Increasingly the future of financial services in the U.S. is being played out on a three-sided table. On one side sit fintechs; on another, traditional financial institutions. On the third side sit consumers. Plaid, a fintech company best known for its data sharing applications, has its finger on the pulse of all three sides.
The company has for several years conducted a free-wheeling annual prediction session. In a departure from past webinars, Zach Perret, Co-Founder and CEO at Plaid, invited fellow company officials to respond, live, to his forecasts. While they sometimes agreed with the boss, they didn’t hesitate to oppose his views on some matters.
1. Long Trend of Unbundling Financial Services Is Giving Way to Rebundling.
For many people, filling all of their banking needs with one bank or credit union was simply the way they did things. This was “bundling” as we used to know it, according to Perret. Because so many of those services were delivered through local branches, he explained, this could be described as “geographic bundling.”
As digital financial services became widely available, many of them delivered by fintechs with a narrow product focus, many consumers began selecting best-in-breed offerings from one company here, another there. This was “unbundling.”
But then, as these skinny offerings proved less viable for the long haul, more neobanks and fintechs began widening their offerings for the consumer segments that they served best. SoFi, once a student loan specialist, has grown and acquired its way to becoming a bank with broad offerings, for example.
“So now we’re seeing a huge focus on rebundling around consumers’ demographics,” said Perret. In some cases the providers serve multiple financial needs from a single app and sometimes from the bundling of multiple apps.
A tug of war is beginning between traditional institutions that want to be part of this demographic rebundling and fintechs that want to take the lead.
John Pitts, Plaid’s Head of Policy and a former Consumer Financial Protection Bureau official, said that regulators will look favorably on traditional institutions attempting this because they see the increased need for revenue. A growing number of traditional players are giving up traditional fee-income sources — a notable one is overdraft service.
Regulators are wondering how institutions will replace income formerly derived from dropped fees.
“They will ask if the institutions can borrow ideas from other companies to offer the kinds of packages that will take them into the digital 21st century,” Pitts says.
Ginger Baker, Plaid’s Head of Financial Access, had a counterpoint to the arguments of Perret and Pitts. She thinks providers will increasingly be invisible.
“People are not going to be thinking too much about whether or not their services are bundled or unbundled. They are going to be thinking, ‘Am I getting the experience I want?’ Successful financial services will embed the capabilities and functionality into the experience they are already in.”
— Ginger Baker, Plaid
To illustrate her point, Baker noted that she had recently purchased a movie from Amazon for her family and couldn’t even recall which credit card it had been charged to. She was focused on the film.
2. The Day of the American Super App Finally Arrives (Or Will It?)
For Perret, a critical corollary to the return of bundling is the arrival of true U.S.-based super apps — more or less the ultimate in bundling. Some will come from traditional banking, some will come from fintech, and some will come from brokerages or other investment companies. One of the differentiators between this new form of bundling and the old is that features, all conceived for the digital age, should work better together than old “analog” bundled services.
“The winners will have a lot of success with this, and I predict that over time they’ll actually be able to add in features that go above and beyond financial services,” said Perret.
Baker said she thinks the super apps that go beyond financial services are already here. For her, much of what she does in her life comes from Amazon, Charles Schwab for savings and investing, or Block’s Cash App for sending funds or doing social media-based spending. (Block is the former Square.)
“Those three apps are my super apps,” she said. “They play diverse roles and satisfy me in all the things I want to do.”
Pitts gave Perret’s prediction a qualified endorsement.
“The rise of the super app is inevitable,” says the former regulator. “However, we are going through a deep, deep structural change in antitrust law.”
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Pitts believes that market forces favoring super apps will be irresistible, but the administration’s attitude on financial mergers and competition will create “a hard ceiling” on their growth.
“This will create some serious headwinds that will keep us from getting to the super app level that you see in China,” says Pitts. As popular as fintechs have been, he predicted, some of those headwinds may hit the industry in 2022.
3. Digital Wallets Will Graduate from Payments-Only to Payments Plus Store of Value.
Today digital wallets typically serve as go-betweens, connecting consumers’ debit and credit cards to merchants.
“I predict in the coming 12 months digital wallets will have a niche in the middle, so that they’re going to do things like actually hold balances,” said Perret. “This will make them become more like financial services providers.”
This has already begun to be seen in the P2P payments space and in merchant stored value cards.
Pitts agreed, in part because he sees European experiments with “Variable Recurring Payments” hastening this along. VRPs are routines built into digital wallets that enable consumers to seamlessly pay frequent vendors speedily even though each purchase is for a differing amount.
“Europe is a real bellwether for where the U.S. is going on this,” said Pitts. “The big gap right now in the U.S. is that we don’t have really deep, formal access to the bank payment rails for fintechs. But despite that, you’ve seen everyone figuring out new ways to use the card rails and the ACH rails.”
Once the Federal Reserve’s FedNow faster-pay program launches, “it will create even more options, an explosion of new payments use cases and a deeper embedding of the payments process into literally everything you do,” Pitts states.
4. Real-Time Decisioning Will Revolutionize Consumer Credit.
Perret said that there is a intersection of better data processing, better machine learning and new cloud computing features that will make it possible to improve consumer-credit decisionmaking. To most consumers, he added, this will happen so quickly it will appear to be virtually real-time to most consumers.
“Over the coming 12 months this will revolutionize the way consumer credit is issued,” said Perret. “We’ve already seen this in the emergence of things like buy now, pay later. But I expect that this is going to change much more.”
Pitts suggested that his colleague was being too conservative. While financial services is facing some regulatory headwinds in Washington, he said, in the case of credit availability there are “regulatory tailwinds.” While all federal banking regulators have officially OK’d use of alternative credit data, for example, the Comptroller’s Office has been working to increase its use as part of “Project REACh.” (Roundtable for Economic Access and Change.)
He noted that studies indicate there are roughly 41 million “credit invisibles” in the U.S.
“Our traditional model of credit underwriting has left millions of people behind, systematically left out of the financial services ecosystem. But we’ve now hit a point where technology can allow them access that had high friction before.”
— John Pitts, Plaid
Perret said he thinks the technology that made BNPL possible is just the beginning of what’s possible.
5. Web 2.0 Will Transition to Web 3.0.
Web 3.0, also known as Web3, represents a rethinking of the World Wide Web on a blockchain chassis. The term was created by Gavin Wood, Co-Founder of Ethereum, in 2014, and has begun to draw the interest of many in the cryptocurrency field, according to Wikipedia. One major fan is Jack Dorsey, founder of Block (formerly Square) and Twitter.
One potential impact of Web 3.0 would be more decentralization of financial services. Perret said that an essential feature that must be worked out is the ability to validate people’s identity. Having an interim stage between Web 2.0 and Web 3.0 — which he dubbed Web 2.5 — will help in this regard.
“Over the coming 12 months there’s going to be a big push to create this middle ground,” said Perret. This will be an “on-ramp” to more decentralized finance options.
Baker says this middle stage is already being seen in companies that are providing digital asset exchanges that permit people to move cash into crypto and vice versa. The exchanges play a central role that in time could be offered in decentralized form. Pitts thinks there will be a long period, which is already here in some ways, when Web 2.0 and Web 3.0 will not only co-exist, but see traffic slide back and forth between the platforms.
Decentralization is not something regulators will be comfortable with, in principle, according to Pitts. To the degree Web 2.5 is carried out, that should help them grow more comfortable with Web 3.0, especially to the degree that consumer protection can be demonstrated.
6. Climate Tech and Fintech Are Starting to Meet.
Federal regulators increasingly consider environmental issues as a form of risk that traditional financial companies must address. Some fintechs, such as Aspiration, have long made environmental issues a key part of their demographic appeal. Some banks are following the lead of pioneers like Bank of the West, with its “1% for the Planet” checking account. Among its features are automatic calculation of the carbon footprint of a consumer’s debit card purchases and donations by the bank to environmental nonprofits pegged to customer deposits.
More of this will be coming.
“Many banks are analyzing their lending portfolios, to understand the climate impact of all the loans they make and all the customers they bank.”
— Zach Perret, Plaid
Perret thinks more environmental thinking will filter into fintech companies.
“But I also hope that consumers themselves are going to start making banking and spending decisions based on climate change thinking,” Perret said.
Pitts said he’d talked to a bank recently that collects the vehicle identification numbers of every car that they finance. They do so in order to calculate the overall carbon footprint of their auto financing program.