Loyalty is the new money (again) as intermediation costs go lower vs. direct ownership

Retail is already being slowly changed and fintech will be the catalyst for financial services (unless GDPR stops or dents it)

The loyalty game is on again: big businesses reassess what they could muster with their own resources and how they could instead leverage the existing relationships they have established over the years and add value, rather than risk losing customers to the endearing propositions of fintechs.

There is one key reason for this: the cost of intermediation. Rather than the push from regulators than allowed for PSD2 and Open Banking infrastructure development, it was the cost of capital that put a dent on expanding products across the board (supporting transactional products become hard for traditional player, while at the same time the cost of capital allowed the blossoming of alternative payment service providers).

It was really lending that banks tried to keep, yet quantitative easening drove returns lower and so incunbents largely used them to refinance existing holdings while corporate borrowers and investment trusts used the arbitrage to seek alternative distribution networks that have better efficiency ratios.

The cost of intermediation, cost of distribution and general logistics evolved across the board: be that movement of goods or movement of money.

For fintech this allows to lure customers away skipping the prohibitive cost, they are, of course, assisted by the cost of capital they attract. While enjoying the early start to fund capital investment, the operational model also became less stable as startups lure the same early minority from one another, leading FT to state that UK fintechs are not at all eating banks lunch (paywall).

Fintechs natural adaptability and nibleness is in the tech stack they operate on: the culture of API is way to build a new service through recombination — rather than imitation, tedious repetition and internalisation. They also learn from the retail game: the cost of logistics is now becoming often marginally competitive than the cost of storage, as retailers orighinally selecting superhubs leverage the low cost of rent, thanking the result of the outgoing real estate boom (allowing both WeWork business to exist, now supports small regional logistics centres and allow Amazon Fresh).

Overall, the competition in retail:

• drives down overall basket returns on standard offering that’s stored
• stimulates innovation in werehouse automation and logistics

At the same time, though, it also gives retailers the opportunity:

• for retailers to re-sell the relationship built by contextualising the services with other goods they can connect through online platforms — hence we should expect incresing investment in loyalty and advanced outbound analytics and marketing;
• though the very same tech pipe, retailers can add an infinite “long tail” of goods produced, sold and marketed by others — as this can be delivered for in-store pickup.

The cost of distribution gives the world a flurry of innovative opportunities: lessons learned from retail domain should be well heeded in other verticals, including financial services.