An argument has been circulating through financial services for some time, running like this: Traditional banking institutions are producing too many products, and can’t hope to compete with fintech specialists focusing on just one product. This thinking has led to the creation of a few tremendous successes, such as Wealthfront and Betterment in the wealth management space.
But is this really where things are headed? Let’s examine the reasoning of supporters and opponents.
Viewpoint: Traditional Players Can’t Do It All Anymore
The key argument was forcefully put forth last year by Frank Rotman, a partner at QED Investors. He wrote: “There are many full-service banks and credit unions today, most of which are too small to deliver a suite of products profitably.”
And further, he wrote, “Share will increasingly become concentrated in the hands of best-in-class product providers as channel barriers fall and information becomes more abundant.”
Most industries, Rotman said, split manufacturing from distribution years ago. The company that manufactures hammers does not sell them directly to the consumer — the consumer goes to the hardware store or home center, or orders them on Amazon because they get free shipping. Movie studios no longer operate their own theaters.
So, the argument runs, banking should follow this model. Some institutions will be factories, others distributors. Both cases involve working with fintech and big tech companies.
Further, this argument holds, traditional generalist institutions should specialize, because no institution, particularly smaller ones, can produce best-in-class products across the numerous product lines that banks and credit unions serve. To thrive, financial institutions must find their unique place in the market. Fintech specialists that build one product superlatively can opt to distribute them through the banks and credit unions or other corporations that have large bases.
Specialist banking institutions may be better positioned to thrive than small generalists, just as fintech providers are better served finding consumers where they are already concentrated — at traditional players.
But Financial Services Aren’t Hammers
There’s some appealing logic to this argument. But does it hold true in a digital age?
Increasingly, digital approaches are undermining the idea that manufacturing and distribution must be separated. Digital channels allow for low-cost marketing and distribution efforts. Netflix and Amazon Prime Video serve as strong examples. They both not only stock huge libraries of shows, but have become movie and show producers that also exclusively distribute their own products. Makers of everything from automobiles down to energy drinks can offer these products direct to consumers these days.
Doing business this way could work to the benefit of digital banks, as the success of challenger banks in the U.K. and Europe is beginning to show.
But a Tesla is highly differentiated. How different is your institution’s savings account from all the others out there?
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Fintechs Bundled, and Now They are Rebundling
Fintech vendors have been singing this song for years: Banks offer too many commoditized services that often aren’t unique enough to stand out on their own, whereas fintechs can take one of these services, produce it better through deep customization and a seamless experience, and win customers.
These specialists are now broadening their offerings, leading to the phenomenon of “rebundling.” Advanced fintech players such as SoFi and Credit Karma are now offering products outside their original value proposition, and offering them directly to consumers via digital channels.
Some pundits describe the unbundling of bank services as Fintech 1.0, and the rebundling of those services under new brands as Fintech 2.0.
Jonathan Coffey is business operations manager at Current, which offers banking services, but whose card is issued by New York’s Metropolitan Commercial Bank. Coffey took issue with this assessment, at least as it pertains to companies such as Betterment. In a July 23 series of tweets, responding to a Fintech 1.0/2.0 discussion, he stated:
- “This is kind of a tired trope and I think not quite right; nobody is really trying to re-create the money center or super-regional banks, but people are trying to create holistic experiences for the customer segments they are targeting.”
- “In some cases that’s going to require a checking account and debit card; others not so much.”
- “I’d argue it’s more an extension than a re-bundling for @Betterment: this is a means to sweep a bigger share of users’ paychecks into investment accounts (the core business and value proposition).”
What Coffey is suggesting is that Fintech 2.0 is not about becoming a bank, it’s about better serving customers, and maybe for some companies, finding revenue instead of continuing to pull in fresh venture funding. Most challenger banks have not yet reached profitability, and are seeking to offer supplementary services in order to increase profitability.
For now, the venture money continues to pour in, at least to established fintech companies. Robinhood, MoneyLion, Varo Money, N26, and Curve have all pulled in mega-rounds. Fintech funding in the first quarter of 2019 outpaced the first quarter of 2018, the largest year for fintech funding on record.
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Does the Best Hope Lie in Deeper Partnerships?
As digital banking advances, banks and fintech can combine powerfully to create and distribute products together. At the upper end of the scale, fintech unicorns are willing to partner with large banks, but are also going it alone. Companies such as SoFi and Robinhood have large customer bases and a steady stream of venture funds to keep them afloat for the long term.
Anish Acharya, former VP of Product at Credit Karma, recently joined venture capital firm Andreessen Horowitz as its new head of fintech. On this debate, he’s observed that “what’s interesting is that as legacy banks are starting to think about unbundling, startups are increasingly talking about cross-selling (bundling) from their dominant vertical entry point.”
Credit Karma, his former employer, has made this very journey. The company began as a way for Millennials to check their credit scores for free. Since then, the company has developed in multiple directions, including launching a tax preparation service and a marketplace for third-party financial products.
Chris Sugden, a managing partner at Edison Partners, which co-led a $100-million round in the financial wellness-oriented banking services provider MoneyLion, observed, “Part of the big thesis here is the rebundling idea that consumers would like to get as much if not all their financial services in one place… Overall consumer dissatisfaction with the traditional banking services, fees and the cost value provided this window.”
Andreessen Horowitz’ Acharya continued, in a Twitter thread, that, “While there are some natural points of cross-sell, i.e. scores and reports lead naturally into certain types of lending, many of these other cross-sell attempts can end up feeling forced/unnatural and are being met with limited success. What indeed gives a brand ‘permission’ to move beyond their core offering?”
On the one hand, there is brand loyalty, which can be very powerful, and there is the famous stickiness of financial services and inherent conservatism around managing money.
But on the other hand, and somewhat paradoxically, fintechs bundling in bank services are offering commodities. Consider: Wealthfront offers 2.57% on its Cash Account. Betterment set its rate at 2.69%. If the interest rates weren’t so low, this would sound like two competing community banks … in the 1990s.
Actually, as product manufacturing and distribution increasingly migrates to digital forms, banks and fintechs should ask the same questions:
- Are fintechs properly leveraging their hard-earned affinity into the cross-selling of new products?
- Or are they forcing new products into the marketplace simply because they can, thereby putting themselves into Rotman’s dilemma of trying to be all things to all people?
As fintech matures and market leaders grow into increasingly bank-like entities, they will continue to find themselves facing very bank-like problems.