Breaking down vertical banking silos: Our outdated payments industry should look to Apple and BMW's supply chains

Hank Uberoi
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Banks: the last bastion of the vertical approach? (Source: Getty)

We depend on payments as the underpinning fabric of almost every aspect of cross border commerce.

Yet the payments industry is still fundamentally built on a model which suited the needs of a world circa fifty years ago, rather than the dynamic, agile, hyper-connected world of 2015. The problem behind this is that individual financial institutions have built their own vertical solutions to deliver cross border payments and as such have created unnecessary “walled gardens” throughout the industry.

This siloed approach is a model rooted in history. It’s not found in other, highly successful sectors – witness the mobile market to see how a successful multi-original equipment manufacturer model has made Apple the biggest brand on the planet.

The Apple model works because it brings together best-of-breed elements (produced by specialists and sourced from across the globe), that collectively constitute what the brand wants to deliver; namely an experience and whole ecosystem, but without having to manage the entirety of the production and development process.

Read more: Peer-to-peer-payments are transforming business lending

The automotive sector is likewise built on such strong supply chains – for example, a BMW is made of myriad elements sought from across the globe and brought in under one badge, one sales model, and ultimately one driving experience. The amount of the car “made” by BMW is nominal, but this doesn’t matter.

Loyal BMW drivers want and get the BMW experience and quality.

This demonstrates neatly that innovation can’t be solely developed at an individual level and kept there.

Banks, however, are the last bastion of the vertical approach, and it’s time they took note of the models so expertly established and delivered in other industries in order to stay innovative, agile and in line with the demands of modern enterprises and consumers alike.

They’ve kept in-house the “utility” operations (outbound payment networks, technologies and infrastructure), that people rely on, yet by creating them individually they’re inherently slow, difficult to revitalise, consume capital for no competitive advantage and the industry ends up with multiple compromise solutions that are not fit for purpose.

Read more: Alternative lenders are a blessing, not a curse, for the retail banking market

By outsourcing the operations that are “utilities” to partners and innovators, each bank can instead develop bespoke services with their customer at the core – and not have to spend millions on developing copycat capabilities. It brings the best of all worlds – it allows for quick and nimble solutions, but allows banks to offer ‘best-of-breed’ solutions to partners and customers alike.

There’s economy in using common industry-wide capabilities provided by focused specialist freeing up significant amounts of capital to deploy where it can actually provide better value and competitive advantage.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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