Thoughts on the Copernican Revolution in Banking
Everyone in banks or interested in understanding the future of banking needs to take time out to read Frank Rotman’s Copernican Revolution in Banking. There’s a lot for legacy providers to consider but the part I want to dig into is how the way people discover financial products will drive the rewiring of the industry.
This draws on recent talks I’ve given for Finastra and Mastercard Canada and something I’m going to keep iterating on, so all constructive input is welcome.
A stack is quickly emerging that makes it cheaper and faster than at any previous point in human history to launch financial products at scale. With an e-money license, a credit card to give to AWS and a Banking-as-a-Service partner like Railsbank, you can be live in record time.
Whoever looks at fintech, sees the classic CB Insights graphic of a bank homepage and thinks that fintech is all about unbundling and rebundling of financial services is completely missing the bigger shift. Collapsing costs and startup-friendly licenses are causing a massive increase in the number of competitors and a rewiring of the maths of financial services, that when combined could become an existential threat for banks.
State of play
Frank estimates that a typical bank has at least 300 financial products. While, in some ways this is a lot (and we’ll get more into that in a moment), it’s also not very many. For example, most banks have basically one current account product that they expect everyone to use and most banks’ current account products look basically the same.
This lack of product diversity happens for a few reasons:
- Banks’ tech stacks make new products take years to build and don’t lend themselves well to agile product methods (launch, learn, iterate)
- People in branches that sell products can’t keep too many products top of mind
- When products are sold by people, the risk of mis-selling goes up, doubly so when they have lots of different products to remember
- Poor transaction monitoring resulting in lots of false positives and massive manual compliance overheads makes launching and operating products too expensive
On the other hand, fintech startups with the legacy technology, native digital distribution and an iterative approach to product have a significant structural advantage in each of these areas.
The great rewiring of financial product maths
If it costs several orders of magnitude less to launch a financial product, then financial products no longer have to be designed like the one-size-fits-nobody mass market products we have today. The total addressable market needed to make these new financial products viable, sustainable and profitable is a lot smaller.
This will create the environment where financial products can target niches. Niche products tend to have stronger Product Market Fit, making for greater Net Promoter Score and products that for the first time genuinely help the customer.
Looking forward
In this regard, banks will need to successfully navigate two key challenges. On one hand, they will face a fundamentally new type of competition as markets shift from oligopolies with undifferentiated products to asymmetric competition with new entrants that have highly differentiated niche products which are cheap to build and fast to iterate. On the other, this challenge compounds and becomes a structural disadvantage as distribution moves away from branches and toward the internet, the native habitat of the tech company.
Coming back to Rotman’s 300 financial products, anyone that has tried to optimise SEO for a company with one product will know that it’s really hard. Trying for 300 is likely to be a losing game. For me, these two slides should be keeping bank management teams awake at night. If the top 3 results get 90% of the clicks, making for the lowest CAC, best economies of scale and the best unit economics to re-invest in widening the gap on competitors, then that’s a flywheel that I don’t want to be on the other side of.
Conclusion
Unless banks can quickly mount a decisive rear-guard action, costs and barriers to entry are going to continue to fall and the number of niche products banks have to compete with will significantly increase. The classic race between banks and incumbents of finding products vs finding distribution may collapse as banks lose the distribution game just as they also lose out on product.
Over time, financial products are likely to evolve to be more and more niche and people’s money is likely to be more and more fragmented. Tools like Curve that make this easy to manage will become more important.
Eventually, as financial products become more niche, financial products may end up not looking much like financial products at all. Putting banking and payment capabilities in the hands of developers is exciting as they can start to be applied to non-financial problems. If banks can break out of their legacy tech lock-in and work with Banking-as-a-Service providers to power the new wave of financial products, then the prize is massive. The $2 trillion payments industry is likely to grow fast as payments are made accessible to engineers. The likely outcome for banks that don’t figure out how to survive in the face of asymmetric competition and fight the losing game so clearly explained by Rotman, the likely outcome is not good.
Slides from Frank Rotman’s excellent ‘The Copernican Revolution in Banking’. Go check it out
