By Russ Jones

I recently attended the O’Reilly Emerging Technologies Conference hoping
to learn about up and coming technologies that might hold promise for
Glenbrook’s clients. While I didn’t find exactly what I was looking for
(the opportunities in financial services for smart dust, robofly, and
nanotechnologies continue to elude me) I did have one of those "Eureka!"
moments when I understood how effectively the big three Internet applications—Amazon,
Google, and eBay—have morphed into open service platforms. What is
happening here on a broad scale should be instructive for many financial
services providers and eCommerce providers.

How to Think About Platforms

Platforms in the software business are an old concept. The general idea
is that one developer provides ubiquitous enabling functionally, freeing
up other developers to innovate further up the food chain, closer to the
customer’s real problem. Platforms usually provide functionality that
is general or horizontal in nature—and serve as a foundation for
developers working on industry specific or vertical solutions. Taken as
a whole, the core platform and its value-added developers create an ecosystem,
of sorts, that thrives around the provider’s platform.

Most importantly, successful software platforms benefit tremendously
from the virtuous circle—the more applications embrace the platform,
the more pervasive and valuable it becomes, and as the platform becomes
more pervasive and valuable, the more applications embrace it. As one
example, successful platforms have many more outside developers working
on them than may even work for the provider’s platform company. Pretty
neat if you happen to control a platform, enormously frustrating if you
happen to compete against one. Microsoft Windows is the sine qua non
example of a software platform, although you might also think of IBM’s
WebSphere and Groove as software platforms.

What’s new in the world of platforms is that the really interesting ones
are increasingly open and service-based. Instead of a licensed, run-time
API being the basis of the platform, a relatively simple Internet service
can provide enabling functionality to others all over the world. In the
old platform world, software providers maintained influence by controlling
the APIs and aggressively cultivating developers. In the new platform
world, online service providers instead will exert the most influence.

The New Platforms Emerge

Over the last several years, three major Internet applications have been
slowly exposing their application functionality to other developers—established
companies, startups, and individuals—as discrete collections of services.

• Amazon. Originally an online retailer selling only books online,
  Amazon today sells just about everything and claims that it is the merchant
  of choice with 75% of first-time buyers on the Internet. Out of the
  spotlight, in the backroom in Seattle, the company has been methodically
  exposing its core functionality piece by piece over the last 15 months.
  Through its AWS (Amazon Web Services), Amazon provides application developers
  with three basic services: a merchandising service that helps developers
  integrate information from the Amazon catalog; a buying service that
  helps developers integrate shopping cart and purchasing functionality
  into their own applications; and a selling service that helps developers
  upload, monitor, and control product sales in the various Amazon submarkets.
  The selling service also enables Amazon catalog partners to accept payment
  through Amazon and authorize refunds to customers. Today, there are
  over 17,000 registered developers and AWS handles 3 to 5 million requests
  per day.
• Google. The Google story is, of course, all about online search
  at a scale that is almost unimaginable—3 billion indexed pages,
  over 200 million queries per day, and roughly 75 million unique users
  per month. What you might not know is that for the last year Google
  has been experimenting with a callable service interface to a subset
  of its functionality. The company has also opened up its full index
  to a select set of developers through various innovation contests. The
  current functionality allows developers to glean market trends from
  the massive index, monitor the Web for new information on a subject,
  or incorporate Google functionality into existing applications. While
  the company has been tight lipped about the number of developers for
  its platform, the numbers are large enough and the services opportunity
  strategic enough to warrant O’Reilly & Associates publishing a how-to-guide
  for the Google Web API.
• eBay. With 69 million registered users, amazing purchase velocity,
  and quarter after quarter of strong financials, eBay’s platform strategy
  is lost in the noise to many observers. But eBay has an active developer’s
  program and is encouraging third parties to develop tools for the eBay
  platform and to integrate eBay functionality into their own applications.
  In a broader context, the company has also established its eBay Stores
  service as a merchandising platform for sellers and has seen demand
  skyrocket with over 100,000 merchants actively using the service. The
  real platform play for eBay, however, is PayPal. Over the last two years,
  PayPal has moved away from person-to-person payments and has established
  itself as a merchant payment mechanism that is accepted at over 42,000
  Web sites. The company estimates that it handles 12% of all the payment
  transactions on the Internet and has roughly achieved online transaction
  volume on par with American Express. What’s more, the transaction volume
  continues quarter to quarter to shift further away from auction into
  the mainstream.

While most think of Amazon, Google, and eBay as simply online destinations—or
applications—we recommend you view them as a collection of services
that are becoming increasingly powerful and ubiquitous. And as others
adopt these services, the new platform providers become further ingrained
into the fabric of our online world, are harder to displace, and are more
valuable in the marketplace. By helping third parties innovate and then
benefiting from the mutual innovation, each ecosystem expands in size,
reach, and influence.

The Financial Services Angle

All of this is fine and well, but what does it have to do with financial
services? Plenty I believe. Here’s why:

• Amazon. Amazon.com has been expanding the robustness of its
  various submarkets and now reports that 21% of all purchases are not
  for items that Amazon ships but which are instead fulfilled by merchants
  that sell on the Amazon platform. Through its AWS platform, Amazon has
  already exposed merchandising services, selling services, and buying
  services. Amazon is already talking about exposing its 1-Click purchasing
  mechanism as a Web service to other off-Amazon merchants. With access
  to Amazon’s 31 million paying customers, how much of a merchant’s acquiring
  business could move from their current commerce solution provider over
  to Amazon and its acquirer?
• Google. Google crawls over 40 million Web sites retrieving
  and indexing everything it can find on the public Internet—High
  School football scores, recipes, and, regrettably, even credit card
  numbers. Why doesn’t a financial service provider team up with Google
  to mine its index for credit card numbers and transaction records that
  continually leak from ill-managed Web sites? Visa, for example, has
  a formal Cardholder Information Security Program (CISP) that offers
  guidelines to merchants on how to protect sensitive card information.
  Instead of doing selective audits, why not work with Google to crawl
  the Web looking for non-compliant merchants? While this certainly won’t
  guarantee that a merchant is CISP compliant, if Google can find credit
  card numbers on a merchant’s Web site that pretty much guarantees they’re
  not. The same approach could also be used to find insecure checkout
  pipelines (e.g., with no SSL protection) or merchants with expired security
  certificates on their secure servers. CardCops.com is already doing
  this but on a much smaller scale and could benefit by building out its
  service on the Google platform.
• eBay/PayPal. While not strictly offering a Web services interface,
  PayPal has nevertheless been quite effective at establishing its core
  service as a platform—and has publicly stated its intention to
  grow its off-eBay business. But more than just serving as a payment
  platform for merchants, PayPal is also emerging as a platform for startups
  attempting to build on an existing payment engine to solve incremental
  customer problems. A company called Payloadz, for example, utilizes
  the PayPal platform to combine payments with digital content protection.
  Another company called Xoom is using the PayPal platform to help
  consumers send money from the U.S. to the home of recipients in the
  Dominican Republic—without the need for recipients to have a bank
  account or even an Internet connection. BitPass, a new micropayment
  startup, leverages PayPal’s platform to sell prepaid access rights and
  provide digital content vendors with a new mechanism to get compensated
  for their content.

The opportunities are there for financial service providers willing to
look outside their traditional comfort zone. Can you see them?

Tearing a Page Out of the Amazon Playbook

Financial service providers can either tear a page out of the Amazon
playbook, so to speak, or hang back and wait, hoping that others won’t
be successful at building open service platforms that compete with them.
The good news is that it is relatively early the transition and a number
of options are available:

• What would it look like if a financial institution were to build a
  bill-paying platform? What functionality would need to be exposed? What
  incremental applications might be built by others?
• What is the platform play in check truncation? With the pending Check
  21 Act likely to be signed into law later this year, what opportunities
  are available for opportunistic institutions to create an interesting
  image replacement platform?
• How might enterprising startups add value to the tried and true cash
  management functions of a "platform bank" through a clearly
  documented, callable cash management interface?

Some companies are already making their moves. CyberSource recently announced
that it now provides a complete Web services interface to its payment
processing capabilities. While this is unlikely to be a competitive differentiator
in the long run, it will be a decisive factor for leading edge merchants.

Intuit has also switched gears and is aggressively courting developers
to extend their services into industry verticals in ways that Intuit simply
wouldn’t ever get to on its own. As a sweetener for developers, Intuit
has made it clear that the most innovative of those application developers
will be high on Intuit’s potential acquisition target list.

What’s My Motivation?

Organizations shifting to a open service platform model have clear goals.
First, they hope to encourage incremental innovation that adds value to
their core offering or core service using the resources of others. It’s
also a realization that most of the good ideas in the world don’t come
from your own staff. While you might very well have lots of smart people
in your organization, they are also aware of and sensitive to the inevitable
organizational constraints that tend to restrain innovation.

As we identified in our "Top
Trends 2003" Advisory Report, financial institutions are also
moving towards cross-border outsourcing in an attempt to reduce in-house
development costs. Can your organization also move a step beyond simple
outsourcing to reduce costs and towards the service platform model that
enhances innovation, expands your reach—all the while shifting development
costs from your budget to your partner’s budget?

As Amazon.com likes to point out, there are now many more developers
enhancing Amazon outside of Amazon than in the development organization
inside Amazon. That’s your motivation. What’s your strategy?

Publication History

Initial Publication Date: July 22, 2003