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
Platform concepts can connect many different types of parties
Customers: Expanding demand base & differentiating user experience
Vendors/Suppliers: Expanding supply base & differentiating user experience
Employees: Enhancing benefits to help attract top talent
Lenders/Shareholders: Enabling new funding models & enhancing transparency on funds usage
Governments: Ensuring compliance & automating processing of taxes, tolls, etc.
And apply broadly across sectors
Utilities: Connecting consumers/businesses with 3rd party providers, including renewable energy sources
Manufacturing: B2C and B2B marketplaces (both end-user and unfinished goods)
Retail: Loyalty, stored value and B2C marketplaces
Transportation: Connected cars, loyalty, logistics/shipping networks
Insurance and Asset Management: Broader consumer services such as banking products
Real estate: Tenant deposits, management services for 3rd party-owned properties
Education: Tuition payments, student spending accounts
Healthcare: Employer benefits, savings accounts, government grant administration
Arts, entertainment, education, accommodation and food services: Broaden end-user scope and services provided through loyalty, stored value and 3rd-party vendors for additional services
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
Financial paradigms of platform business models
CORPORATE MONEY
Business Models
1. e-commerce distribution without 3rd parties: Goods/services provided by you sold through internet/phone
2. Loyalty / closed-loop stored value: Enable customers to receive rewards by storing funds redeemable solely by goods/services
provided by you
3. 3rd-party services sold under a royalty model: Provide customers content from 3rd parties sold by you where you independently owe
them royalties per use
Key Accounting and Financial Considerations
Follows traditional financial model where goods/services are provided by you and where:
- Buyers create gross sales
- Sellers/vendors are paid through accounts payable
- Balance sheet recognizes inventory held prior to sale
- You would typically be viewed as responsible for sales tax / VAT
THIRD-PARTY MONEY
Business Models
4. 3rd-party marketplace (includes gig-economy): Support clients to directly purchase goods/services from 3rd parties on your platform
5. Payment processing/facilitation: Support payments on-behalf-of third parties
6. Open-loop stored value (includes planning/savings): Enable customers to store funds redeemable by goods/services provided by 3rd
parties and/or fiat currency
Key Accounting and Financial Considerations
Modifies the traditional financial model to that of a payment intermediary where:
- Gross income is the platform fee and COGS is typically just cost of acquiring this fee (e.g. credit card interchange)
- Sellers/vendors inventory and services aren’t recognized in COGS nor balance sheet
- These 3rd parties would be responsible for sales tax / VAT, even though certain jurisdictions require you to support this on their behalf
- New revenue sources may present themselves from facilitation of payments / FX and economics from 3rd party funds held
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
Capturing value from platform models creates new considerations
Considerations and Questions
Licensing/registration & exemptions:
- Do I need to be licensed / registered to support this business model?
- What financial requirements (minimum capital, entity location) are necessary to support this?
Safeguarding:
- How do I protect the underlying beneficiaries of the platform?
- Do I have any regulatory requirements to hold their funds with certain institutions, with high quality assets or obtain insurance on my default?
- Can third parties on my platform benefit from deposit insurance/guarantee coverage?
Know-your-customer & anti-money laundering:
- Do I need to create a program to ensure third parties on my platform are appropriate and their ongoing transactions are monitored?
Payments:
- Am I prepared to handle the volume and velocity of payments and receivables associated with facilitating commerce on my network?
- How do I reconcile who I am receiving funds from?
- Do I need to support new alternative methods of payment that my firm did not leverage before?
Recordkeeping and reporting:
- Am I required to maintain records on customers?
- If so, what types of information are necessary (e.g. activity, liabilities, taxes, lost property) and to whom do I need to report this to?
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
Rise of platforms calls for a different kind of bank
STABILITY
J.P Morgan remains committed to customers with $11.5bn annual technology spend and management focus on Wholesale Payments offering. Beyond this, the firm’s balance sheet strength and heightened oversight of cybersecurity and anti-money laundering reduce the risk profile of platforms leveraging J.P. Morgan.
INNOVATION
Capabilities tailored to supporting platform businesses:
- Third-party money – Wide array of ways to support account structures that recognize third-party funds ownership which integrate into the firm’s leading cash management offerings all while providing value on deposits
- Wallets – Home-grown solution supporting flexible sub-ledgers to enable platform node tracking, payments and value-added services all delivered through a robust, resilient API-based communication
PRODUCT COVERAGE
Complete transaction banking capabilities across:
- Collections/payments – Global support across HV, LV, RTP, credit cards and alternative payment methods
- FX – Leading global liquidity provider with support for transactional and strategic execution
- Liquidity – Robust offerings enabling global, cross-border solutions with the banking of J.P. Morgan’s $2tn fortress balance sheet
BANKING RELATIONSHIP
Wholesale relationship where pricing on transactions, FX and deposits are based on overall value, including existing relationship. In addition, J.P. Morgan’s scale and direct clearing connectivity, where available, generally result in a lower cost to serve which gets passed on to customers.
REPORTING/RECONCILIATION
Automate end to end with detailed data and new innovation at scale.
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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