Disruption of the financial sector is just on the horizon, says Haydn Shaughnessy, author and innovation specialist. He presented a webinar on “The Rise of Mega-Platforms and the Risks to Banking” to the Global Association of Risk Professionals (GARP) on May 25, 2016. His books include The Elastic Enterprise, Shift, and (most recently) Platform Disruption Wave.

“What are the consequences of the disintegration of industry structures?” Shaughnessy asked. Most people see innovation as trying to get more of something that’s desirable, he said, but they might not understand clearly where they are headed. In short, what is the “big picture” of disruption over the next decade?

Mega_book_Shift“Think of a big platform that combines the capabilities of Amazon, Paypal, Expedia, and other top functionalities—all on the same platform,” he challenged the audience. That platform is the giant Chinese conglomerate Ali Baba Group. Often thought of as the Chinese version of eBay, its functionality extends far beyond that.

Shaughnessy described some typical errors in thinking about platforms. “It’s more than just open APIs,” he said, referring to publicly available application programming interfaces. The innovation ecosystem is changing rapidly due to Moore’s Law.

Mega_book_ElasticThe network effect means new business can scale very quickly “but it is rarer than you think,” he said. The advent of the phone and of social media are two “classic” instances where the network effect has occurred.

“Platforms are all about leveraging intellectual property,” Shaughnessy said. They must attract participation and content to draw others to the platform.

He drew a parallel to IT developments. Around 1998, the internet became impossible to navigate. Participants in the search engine market were struggling to justify themselves to the broader community. “Then Google stepped in with PageRank,” he said. “High page rank became extremely important.” The internet community discovered an important dimension to information.

“In 2005, Ali Baba Group had a key problem: how to build trust in a country that was not used to being on-line,” Shaughnessy said. “They moved their payment into escrow, and that established the trust.” Soon there were huge transaction engines that functioned as deposit takers. Ali Baba Group is now the largest retailer in the world.

Beyond Ali Baba there is now Tencent, a $200 billion company whose services include social network, web portals, e-commerce, and multiplayer online games. [By comparison, Alphabet, the parent company of Google, has total assets of about $150 billion.]

Alibaba_Group_logo_2The Chinese government helps mega-platform development by building and supporting infrastructure. Chinese companies can now promise to ship products within 3 days anywhere on the globe. Shaughnessy said that Ali Baba now handles 120,000 transactions every second.

After describing the advent of mega-platforms, in the second part of his talk Shaughnessy spoke about how they will affect banking and its risks. ª

Click here to go to part two of the presentation.

Click here to go to Haydn Shaughnessy’s website.