Marcus Swanepoel
Jul 14, 2016 · 7 min read

Ah, the good old ‘unbundling of a bank’ slide — fintech conference favourite. And yes, while many of the banks’ products are being attacked (although ‘nudged’ is probably more accurate) by fintech players specialising in various verticals, we believe this is likely just a temporary market anomaly.

Image curtesy of CB Insights, and about 200 other fintech conferences.

Why do people use ‘bundled’ products?

All else being equal, people tend to prefer doing related things in one place; it’s simply a matter of convenience. Whether it’s going to the grocery store to buy dinner (if you can find all the right ingredients in the same store, why go to another?) or using one online platform to perform multiple related functions (Facebook, Google, Apple, WeChat etc.), it just makes things way easier. With platforms like Google and Facebook I might use different apps, but it’s still the same platform — similar to having different sections in the same grocery store.

The ‘all else being equal’ assumption is of course key: the quality of all these related services should be at least as good as the alternatives, or at worst that the cost to switch to an alternative is higher than the value it will bring. But how does this relationship behave in the the fast-moving world of tech, with a strong dose of finance thrown in?

Finance raises the bar significantly.

In the financial sector this behaviour of doing everything in the same place is even more prevalent. Why? Firstly, because the cost of switching is a lot higher. To use a product from another financial institution (or another fintech product like a remittance app for that matter), you have to typically first get KYC’d and then pre-fund the new account from your existing bank account, which means a lot of time and effort. It’s not as simple as just changing apps and entering an email address or phone number.

This is about the most boring picture of a ‘barrier to entry’ on the internet. And it kind of says it all.

Secondly, it’s a matter of trust. People care about their money and it takes a huge amount of time and investment in order to convince people to risk even a portion of their money with you. The value of this trust is tricky to measure, but it can significantly distort the relative value perception of alternative products and services.

We recently spoke with one of the biggest consumer banks in Europe about some of their innovation projects. They’ve noticed the rise in popular investment apps and have been testing this on a large segment of their customers. The value proposition is clear: it’s a better user experience, easier to understand, and significantly cheaper than similar products the bank is currently offering. But it turns out most people can’t be bothered: despite knowing about all these benefits, the vast majority (as in 99%+) will still use their traditional, more expensive bank investment options.

To them the (perceived) cost of switching, considering both trust and convenience, is just way too high. Some fintech companies are picking up the scraps, but right now it’s not worth the bank’s while, despite them being quite interested in offering it to their customers.

So what about fintech?

Enter fintech. For some verticals, especially remittances, peer-to-peer payments and lending, fintech has built products that are genuinely so much better than some of the existing verticals within existing offerings, that (some) people actually switch or newly adopt. Better user experiences, cheaper prices, more transparency, nicer features, cooler brands — these new generation fintech players seem to have it all.

There is only one problem. Well five actually.

  1. Unattractive markets: Most of the markets these fintech companies are serving are well known to banks, but for a number of reasons (regulatory, risk, economics) these banks have proactively chosen not to serve these markets. If any fintech company actually proves it is a more important opportunity than banks initially thought, they will go after it, and with their scale and the fact that many of the fintech company customers already bank with them, they will have a very good chance of winning.
  2. (S)low barriers to entry: Assuming it’s a lucrative market, while many fintech products differentiate well, the banks are able to replicate a lot of it. In many cases they have simply chosen not to because there has been no urgency to do so until now. If fintech companies could grow so fast that they take all the bank’s customers before they had a chance to react, that would be a big problem for the banks. The issue is that fintech companies don’t scale fast because they rarely have network effects and their customer acquisition costs are extremely high. On top of that things typically get even worse when you try and operate these companies at a larger scale. This gives the banks a lot of time to react, and reacting they certainly are: You can’t walk 2 blocks in London or Singapore without stumbling over some bank incubator or in-house tech programme. Every second person at the bank is now an innovation or UX expert (bless). Yes it will take them 3–5 years to really ‘get it’, but the reality is that is more than enough time.
  3. Under the hood: Many fintech players, including full-suite challenger banks, use external service providers to help them create a lot of their product differentiation — this includes things like predictive data analytics, credit scoring, wholesale forex, compliance and so on. We’ve dealt with some of these service providers and it turns out fintech companies aren’t their only clients — so are many banks. The front-ends might be different, but many of the back-ends are the same, or will be soon.
  4. Flight to safety: On top of that, in a hot and competitive sector like fintech, combined with a generally tougher fundraising environment, many fintech startups are quickly ‘turning to the dark side’ — pivoting from ‘fighting’ banks to helping them. Peer-to-peer loans is a good example. There are plenty of examples of these startups quickly realising that having a ‘secret sauce’ for credit scoring isn’t necessarily the hardest part of the business — sourcing capital to make loans and reaching scale where you can adequately service your customers and keep pricing competitive without eating though all of your own (or investor) money is. When that realisation kicks some are quick to pivot and sell their now not-so-secret sauce to buyers like banks, while others like SoFi are seriously reassessing their business models.
  5. Going all-in: For consumer fintech products, trust is paramount, and this is incredibly expensive and time-consuming to build. Some companies that show a lot of adoption appear to have got it right, but is this really the case? To trust a remittance app or prepaid card with some of your money is one thing — to trust them with all of your money is an entirely different story all together. Trust does not grow linearly, and that step-change needed to move to the level of ultimate trust is something that is rarely priced into fintech strategies and business plans.

What about products and services for those that are not banked or underbanked? Better chance for sure, but if you are not going to bundle everything, someone else is definitely going to do it at some point.

When will fintech wake up?

Is Fintech asleep at the wheel? Nope, they’ve already woken up. This is either in the form of a ‘full-stack’ bundling, for example UK challenger banks launching with a full suite of products from Day 1, or a hybrid approach, where companies that provide users with current accounts, like Number26, are partnering with others like Transferwise to add more products to the same platform. We suspect there will be a lot more of this happening over the next 12 months, especially for the more mature fintech companies.

Time to bundle bundle bundle…

The Bitcoin world also provides us with a convenient microcosm to observe user behaviour for financial products on a smaller scale, and here we’re seeing exactly the same trends. Despite what many service providers have tried to push onto customers, most people don’t buy Bitcoin in one place and then move it to another ‘safer’ option to store it.

There are of course exceptions with more advanced users (and arguably many casual users should move their Bitcoin to safer places given the sorry state of security in some Bitcoin companies) but the reality is most people more than often just don’t, despite the risks being pointed out to them. It’s simply too inconvenient.

At a slightly deeper level of abstraction, one could even argue that Bitcoin itself is ‘bundled’: It can be used as a store of value, to send money between parties, or to transact online.

This trend is further substantiated by a recent Coindesk report that points out that Bitcoin companies classified as ‘universals’ — those that essentially provide a wide range of ‘bundled’ products and services — tend to raise money at higher valuations and absorb the other ‘specialist’ players over time.

History repeating itself.

The banks bundled their products because it made sense to do so to serve their customers better. Over time the relative quality deteriorated simply because there was no urgency to do better: banks could afford to be complacent. Fintech has brought that urgency back, but are themselves faced with similar consumer wants and needs, so bundling for them appears inevitable. The banks also have plenty of time to react to this new threat.

Who will ultimately be the winners and losers? The banks? Fintech companies or challenger banks who provide bundled services themselves? Fintech companies that partner and bundle with others? Companies that are built from the ground up or already have significant distribution and scale? More on that in future articles, but in the meantime, watch out: the great rebundling has already begun.


This is Part 3 of our series on [Banks] of the Future, where we explore what the future of finance might look like, and what role Bitcoin and/or blockchain will play (if at all). Read the rest of our [Banks] of the Future series here:

Part 1: Frictionless money

Part 2: Open systems

This series was first published on the BitX Blog.

Luno Publication

Luno.com is a global cryptocurrency company, with over 2 million customers in 40 countries. We make it safe and easy to buy, store and learn about BTC and ETH. We strive to educate, and open the doors for dialogue and discussion on cryptocurrency, fintech, finance, and more.

Marcus Swanepoel

Written by

Co-founder and CEO at Luno

Luno Publication

Luno.com is a global cryptocurrency company, with over 2 million customers in 40 countries. We make it safe and easy to buy, store and learn about BTC and ETH. We strive to educate, and open the doors for dialogue and discussion on cryptocurrency, fintech, finance, and more.

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