Innovation – Finance – Technology


Open banking: The nature of digital ecosystems


It is impossible to adress the subject of open banking without looking at the nature of digital ecosystems. While regulatory changes may act as a catalyst for open banking, the growth and nature of digital ecosystems is in my opinion the primary driving force behind the open banking paradigm.

The banking industry is facing many of the same perils as the telco and media industry has been though in the latter years, and the primary challengers are the same ones that have been feasting at the media and telco’s profit margins for more than a decade. These are the four horsemen of the incumbents apocalypse (Google, Apple, Facebook and Amazon). While they are vastly different in many ways, they all share the traits of a succesful digital ecosystem.

Every digital ecosystem starts out as a digital platform, and according to World Economic Forum the platform economy is expected to disrupt all, or certainly, most existing industrial sectors while stimulating the birth of many new ones. According to Irving Wladawsky-Berger of MIT, a platform or complement strategy differs from a product strategy in that it requires an external ecosystem to generate complementary product or service innovations and build positive feedback between the complements and the platform. The effect is much greater potential for innovation and growth than a single product-oriented firm can generate alone. Scale increases the value of a digital ecosystem, helping it attract more complementary offerings which in turn brings in more users and increase the value of the ecosystem. A succesful digital ecossytem manage to repeat this process.

Napster may have challenged the status quo for the record industry, but it was neither the .mp3 file-format nor the iPod that disrupted the physical music distribution. It was when Apple created a seamless digital ecosystem for digital music consumption through iTunes things started to change. However, as the world progress, yesterdays innovations become todays museum pieces, and streaming is already rendering digital music download obsolete. So far Spotify is excelling at this game, and one of the reasons is their ability to utilize big data analytics and social connections to create a unique personalized listeing experience. The ability to create collaborative playlists and connect with your friends through Facebook gives Spotify a competitive advantage over competing services by leveraging third party access to Facebooks digital ecosystem.

Facebook stands out as one of the foremost examples of a well executed digital ecossytem. Starting out as a social network, facebook has evolved to a digital ecosystem and and something similar to an operating system for your digital identity. Facebook has probably realized this a long time ago and allows a fragmentation of the front-end by leaving both Instagram and Whatsapp as separate applications. When it comes to user engagement, Facebook’s reigns supreme above all others. WhatsApp has exceeded 1 billion users, and Facebook Messenger also reports more than a billion users, handling 60 billion messages a day combined — three times the number of traditional text messages. The result is a separation of Facebook messenger from the Facebook content platofrm as a separate platform

A digital ecosystems horizontal integration should also include both customers, partners and third-party services. Facebook caters to brands and agencies that wish to take advantage of Facebook’s vast user penetration though Atlas and Pages Manager.

At the same time Facebook allows third-party developers to create apps and services through Facebook for developers for the Facebook content platform as well as encouraging everyone to create third party apps as chatbots on the messenger platform. Allowing co-creation and open innovation, while ensuring data collection through Facebook Connect.

Amazon recently updated their API Gateway service to include Usage Plans. Usage Plans allow Amazon API Gateway customers to regulate and monetize their own APIs through different levels of access and different categories of users. In addition, Amazon also opened up Alexa’s APIs.

An important trait by succesful digital ecosystems is their ability to cater to third parties as well as platform owners. Had it not been for existence of such ubiquitous platforms as Android and iOS as well as Google Maps for its core functionality in addition to Google Play and Apple’s App Store for distribution it is difficult to imagine how Pokémon Go could have achieved the scale and success we witnessed earlier this year.

A succesful digital ecossytem is often based around a core engine or business model. However, as the external environment is changing, so has the center of gravity for digital ecosystems pivoted accordingly.

iTunes reigned supreme as the center of Apple’s ecosystem, but the iPhone required another core engine. This transition birthed the app store as the new core in Apple’s digital ecossytem. Google has gone through the same evolution from adwords and adsense to the android platform with Google Play as the center for third party engagement. Amazon has also succesfully pivoted from the traditional marketplace as core to Amazon Web Services, which is now Amazon’s most profitable segment. Facebook is still rooted in the user’s digital identity, however acknowledging shifting user behavior and increasing focus on the messenger platform.

When facing disruptive innovations, digital ecossytems are powerful offensive tools. It was not the iPhone who killed Nokia, it was the app store. In the age of digital ecossytems, it is important to find ones position. I strongly discourage attempting to be Google if you’re not Google.

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