, more easily and with fewer investments – just as Big Techs do.
Platforms in finance today are more similar to Big Techs than to incumbent financial institutions. We have compared the top tech companies, platforms and FIs, and the results are clear: platform financial services are much more like tech companies.
Platforms (and Big Techs) generate 2x more revenue per employee than incumbent financial institutions
In 2020, it is common knowledge that the use of technology can decrease (considerably) the cost of making business. Part of the decrease in cost comes from the lower need for people (and their wages) to operate the same enterprise. This is exactly what this graph shows.
BigTechs and platforms like Mastercard, Square and Ant Group generate over $1 million per employee, whereas incumbents like City of HSBC still drag the cost of an extensive personnel.
Financial Institutions, on average, have 2x the number of employees than Tech companies do, and 32x that of platforms
Financial Institutions, on average, have double the number of employees than Tech companies do, even though the latter ones generate on average over $100 billion more than the former and have been around for less time.
If you compare them to platforms in finance, FIs have 32 times more employees, although they only have 8 times more the revenue. Financial institutions are half as efficient generating revenue per employee than platforms.
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A business model that may not hold much longer
The past decade has seen finance adopt technology slowly but steadily. Today, with the pressure of competing with challenger banks, the changing demands of customers, the potential to bank the unbanked by providing finance through your smartphone, and with technology penetrating the industry at an increased rate – accentuated by the pandemic –, the current business model of financial institutions may not hold a chance in the next decade.
Some FIs have already realised this and are deploying their own challenger banks as a contingency plan. Time will tell if this strategy works. For now, we know that they could be doing more with less.
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