The Bankwatch

Tracking the consumer evolution of financial services

Platform vs market logic, applied to P2P Lending

Back from vacation, and thinking about all kinds of stuff.  Long post on Social Capital coming, but meantime, and kind of related <in my mind> Umair does a nice job of discussing the merits of platforms and markets.  It is an important distinction, and his final quote here explains what caught my eye.

What Apple Knows That Facebook Doesn’t – Umair Haque

This conclusion also helps us answer another critical question on the minds of today’s investors, entrepreneurs, and would-be revolutionaries: when will today’s crop of startups start making serious cash? The answer: when they shift from platform logic to market logic.

He finishes by asking which players are being held back by platform thinking?  I worry about P2P Lending being held back back by that thinking, but feel a little better after going through this exercise.  First the background:

Platform logic vs market logic

Platform thinking; is based on consistent sets of principles including these taken from the book Platform Leadership: How Intel, Microsoft, and Cisco Drive Industry Innovation (Hardcover) that “drive success”.

1. Determine the scope of the firm
2. Design product technology strategically
3. Shape relationships with external complementors
4. Optimize internal organizational structures

The book was written in 2002, and the examples are interesting in that context.

Platforms are all about creating a monolithic enterprise that determines its own fate by being consistent and strong to the outside world.  Platforms are about convenience, including external and internal relationships, and products designed to dominate the space.  Platforms are about scale.  Think Microsoft, IBM, Intel, and in banking, Bank of America, Barclays, or HSBC. 

It sounds and feels very insular and inwardly focussed.

Market thinking;  is all about customers and offering something of value, for value.  Its about oferring something for sale that people want.  Market thinking will, as Umair says, “alter the basis of competition”.  This requires a structural shift and is designed to catch the competition wrong footed, not as platforms would, merely look to dominate, using corporate shock and awe.

P2P Lending is generally following a market logic approach

P2P Lending is in its infancy, so its hard to consider any of the players are market dominating at this early stage.

The three market attributes that Umair discusses are interesting though, to explore which, if any of the current players are exemplifying those attributes.

Markets alter the basis of competition
P2P Lending could be said to alter the basis of competition.  The interest rates and the customer processes vary, but generally they do achieve that. 

Markets cause strategic domino effect
Is there a strategic domino effect?  This will be based on scale, and as yet we are not seeing a shift in banking as a result of P2P Lending.  Or are we?  Banks are seeking ways to enter the space and test the waters, by becoming lenders in some P2P Lending companies.  P2P Lenders are springing up around the world, with the latest count being over 30.

Yet, there is somthing holding back the ‘domino effect’.  That is regulation.  The one thing that prohibits the domino effect is regulation.  I am living that with CommunityLend, and Lending Club have filed their revised S-1 in the US.  Once we start to see regulataory approvals in place, how will the picture change?

However many are not considering, or dealing with the regulations.  Is that a good thing or a bad thing?  Regulation, and the ability to have P2P Lending be seen as a friend of safety and security will ultimately be a key factor.  Borrowing and investing are matters of finance that are all the more important to everyone concerned, following the major ball-drop by Banks’ lately.

Markets atomise the value chain
This is where existing players see their processes and products chopped into tiny pieces and taken over by new entrants who see better ways to manage things.  P2P Lenders are doing a good job at this aspect. 


So it seems that P2P Lenders are pretty good on 1. and 3. but not quite so much on 2. yet.  Umair uses FaceBook and Apple to compare the platform to market approach.  He speaks of FB signing deals with incumbents <Microsoft> and thus failing on 2. 

What of P2P Lenders allowing Banks to participate in their services?  On reflection I think this is not the same as selling out to incumbents.  Rather it is requiring incumbents to adapt to the new model if they wish to participate, and places them on the same playing field as the others in the P2P market. 

However the regulation impact is still troubling and whether enough P2P lenders will be able to see it through to establish the domino effect is key. 

Time will tell.

Written by Colin Henderson

August 23, 2008 at 03:00

3 Responses

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  1. Thanks for pointing this out, Colin. The ramifications of “platform thinking” extend to the entire banking industry, not just p2p lending.

    Platform thinking is at the heart of the whole “supermarket” approach to banking consolidation that has gripped the industry for the past 10-20 years.

    By positioning platform thinking in opposition to market-thinking, it suggests that a bank can’t truly be customer-centric as long as it pursues a proprietary supermarket approach to product delivery.

    Ron Shevlin

    August 25, 2008 at 08:26

  2. Thanks Ron … actually I had trouble with this post. Knew what I wanted to say, but it didn’t come out as I had hoped, and you have summed it up really well. Thanks!


    August 25, 2008 at 23:38

  3. Very interesting to explore all this, but as I try to explain more fully in my blog, I don’t think there’s all that much in Umair’s piece, and Apple and Facebook seem interchangeable – leading me to think they are more similar than different. I prefer O’Reilly’s explanation that successful Web 2.0 businesses are based on an “architecture of participation”.

    Simon Deane-Johns

    August 27, 2008 at 15:28

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