There are many good reasons for companies to provide products and services around a platform. Some of the benefits of doing so is to build a strong ecosystem and to embed the products and services in the value propositions that the right customers want to obtain to solve specific problems. There are some insights on how to enable the right strategies for the digital payment platforms for the payment companies to achieve their business strategies.
The blog post will analyze and setup the requirements for how a payments companies can approach the digital payment platform in their strategizing processes.
Elements of a Platform
The future of payments involves the digitalization of currency and provides the means for exchanging currency between a payer and a payee. The digitalization of currency involves a technology stack that involves the possibilities to ensure the transport of data between stakeholders, technical endpoints and the ability to uphold a ledger of the transaction. Kazan & Damsgaard (2013) presented a framework for digital platforms and they did apply it in their analysis of payments companies. The first part of their article identified components of the digital platform, and they applied a model by Hagiu & Wright (2011) for what Kazan & Damsgaard (2013, p. 5) identifies as a multi-sided platform (abbreviated MSP). The elements of the digital payment platform are:
- Platform design.
- Technology design.
- Business design.
Kazan & Damsgaard (2013) identifies in addition to the three above components that an MSP has to facilitate direct interaction in order to be truly multi-sided (Kazan & Damsgaard, 2013, p. 5).
Regarding the platform design Kazan & Damsgaard identifies “Describes open and closed systems, and how complementary products are distributed” (Kazan & Damsgaard, 2013, p. 5). Furthermore, the technology design is defined as “The applied technology based on evolutionary or revolutionary hardware strategies” and lastly is business design identified as “Market-entry strategies through bundling products and leveraging an installed user base (envelopment attack). Alternatively, through Schumpeterian innovation, which is more radical, but rare to achieve.” (Kazan & Damsgaard, 2013, p. 5).
Kazan & Damsgaard (2013) identified four different design strategies for the digital payment platform:
- The open and free approach.
- The closed and moderated approach.
- The open and moderated approach.
- The closed and free approach.
The four approaches for strategies for the digital payment platform have their characteristics for how the payment company can involve the ecosystem to use the platform.
The open and free approach is according to Kazan & Damsgaard (2013, p. 6) charactized as “allows third parties to alter and adapt the system for their needs”.
The closed and moderated approach is in direct contrast to the open and free approach as Kazan & Damsgaard identifies “The closed and moderated approach is the opposite of the latter, representing a closed system with centrally organized” (Kazan & Damsgaard, 2013, p. 6).
Kazan & Damsgaard (2013, p. 6) identified a third approach they name the open and moderated approach, which the characterize as “The open and moderated strategy is fusion of the aforementioned platform schemes, where third parties get involved in the system development process; however the distribution of software is also centralized.”
The last approach, the closed and free approach, is characterized by Kazan & Damsgaard (2013, p. 6) as “is applied by platform providers, which are allowing developers to build application on top of their system, without seeking any authorization. However, access to, or modifications of, the core system are not permitted”.
Strategies for Advancing a Competitive Advantage by the Platform
There are many different approaches for advancing the competitive advantage by applying the needed infrastructure for a platform. This blogpost deals with four approaches:
- Outpacement strategy.
- Superior product strategy.
- The innovation strategy.
- The foundation strategy.
The outpacement strategy is all about applying the strategy for an open and free platform. Other businesses will be able to develop products that embeds the product and as such makes the platform more valuable as a business asset for the platform owner and for the service consumer. In Porter’s generic strategy model (Porter, 1985) it can be both within the cost-leadership and the differentiation strategy. In order to achieve this form of strategic pattern the payment company will have to open up for APIs the market actors are looking for and make the APIs generally available. Scope of communication with market has to be broad and the sales and marketing scope has to focus on communication with many different communities for spreading adoption. Pricing for access to the APIs would have to be reflected.
Superior product strategy is within the closed and moderated approach. In order for the company to survive it has to produce products of a higher perceived value. In Porter’s framework (Porter, 1985) it would be named the differentiation focus strategy. The payment companies trying to establish this particular strategy pattern has to ensure communication and sales for a specific community. As such knowhow of the customers and their needs are key for this strategy to prevail, and the company would have to engage a sales and marketing team that are able to ensure sales for with high-touch-point with the customers.
The innovation strategy is for companies that have the resources to spend time developing innovative products that the companies will continue to deliver to the customers and continue to moderate elements provided for the platform together with identifying additional products that have to be either upgraded, replaced or all together eliminated from the platform. In Porter’s generic strategy framework (Porter, 1985) it will be the differentiation focus strategy or the differentiation strategy. This company delivers a platform that ensures the end users and direct customers innovative top-of-the line services. This type of company is able to sell products to the customers purely on the “wow” moments of the customers.
The last strategy is related to establishing a platform that will work as the foundation. The company provides the platform and opens it for other companies to develop solutions for it, but as such they do not moderate content for the platform and as such the providers and customers cannot expect the platform provider to deliver anything else than the foundation. This approach is in Porter’s framework the cost leadership or cost focus strategy.
The approaches for establishing platforms e.g., for the payment companies can enable different forms of competitive strategies and competitive advantages by using their digital platforms to enable payments for other companies or organizations.
The payment companies must team up with the right people and the right setup to reach the right clusters or communities that can and will embed their services in their products or subscribe to the services in order to enable features and capabilities. The digital payment companies have to enable the digital platform to receive, manage and process services and requests from its customers and the customers customers.
Companies that prefer the closed and moderated strategy would have to enable a superior amount of resources in creating innovation results that attracts customers to the digital platform. For these companies a need to balance innovation and user-experience and continuously deliver services of greater perceived value for the end-users.
Kazan, E. & Damsgaard, J. (2013). Towards A Framework of Digital Payment Platform Design: A Comparative Study of Four European Solutions. ITM Communications 2013/2.
Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. London: The Free Press.