Winning in a world of ecosystems

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Asia is currently in the midst of a boom in digital and technological innovation. The emergence of digital giants—including China’s Tencent, Alibaba, and Baidu; Japan’s Rakuten and SoftBank; South East Asia’s Grab and Go-Jek; and India’s Paytm—is clear evidence of the trend. Fast-moving and aggressive, these companies and others are thriving because they have access to capital and because Asian consumers are especially receptive to new mobile and internet technologies.

Across Asia, the digital boom is a significant challenge for traditional incumbents. Faced with the pressure to digitize and suffering from stagnant performance and slow valuation growth, many incumbents are seeking opportunities to transform and leapfrog. This has led them to embrace ecosystems, collaborating with diverse organizations that provide digitally accessed, multi-industry solutions based on emerging technologies.

Ecosystems present several clear strategic benefits in an environment where traditional banks are losing growth momentum:

Lower customer acquisition costs

Ecosystems can radically reduce customer-acquisition costs because they enable automation on a large scale and, by integrating purchasing pathways, allow customers to buy a variety of products and services on a single platform. In the banking industry, ecosystems can deliver customer-acquisition cost savings of as much as 10 to 20 percent, according to McKinsey analysis.

Access to data and opportunities to monetize these

Ecosystems enable companies to obtain massive amounts of highly accurate information ranging from logistics data to behavioral data. This represents considerable monetization value. For instance, with access to data on customer preferences and financial strength, companies can create significant value by identifying unserved customers and cross-selling products and services.

Banks in the changing world of financial intermediation

Banks in the changing world of financial intermediation

Alibaba is an example. Accounting for 58.2 percent of China’s online retail sales, the tech giant benefits from access to internal and acquired data assets from 576 million active accounts on Taobao, its shopping website—and the world’s biggest e-commerce platform. In particular, Alibaba employs advanced analytics to conduct consumer behavioral analyses and make purchase-relevant predictions. As evidence of its success, Alibaba’s 2018 first-quarter revenue grew by 56 percent over the same prior-year quarter and continued at about the same rate in the second quarter of 2018, mainly through improvements in the digital algorithms through which it targets advertisements to customers.

Enhanced customer relationships and retention

Ecosystems can transform how companies engage with customers, enabling them to create diverse, monetizable touchpoints, generate product offerings that meet specific customer needs, and offer frictionless experiences that reduce customer loss and churn.

Meituan, a website in China for local food delivery services, consumer products, and retail services, is a clear winner in this respect. The company acts not only as an aggregator that finds ideal restaurants for takeout food but also as a platform where customers can buy movie tickets and book hotels. As a result, Meituan enjoys a highly impressive customer-retention record. In the first half of 2018, the takeout-food branch of Meituan claimed about 60 percent of the market, exceeding the combined market share of two rivals, and Baidu.

Valuation upsides and boosted competitiveness

For digitally focused companies, another upside of taking part in the ecosystem economy is the potential to attract the attention of capital markets investors. Ecosystem businesses, having a close connection to the digital and data-driven worlds, feature valuations based on user engagement and top-line metrics.

Ping An, the world’s largest insurer, is a prominent example. Besides its traditional financial-services businesses, its new, technology-driven businesses are gaining recognition from the capital markets. The market value of Ping An Group is about $180 billion, and the combined valuation of its four unicorn companies (Lufax, Ping An Good Doctor, OneConnect, and Medical Insurance TOA) is already about $70 billion. By generating traffic and providing added value, these online companies are boosting Ping An’s overall value.

OneConnect, the world’s largest financial cloud platform, for example, aims to build financial ecosystems by leveraging financial technology. Using artificial intelligence, biometrics, and blockchain technology, it has established businesses that provide marketing and customer acquisition, product development, risk management, operations, and other solutions to banks, insurers, and large investors. As of September 30, 2018, OneConnect was offering fintech services to 483 banks, 42 insurers, and nearly 2,500 nonbank financial institutions.

For traditional companies on the defensive, an ecosystem is a way to maintain competitive business positions and withstand challenges from digital rivals—in particular, by preventing customers from switching to competitors.

DBS, headquartered in Singapore, embarked on its digital transformation journey (including ecosystems) inspired by platform players such as Alibaba and Tencent. Over the last five years, DBS has invested SG$1 billion annually in its transformation, resulting in a substantial increase in digital customers from 33 percent in 2015 to 48 percent in 2018.

In McKinsey’s view, based on a wide range of studies on Asian ecosystems, and on insights from participants, leaders of firms seeking to enter the arena need to decide what kind of role their company will play in their target ecosystem. We see three clear archetypes: builder, orchestrator, and participant. The choice depends on the company’s existing characteristics, its ambition, its risk appetite, and its existing capabilities.

For traditional companies on the defensive, an ecosystem is a way to maintain competitive business positions and withstand challenges from digital rivals—in particular, by preventing customers from switching to competitors

Once business leaders decide on the role their company will play, the next step is to choose a business model. We have identified six distinctive ecosystem business models that improve profitability. Four increase the top line: the acquisition engine model, the platform model, the multibusiness ownership model, and the data monetization model. Two increase the bottom line: the asset/resource synergy model and the infrastructure and capability enabler model.

To operationalize an ecosystem strategy, banks should take an in-depth look at the practices of successful firms such as those mentioned above and debate a number of questions on topics ranging from governance and organizational models, business scope, and front-line issues. They also need to consider strategies around product offerings, customer management, middle- and back-office issues, talent recruiting, partnerships, technology, advanced analytics, and performance management.

Addressing the ecosystem challenge from these multiple angles is no small task. But in our view, success will depend on a deep understanding of the landscape and how the firm will offer value in its chosen ecosystem.

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