Firms that employ platform business models by harnessing digital technologies to unlock the value of their network continue to have strong valuations.  The current business environment, as impacted by the developments related to the COVID-19 pandemic, has served as a catalyst for other companies to accelerate their digital-first and direct-to-consumer models. This article explores how platforms are not only transforming business challenges and rewards but also transforming requirements for transaction banking providers.

The emergence of the platform business model

Quite simply, a platform is a business model that creates value by bringing together a network of independent parties to facilitate the exchange of information or provision of goods/services. Digitally native companies, such as gig-economy operators, marketplaces and payment facilitators have increasingly used this model to act as a visible intermediary supporting commerce between their customers, sellers, vendors and other third parties.  While “Silicon Valley” firms have successfully employed platform models, this concept can be leveraged in a much broader context.

  • Rewards: Brand new customers / business lines, further revenue penetration from existing customers through loyalty programs and distribution models that are more resilient to disruptions
  • Challenges:  New competitors, enticing participants to join your network and expense to keep participants on the platform, including protecting customer information

Not all platforms are created equal

At the heart of nearly every platform is the objective to create a network that generates throughput by adding value to each node on the network…but the financial impact this creates on the operator depends on the type of relationship being pursued with the network.  We believe there are six business models used by successful firms to maximize value of their network, which are divided into two paradigms driving the financial impact on a firm.

  • Rewards:  Transforming financial footprint of business to be more friendly to gross margin and reduce balance sheet leverage
  • Challenges: Accommodating changes to internal tax, finance and treasury processes to properly support new business model

Platform differences extend beyond financial statements

Beyond important financial considerations mentioned, these models have broader impacts to a firm’s operations, payments usage and potentially even corporate structure – particularly when employing a platform involving third-party money. Most firms will need to engage a transaction banking provider to help meet these requirements.

  • Rewards:Ability for the platform operator to earn incremental revenues from being a financial intermediary in funds, payments and FX
  • Challenges: Costs from implementing appropriate corporate structure and exposure to transactional bank relationships to support more complex, voluminous activities

J.P. Morgan is here to support you on your platform journey, where you continue to own your client relationships

Given the complexity and effort needed to properly structure a successful third-party platform business, firms may quickly realize that choice of transaction banking provider has a more profound role in business success than in traditional business models.  This stems in part from contractual relationships with end-customers, how payment experience is exposed to network participants, and the degree to which platform economics are impacted by the cost of payments and earnings on liquidity created from third-party activities. J.P. Morgan’s philosophy on supporting firms embarking on platform business models revolves around the process of nurturing customers to the new requirements to support such business models, maintaining a wholesale banking relationship to enable firms to maximize value from this new revenue source, structuring accounts to optimize deposit treatment and heavily investing in innovative solutions such as Wallet to enrich the operational experience.

  • Rewards:Maintaining brand and loyalty by directly owning customer relationships while accessing capabilities of a global financial services firm that is committed to supporting clients over the long-term
  • Challenges:  Extending normal business costs to supporting new client activities and incremental costs of maintaining compliance with licensing and regulations

Helping clients optimize working capital is a key strategic priority for J.P.& Morgan. Wherever you are on your digital journey, we stand ready to support you in crafting tailored and efficient solutions.

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