Unbundling banks in 2019
The next big things in financial services innovation will be a new customer acquisition and retention model build on top of a modern tech stack, and B2B banking products.
We are well over the product dimension
1.5 years ago I published my reflections on the state of rebundling in fintech. A lot has changed since: many challenger banks became unicorns, banking infrastructure startups like Plaid and SolarisBank raised big rounds, 11:FS became a real fintech powerhouse. Talking about “startups unbundling a bank” has come out of fashion the industry shifted to a collaboration-first mode.
But let’s look back for a second at the unbundling-rebundling dynamics of fintech. The famous CB Insights visual of fintechs attacking banks was focused only on banking products. This part of banking was the first one under attack when tech entrepreneurs and former bankers grew dissatisfied with expensive, inflexible, non-inclusive financial products that did not match the spirit of the era. SoFi, Acorns, Robinhood, Transferwise, Revolut and many more consumer-facing startups were born in this wave. The rebundling way came in form of partnerships with incumbents and with fellow fintechs.
Frequently, these startups aimed to create their infrastructure from scratch. N26 is a good example here: started leveraging Wirecard’s core and license, it then went to get fully licensed and build its own core banking.
Tech stack is the new battlefield
At some point, fintech realised that a more fundamental issue with the banking system is not their product manufacturing approach, but the underlying tech stack.
Former Barclays CEO describes traditional banks as “museums of technologies”.
Even if the core banking is “digitised”, in most cases it was created decades ago, often with different vendors and components. This brought suboptimal interoperability, slow and redundant processes, and most importantly — limited scalability.
The digital era — and the accompanying digitally-based financial services — requires a different approach to the core: modular, scalable, fast and lightweight. This is where the next unbundling frontier has emerged: unbundling the core banking. Startups like 10x Technologies, SolarisBank, Plaid, 11:FS Foundry and the likes develop a technology layer for financial services. Some only do modular core banking functions, some come with a banking license — thereby attacking (or unbundling) the bank’s tech layer.
These developments enable a banking-as-a-service model in the industry: virtually anyone can launch banking products and pay a SaaS-like fee instead of dealing with a complex process of setting up a new bank. Launching financial services becomes commoditised.
The rebundling pattern gets a new swing: now it can be a platform assembled from tech stack modules and products — “a financial supermarket” discussed by many in the context of Open Banking.
Customers coming next
In the age of the Internet and an ever-accelerating pace of change, the differences between generations become more dramatic. Gen X, Y, Z and Alpha behave differently, have a different perception and a different way of interacting with the world. Acquiring and retaining them as customers are, perhaps, the most fundamental challenges of the future.
Enter the next area of banking unbundling: customer acquisition and retention. It has already manifested itself in the “generational fintechs” we are seeing. Another sign: in September 2019, Revolut set out to launch a bank for teenagers.
However, these waves of fintech will struggle for sustainability. Old customers are getting less active. Young customers grow up very loyal to the brand but start demanding complex products that fintechs cannot deliver without banking experience and a proper balance sheet. Fintechs will need to cooperate with each other and with traditional banks on these services — at a truly large scale.
Here comes the next wave of rebundling: different products and acquisition approaches for each distinct customer group (generation, income level) grounded on a digitally-native core banking with a sufficient balance sheet to enable a broad range of financial products and keep risk under control. Consumer-facing (i.e. product) fintechs will own the customer relationship and will be the acquisition drivers thanks to truly understanding the need of their customer and communication through the relevant channels. This will run on a digitally-native core and will be backed by a substantial balance sheet.
An example of customer acquisition tactic for growing new financial services can be found in Asia. WeChat, having built a strong connection with its user-based, launched a personal investment product in 2014, that, in a year, amassed US$16.2 billion assets under management.
The likeliest scenario of rebundling? Fintechs being predominantly customer-facing or powering the core, traditional banks providing the balance sheet and complex services. We might also see “curated financial marketplaces” where the smartest talent (or even AI) would create dedicated products for engaging a particular target audience, build on an appropriate core.
After all, regulatory and technological changes may be great innovation enablers, but the consumer is the sole innovation driver.
This shift will define how different types of startups and incumbents interact (it is unlikely we will see big startups emerging here). However, there is one more dimension of fintech waiting for its unicorns.
P.S.: Going beyond consumer
Another angle of fintech innovation that only recently started getting attention is the retail versus corporate banking services. While there is a broad choice of fintech products for consumers, SME and corporate banking receive much less attention from financial innovators.
The potential market is much larger, as corporate banking generates higher profits than the retail sector. Also, the playbook for building digitally-native and winning financial propositions is already written by consumer fintech, making the job of disrupting corporate banking simpler.
Holvi, Penta, Brex, Mettle, Adyen are just starting to scratch the surface. I expect the next generation of large fintechs to appear in the SME and corporate banking sectors.
Opportunistically, we at TA Ventures are looking at all aspects of unbundling-rebundling and general fintech. If you are an early-stage startup working on one of the changes — drop me a line.
