Fintech 2.0: Is Your Bank Ready for the ‘Great Rebundling’?

The pivotal next phase of the fintech trend will be about integrating disparate apps and banking services. It could signal the start of the 'ecosystem era,' and will benefit traditional institutions if they move quickly.

It’s hard to pinpoint when fintech started, but there’s no denying its prodigious growth in the past decade. What used to be a market of niche applications for younger consumers has now attained widespread adoption across the entire economy.

The percentage of U.S. consumers using technology to manage their finances jumped from 58% in 2020 to 88% in 2021, according to a survey of 2,000 consumers by Plaid. To place that in perspective, more people now use fintech than video streaming and social media, making it one of the most widely-adopted consumer technologies.

While fintech companies spent the past decade growing and attaining household legitimacy, analysts say the next decade will look entirely different. Both consumers and fintech companies are now looking beyond their point solutions to a more holistic ecosystem that can address all consumers’ needs in one place.

Turning Point:

Fintech adoption reached a milestone with nine in ten consumers saying they use it. Now comes expectation of increased connectivity between banking providers.

80% of respondents in the Plaid survey say it’s essential to connect their bank accounts to financial apps, and 76% say a high level of connectivity is an expectation when choosing a bank.

“As consumers increasingly use multiple apps and services to manage their financial lives, they expect interoperability between those services,” said Ben White, Policy Research & Advocacy at Plaid, in a blog post.

( Key Resource: Neobank Tracker: The World’s Biggest Database of Digital-Only Banks )

Rebundling to Address a Fractured Banking Experience

Fintech 2.0 is all about “rebundling,” says Colin Walsh, Founder and CEO of Varo Bank, in a post at Forbes.com. Companies in Fintech 1.0 had limited use cases and operated in siloes in their niche areas. For example, there was Robinhood for stock trading, Acorns for saving, and Venmo for P2P payments. Each was founded on a niche and piloted the concept, often with no goal of integration or a clear path to profitability in the early stages.

Fintech 1.0 laid the foundation for where we are today, and also led to the current problem — a fractured customer experience with too many apps specializing in narrow areas and all competing for the customer’s attention. The time is now ripe for an evolution, one that is already underway, says Walsh.

The rebundling trend is about seamlessly integrating all the things a customer needs to manage their financial life in one single place. “If done correctly, combining services that used to be spread over several apps into one place should save time, stress, and money for consumers,” Walsh notes. As evidence of this, Robinhood, Venmo and other specialized apps are taking steps to expand their range of services.

Yet this idea of Fintech 2.0 isn’t wholly new. Santander and Oliver Wyman opined in 2015 about Fintech 2.0 being “just around the corner” and delivering “fundamental changes to the infrastructure and processes at the core of the financial services industry.” The paper noted one of the keys to success was for banks and fintechs to collaborate, each providing the other what it now lacks, be that data, brand distribution, or technical and regulatory experience.

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Collaboration Gains Momentum

In many ways, financial institutions and fintech companies have already begun to partner, collaborate and pave the way for the actuality of a Fintech 2.0 landscape, just as a handful of banking-as-a-service providers enabled Fintech 1.0. Financial industry analysts believe the lines between fintech companies and traditional institutions will blur further as they look to each other to share data and improve integration.

Symbiosis:

While banks need the innovation and know-how of fintech companies, the fintechs need the trust, regulatory legitimacy and balance sheets of banks.

Financial institutions will need several things to succeed in Fintech 2.0 era, Walsh observes in the Forbes article. One of the first, which is at the core of the trend, is customer-centric thinking that considers not just a single pain point but all pain points with a holistic means to address them.

The next ingredient is cutting-edge technology and platforms that can leverage data to adapt to customers’ changing needs. Also important is a sophisticated design with user-friendly digital experiences that offer consumers a holistic view of their finances and relationships.

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Expect More Digital-Only Banks as Part of Fintech 2.0

Bank charters are also shaping up to be an essential component of the next fintech era, Walsh observes. While true digital banks are rare, their numbers are likely to rise in the coming years, he believes, and they will serve as testbeds for technology, design, and financial product integration and innovation.

He should know. In July 2020, Varo Bank became the first fintech in the U.S. to gain full regulatory approval for a national bank charter.

Walsh notes the ultimate win-win scenario is where companies focus on rebundling and building sustainable and profitable customer-centric business models where customers, investors, and regulators are satisfied. “It’s also an achievable goal for the fintech leaders of the next few years,” he states, “provided they have a solid grasp on the maturing fintech landscape and the consumer demands that are driving rapid convergence toward Fintech 2.0.”

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Towards a Fully Digital Banking System

Not surprisingly, new fintech startups have quickly emerged to stake claims in this market, using their ability to innovate and pivot to meet customer needs. However, banks and credit unions still have a fair shot in the game because these fintech startups cannot often integrate multiple financial products, while incumbents do have that capability.

Who Wins?

Despite the label, ‘Fintech 2.0’ does not presuppose that fintechs dominate. The outcome is wide open.

They also have decades of experience building relationships with customers and deep regulatory knowledge. “The winners in Fintech 2.0 could come from either group, but to come out on top will require mastering several aspects of the overall financial experience, all equally important,” Walsh predicts.

 

Many of the essential building blocks of Fintech 2.0 will come to market in the next three to five years, according to a report produced by Money 20/20. These include banking technology stacks, central bank digital currencies, data, commerce experiences, and ecosystems.

The report notes that unlike a decade or two ago, the majority of people worldwide now have internet access and access to electronic money services through financial institutions or mobile money. For banks and credit unions, this represents a more significant market opportunity than in the days of Fintech 1.0.

Traditional financial institutions will have to move quickly in the new fintech era. The Plaid report findings suggest even bigger changes in the years ahead as the rapid growth in the past two years demonstrates a significant shift in how, when and where consumers interact with their money.

“With the current pace of adoption and innovation, we anticipate a fully digital financial system within this decade,” the report states. “Making sure this transformation works for consumers will require concerted efforts from the entire ecosystem: financial institutions, fintech companies, policymakers, and the increasing number of non-financial companies offering digital finance services.”

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