The making and breaking of ecosystems: A platform’s journey to becoming a financial superstore
Are platforms going from dominant player to preferred partner to somewhere in between?
There has been a significant mindset shift in how business empires are built. For the longest time, the language of business was competition, driven by cut-throat strategies. The funda has been straightforward — conquer, divide, and dominate. And many monopolies and oligopolies have been built this way — until a new type of market leader started emerging.
They are now fashionably called ecosystem players — whose genetic predisposition is to create new value. Examples galore. For instance, players like Flipkart and Amazon invest heavily in empowering their seller ecosystem with tools and data to run their online stores, partner with manufacturers, coordinate with logistics partners, arrange online payments, access loans, and more.
A quick google search will tell you just how many players are offering loans curated for Flipkart sellers — Lendingkart, FlexiLoans, Indifi, InCred, Bank of Baroda, and several more. Flipkart also made in-roads for BNPL players, co-branded credit cards, and other checkout finance solutions to service their buyer side. Moving beyond BNPL and co-branded credit cards, it recently took the plunge into the Personal Loans segment. This move is backed by an arrangement between Flipkart’s arm, Flipkart Advanz and Axis bank.
Basically, platforms made collaboration their competitive advantage.
In fact, even VC funds' strategy of late has been to build a portfolio of largely independent businesses that create products or services that together make a coherent solution.
Although this shift from moats to turnstiles was initially hard to comprehend, it has really caught on. The Indian embedded finance industry, for instance, is expected to grow at a CAGR of 36.3% from 2023 to reach US $23,451.6 million by 2029.
This is not just the story of e-commerce players; it extends to equipment manufacturing, telecom, automotive, pharma, and several other industries. In fact, a BCG study found that more than half of the largest companies in 2021 have seriously engaged in ecosystem business models.
Interestingly, another study by MIT Sloan analysed the performance of 57 ecosystems in 11 sectors across geographic markets and found that fewer than 15% of them were sustainable in the long run.
In the era of big techs like Amazon, Google, and Apple, it is tempting to look at them and believe that ecosystems are wildly successful — but that would be overlooking the much larger number of entrants that failed to take hold.
About half of the ecosystems in the MIT study never took off.
A quarter of them won it all, but temporarily — they won a significant market share peaking at 80% only to fall to half that share or less in a matter of seven years. About 10% of the ecosystems in the study, including Uber, have had a decline though not as rapid, and are struggling to hold territory. It is only 15% of them that showed signs of sustainability. This study is illuminating in the context of an Indian trend that has strong undercurrents; the quest for an NBFC licence.
Ecosystem play: A fork in the road
For ecosystem businesses to be sustainable, you have to consistently grow the pie, so that everybody has enough. For loan originators to sustain their topline growth , whether it is a Paytm or a Flipkart or a BharatPe, they need to constantly expand its creditworthy user base or find a way to effectively service the riskier segments of their existing user base with credit. The latter possibly explains the sudden rush to acquire an NBFC licence.
It appears that platforms want to eventually get into more risk. Bharatpe acquired an NBFC, Cred has started lending via its in-house NBFC, and now Flipkart is vying for one. In fact, Flipkart, as part of its fintech play, is backing a separate entity called Super.money within the group to start distributing personal loans and evolve into an independent credit marketplace. Although currently Flipkart and Super.money is focused on distribution, media reports hint at its plan to bring in external investors and a slight independence from Walmart to be able to take on more risk.
My question is whether this clear need of platforms to play the role of balance sheet providers to some measure, hint at something larger. Is there again a mindset shift in how business empires are built? Circling back to where we started, at first businesses shed the dominant player strategy to be the preferred partner. Now, it seems they are striving for greater independence within these interdependent ecosystems, signalling a potential shift in mindset and strategy.
Are platforms going from dominant player to preferred partner to somewhere in between? I’d love to know your thoughts.