We are fast entering the second wave of FinTech.
In the first wave, start-ups 'unbundled the bank'. Swashbuckling new entrants built exciting businesses around individual products in areas like business lending, FX and payments. The FinTech trailblazers weren't interested in providing the full joined-up bundle of bank services – from current accounts to payments, lending and insurance. They wanted to do very specific things. And do them better and cheaper than incumbent banks.
But now, the FinTechs are bundling it all back together again. Take Revolut. It started out as a way to manage travel spending. Now it's looking to use partnerships to offer more services to its customers. Or Zopa. The peer-to-peer lender is applying for a full banking licence, giving it the option to offer FSCS-backed savings products. Or Transferwise, which is now launching cross-border bank accounts.
Why is this shift happening?
To understand it, we need to think about the six main services a bank provides:
- Payments (incoming and outgoing)
- Keeping track of what you've spent and where
- Keeping your money safe
- Lending you money (overdrafts, loans, mortgages)
- Paying you interest on savings
- Offering other products – like insurance
For decades, the bank has been a 'supermarket' for our financial needs. The bank pays once to acquire you as a customer, but can cross-sell multiple products over the course of your relationship.
The hub of it all was the 'free' current account - one of the great customer acquisition tools of all time. Of the above services, the bank can give you one to three for 'free', and seek to make revenue from doing the other jobs. Because you spend a lot of time engaging with your bank, when you need something else related, they are the natural starting point.
The coming of the internet has diminished this model over the last two decades. New channels and platforms have emerged to tempt customers away from the comfortable embrace of their banks. Whilst some products, notably credit cards, have retained their strong link to the current account, you can now get your hands on cheaper mortgages, better rates of interest, competitive insurance products and new systems of payment. And you don't even need to visit an independent financial adviser or another bank.
But throughout all the disruption, the rise of the FinTechs has been kept in check by the enduring presence of the current account. It's been a great anchor holding the retail banking sector fast in this digital storm. But the anchor-chain may soon break. The introduction of open banking regulations across Europe threatens to tear up the moorings.
For the first time, current account data will be open to new third-party competition. FinTechs are looking at this with considerable excitement.
Rather than challenging specific verticals, some FinTechs are looking at the whole product suite. Banks as a supermarket for financial services have been popular because it makes customers' lives easy to have just a single source of financial products. It also means customers only need to place their trust in one brand. Combined, these two forces of UX and brand, make a powerful case for a financial services supermarket type of model, but that doesn't necessarily have to be in the form of a retail bank we know today.
Look again at the six jobs a bank does. Challengers now want to do more of the things on that list, and even expand the jobs a bank can do for you. They might help you find better energy deals, push bespoke offers (like a supermarket does), or help you budget more effectively. They can take on countless new roles in your life.
We are seeing start-ups take three different approaches to this opportunity, and we should expect a Darwinian evolution of business models in the coming years:
- The first approach is a 'broad and owned' model, where proprietary product capabilities are built.
- But new entrants don't even have to build banking products themselves - the second approach is a 'broad and brokered' model, where the company simply takes a commission whenever anyone borrows, invests or buys a product, like insurance, from a third-party provider.
- A third group are maintaining a niche approach by audience, focusing on specific groups such as Monese with workers from abroad.
Diversity will mean that niches are formed and opportunities realised. There will be winners in all models.
Welcome to the second wave of FinTech. When start-ups re-bundle the bank... and try to do it better.
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