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The Unbundling & Rebundling of Banks

Alex Barrett

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This story originally appeared on iNovia conversations.

“Silicon Valley is good at getting rid of pain points. Banks are good at creating them.” — Jamie Dimon, CEO JPMorgan Chase

FinTech has made massive waves across the world in recent years, with more than 5,000 companies founded, raising nearly $6 billion in venture capital financing.

Let’s take a step back and reflect on why we have seen so many unbelievable entrepreneurs choose banks as the next establishment to disrupt. Of course, the simple answer is that banking is a large sector, with lots of room for improvement; and millennials desire digital experiences in their financial lives. While those are the most often quoted reasons we see in pitch decks today, we believe the real tailwinds behind the growth of this sector lie even deeper.

First off, an attractive quality of a market ripe for disruption is one where the critical infrastructure is already in place for innovation to be built upon. Matt Heiman at Greylock references that critical infrastructure in this post, citing data APIs like PlaidYodlee, and Flinks making it easier to work with financial data; payment APIs like Stripe making it easier to accept payments; and financial market APIs like Xignite, making it possible to pull in live stock prices. Having this foundation in place makes this space all the more attractive for entrepreneurs.

Second is the harsh reality that one’s financial picture today is much different than it was a decade ago.

  • Real annual wages have been stagnant since 2000
  • Education costs are rising exponentially
  • Credit card balances are higher than ever
  • Credit scores are lower than ever, limiting access to capital
  • Home ownership is at its lowest level since the Census starting tracking it
  • High deductible health insurance plans are now the norm
  • Populations are aging and retiring older

As Sarah Tavel points out in this post, called “Saving People Money”, in response to these changing macroeconomic factors, people need new ways to save money, manage money, and invest money. Cue the need for tons of innovation.

Lastly, banks have turned into modern-day conglomerates. The large banks today offer every product you can imagine, from insurance to loans, to mortgages, to cross-border money transfers, etc.

This is a prime example of an institution that does a whole lot of things, but does none of those things really well. This is the perfect landscape for a startup to focus its efforts on a select few of those items and execute to perfection.

The ability for a startup to begin “unbundling” some of those banking services is predicated on the notion that a physical presence in banking is no longer at the core of the customer experience. Alex Rampell, Partner at a16z, makes a great comparison between the financial sector and the retail one, citing Amazon as the retailer that caught these same tailwinds and removed the physical presence from the equation, allowing it to displace WalMart as the biggest retailer in the world. He leaves us with a crucial thought in this video, asking “when will banking have its Amazon moment?”.

These factors have opened up the possibility for thousands of startups to transform the way modern banking is done. Every transformation happens in multiple phases, and the first step in this equation is unbundling. The opportunity at hand is for startups to be exclusively focused on only one banking product (say savings or lending). Consider several examples of this being successful:

Alternative lending platforms such as SoFiKabbage, and Clearbanc have all taken advantage of the inefficiencies in the lending departments of large financial institutions. These lenders all have similar formulas in the way they disrupt traditional banks:

  • High Touch: Start by focusing on a specific user and understand that user really well. This allows the company to underwrite that specific user much more effectively than a bank would. Underwriting more users means more originated loans, and lower loss ratios. For example, SoFi has focused on students, Kabbage on SME’s and Clearbanc on entrepreneurs.
  • Reduce the margins banks earn on loans: A traditional bank accepts money (deposits) and pays a minimum amount of interest (<1%) and then loans that money (primarily on credit cards) for closer to 19% interest. There is a lot of margin there to cut in to for a startup. Given the lenders mentioned above don’t have brick and mortar operations to pay for, they can beat the banks loan rates in most cases, and offer credit to more borrowers.

Robo-Advisors such as WealthfrontBetterment, and Wealthsimple have automated a routine job that was typically done by financial advisors. Large mutual funds and ETFs were already mostly being managed by algorithms, however clients had to consult financial advisors prior to investing. By removing the advisor from the equation and promising individuals a balanced, diversified portfolio that fits their lifestyle, robo-advisors are able to offer equal returns with much less management fees (typically 0.5% vs 1.5% at traditional banks).

  • Savings platforms such as Acorns have found new, innovative ways to encourage people to save money. They are able to offer a fully digital experience, and have ‘gamified’ saving, by incorporating goal setting, rewards points, and a social element. Alternative savings platforms can earn a higher return for clients on their savings all with free accounts that they can contribute to or withdraw from anytime.

These examples continue across every facet of a bank. This image below gives a taste of the FinTech landscape today, and highlights every element of unbundling currently under way. This is the home page of Wells Fargo and it outlines the top startups picking apart every piece of the bank.

CB Insights/iNovia

Of course, unbundling is not the holy grail, it is merely phase one. Entrepreneurs’ ambitions and world domination plans are much larger than simply mastering one banking product. The first product, or the unbundling, is just the “hook” to acquire customers and begin building trust and brand name. Startups exploit the banks on one simple product as a hook to win the consumers’ business in the hopes of then being able to target that same consumer with other financial products in the future, hence phase two: rebundling. The more startups that begin offering additional financial products, the more those startups will begin to resemble traditional banks. Here are some examples of rebundling happening in action:

  • Acorns has now differentiated beyond simply a savings platform by launching Acorns Spend, a debit card product.
  • Square began as an easy-to-use terminal for on-demand workers to receive payment. They have now begun issuing loans to their merchants.
  • Paypal has launched a prepaid debit card that includes bank transfers, deposits, and cashing checks.
  • SoFi has moved beyond just student loans and into mortgages, wealth management, and life insurance.
  • Robinhood has extended its trading services to cryptocurrency
  • Stash has launched core banking and custodial services
  • Credit Karma knows everything (far beyond just credit cards).

What has emerged in the FinTech space is a race to own the end client relationship. Each startup took a different approach, chose a different vertical, and unbundled a different element of the bank. But as all those startups look to layer on, and rebundle the core services of a bank, they will all be vying for mindshare from the same customers. Suddenly, a group of thousands of companies solving various, unrelated problems, will become competitive and will race against each other to be the “go-to” digital bank (or the ‘Amazon Moment’). Despite the numerous examples of rebundling above, we are not quite there yet. As the graph below depicts, we are still at the tail end of the unbundling phase, with startups trying to achieve critical mass in their verticals, prior to commencing the rebundling process.

Once the rebundling phase begins on a macro level, the threat to traditional banks will increase exponentially. Today, consumers excited by digital offerings startups are delivering are faced with the pain of having to piece together all of their financial needs like a puzzle (since every startup only unbundled one product). Getting all of your financial needs serviced, requires interacting with many startups. This pain still generates enough friction for consumers that they maintain their relationship with their traditional bank, and experiment with one or a few new innovative products on the side. Most customers with an Acorns account, also have a traditional savings account at their bank (likewise with investments and loans).

While we don’t expect startups to attempt to put together products that cover everything Wells Fargo offers today, we expect them to bundle a subset of elements that have high synergies. In the past, a HENRY (High Earner, Not Rich Yet) would have one relationship — a big bank; in the future they won’t have 50 relationships (one for each service) but they may have 3–8 relationships with digital rebundlers. Customers will have the opportunity to transfer more and more of their banking relationships to their most trusted digital providers, and will be able to move further away from their traditional banking relationships.

We have yet to see the true threat to banks. But it is around the corner.

Let’s conclude by summarizing what all of this means for inovia in terms of how we allocate capital and make investment decisions in the FinTech space. Here are some of the key elements we look for:

Having a unique and differentiated customer acquisition machine: the ability to acquire customers cost effectively is of utmost importance in the FinTech space. As mentioned above, owning the client relationship is the holy grail, and having a customer not only counts as revenue for the current product, but also allows the startup to target that customer with additional banking products in the future. Here are some examples of unique customer acquisition strategies that have proven successful for FinTech startups;

  • SoFi began by targeting students with its loan products. This led them to be able to use universities as distribution channels and acquire students cheaply (this customer profile was being ignored by traditional lenders). They coined the term HENRY to describe their target customer. This profile was not of interest to banks since they were not wealthy enough (yet) to drive a significant amount of business.
  • Clearbanc offers revenue-based financing to entrepreneurs. They quickly realized that many small businesses use Facebook as their primary advertising channel and that one of the barriers for small businesses is access to capital. Clearbanc partnered with Facebook to help provide capital to these small businesses (much of it to be re-invested in Facebook ads for customer acquisition). This allows Clearbanc to acquire users cheaply through the Facebook merchant network.
  • Affirm allows consumers to pay for large retail purchases in installments. Rather than target consumers directly, Affirm used merchants as their distribution channel. Once a customer reaches the cash, the merchant would ask the customer if they wanted to pay using installment payments (powered by Affirm). This turned the business into a B2B model of selling to merchants rather than a B2C model of competing on customer acquisition.

A well-thought out rebundling strategy that involves owning the end consumer or merchant: Entrepreneurs need to think about pitching the big vision from day one. Building a massive business in the FinTech space will not happen with a series of accidental product additions along the way that we “hope” consumers will enjoy. Owning the end customer should be the objective from day one, it is the core of the business and the reason for existence. Then it is up to the entrepreneur to experiment with various “hooks” to lure in their first batch of customers cheaply. These hooks are more flexible and far less important than the actual master business plan. Here is some advice on choosing the right hook:

  • Test and iterate quickly on initial customer segments you are targeting and the product offering you’re selling. Try something and kill it within a few weeks if you are not luring a unique kind of individual. It is crucial to find a differentiated customer base to initially target, rather than going after the same customers as everyone else.
  • Pick something that resonates with millennials. For example, Ellevestcreates mutual funds tied to the unique career path of women, OpenInvestallows clients to add social impact stocks to their portfolio and Quantopianallows anyone to create financial trading algorithms. The overall vision of all of these companies is to be the trusted financial partner for their target client base, however they have all approached the market with hooks that resonate deeply with that market they are targeting.
  • Once you’ve found a differentiated customer base and a product that resonates with that base you will begin attracting attention to yourself. The idea is that you can use your initial base as a springboard to layer on your rebundling strategies in a more cost effective way. Start with engaged users, build brand awareness among them, garner attention, and then begin rebundling.

Innovate in a new area of banking: Over 40% of all investment dollars into FinTech startups to date have been poured into the alternative lending space, leaving massive industries (such as mortgages and insurance) with few well-funded companies. Additionally, there potentially many innovative ways to improve one’s financial lives that don’t even exist yet and are not even done by banks. Finding a new way to add value financially is a compelling way to disrupt the antiquated banking industry. Examples of radically new financial products are;

  • Mortgage companies like RibbonPoint and Properly that allow consumers the ability to sell their homes more efficiently and even offer the possibility of unlocking some of the equity in their home (things banks don’t do today).
  • Contextualized insurance companies like Lemonade, and Slice. Today, an individual may act as a business one day (renting our their home on Airbnb, or driving their car for Uber) and as a regular citizen the next. Insurance needs to adapt to understand the context in which your assets are being used.

Create your own infrastructure and be self-reliant: Many FinTech companies simply add a new layer or application on top of existing banking infrastructure. This is a great way to validate the problem, but in the long-term the majority of the gains will still accrue to the financial institution serving as the infrastructure layer. FinTechs that are self reliant can be more disruptive and rebundle other apps even easier than those that rely on others. This is one example of a well-planned rebundling strategy from the start.

At inovia we look to partner with audacious founders building enduring technology companies. It is clear that the ability to have an impact on one’s financial experience has the potential to disrupt everything we know about our banking systems. Those are the types of ‘big bets’ we thrive in undertaking.

Alex Barrett
Author: Alex Barrett

Alex Barrett is a VC at iNovia Capital. His experience in financial services began during his time in Accenture's Management Consulting practice.

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Financial Services

A marketing mindset translates to DX success for banks and credit unions

43% of banks saw a stronger ROI in digital transformation efforts by giving marketers a seat at the table.

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A winning strategy for banks and credit unions in their digital transformation efforts? 

Bringing marketers on board.

Global marketing agency Metia Group polled 500 senior financial marketers in the US and Europe between April 27 and May 17 — covering institutions of all sizes with active DX initiatives underway. Their research found that the most successful efforts are those where a marketing mindset was applied.

Of those institutions surveyed, more than one third gave their marketing teams a full seat at the table to determine company-wide DX efforts.

As a result of including marketing teams, 43% of banks said their initiatives exceeded expected ROI. This compares to only 23% of the other institutions not taking the same marketing-led approach.

Additional key findings of the Mindset Matters report include:

  • Institutions with a marketing mindset were able to pivot their customer experiences more rapidly in response to COVID-19, with 32% finding it easy to pivot the digital customer experience, versus 25% of other institutions.
  • Financial institutions with a marketing mindset were found to be more likely to have built digital experiences superior to their competition: 60% versus 35%. They also reported greater success in terms of customer acquisition, increased deposits, and improved cross-sell rates.
  • 69% of those surveyed believe that the role of marketing will be even more critical post-COVID in securing a strong future for financial institutions.

“Marketing experts are the most customer-centric personnel in any organization, and their absence from the digital transformation process in the majority of financial institutions is a missed opportunity,” said Liz High, Vice President of Insight and Strategy at Metia. Smaller institutions that have been further disadvantaged by COVID-19 have a clear opportunity to extend the impact of the resources they do have, by putting their senior marketers in the driving seat. The same is true of the larger banks that want their investments to deliver what matters to their customers.”

The report from Metia can be downloaded here.

DX Journal Staff
Author: DX Journal Staff

DX Journal covers the impact of digital transformation (DX) initiatives worldwide across multiple industries.

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Financial Services

Alipay to Support Digital Transformation of 40 Million Service Providers in China

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Alipay, the world’s largest mobile payment platform (operated by Ant Financial Services Group) has announced a three-year plan to further open up its platform to support the digital transformation of 40 million service providers across China.

The goal is to enable these providers to develop and offer a range of lifestyle apps for food delivery, hotel booking, transport, and medical services.  

“The service sector in China is still in the nascent stages of digital transformation, and that means it has huge untapped potential,” said Ant Financial Chief Executive Officer Simon Hu in the company’s press release. “Amid the ongoing coronavirus outbreak, we have also seen how digital technology can be used to help service providers become more agile and respond effectively to the fast-changing market environment.”

“Building a one-stop digital lifestyle platform not only creates immense value for our users – it will also play an essential role in accelerating the digital transformation of the service industry and unlocking more growth opportunities,” added Hu.

As part of this initiative, Alipay will allow service providers to tap into in-app traffic, while AI-driven incentive programs will encourage service providers to consistently improve the customer experience. 

The press release also explains that users will be able to access personalized recommendations from newly added service sections, meaning service providers will be able to enhance their distribution efficiency.

Under the three-year plan, Alipay will also help 40 million service providers digitalize their operations, increase efficiency and reach more customers by 2030 — with the help of 50,000 Independent Software Vendors (ISVs). Currently, there are over one million on the platform. ISVs are companies that package Alipay’s technologies into solutions to meet the needs of specific industries and use cases, from consumer retail, food-and-beverage, hotels/accommodations, transportation, and medical services.

Impact of coronavirus

In the early days of the COVID-19 outbreak, the company introduced an incentive program that encouraged developers to create mini programs as a way to help users cope with the effects. These include programs that meet lifestyle needs of those working from home, therefore minimizing the need for physical contact with service providers.

In just a week, over 1200 developers responded by creating 181 contactless service mini programs on the Alipay app, for services across China — for example, grocery delivery, legal/medical advice, logistics, and public services. One program providing free medical consultation from AliHealth received an average of 700,000 daily visits.

Beijing-based grocery startup Meicai also launched a delivery mini program for Alipay users amid the coronavirus outbreak, attracting more than 800,000 new users.

Mobile use in China

According to figures from the China Internet Network Information Center, 99.1% of Chinese internet users went online via mobile devices in 2019, compared with just 24% in 2007. Thanks to this increase, the domestic service sector has begun adopting digital technologies.

The National Bureau of Statistics figures show that China’s service industry contributed to 59.4 percent of GDP growth in 2019. While the sector is clearly important to the economy, Chinese service providers still place heavy reliance on traditional brick-and-mortar. Digital technology hasn’t been fully embraced yet as a means to boost efficiency and improve customer experience.

Consumer demand for digitalized services, however, has been expanding rapidly — in 2019, the number of searches for lifestyle services within the Alipay app increased 300% compared with 2018.

As Hu explained, “Since the very beginning, Alipay’s success has always depended on the success of our partners, and that is why we believe the only way to best serve consumers is to open up our platform further, so service providers can better tap into consumer demands.”

DX Journal Staff
Author: DX Journal Staff

DX Journal covers the impact of digital transformation (DX) initiatives worldwide across multiple industries.

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Financial Services

How BMO branch technology saves employees up to 30 minutes per day

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When it comes to banking, it comes as little surprise that customers are increasingly preferring tellerless interactions. 

A recent customer insight report from Mercator Advisory Group found that those who don’t like using mobile and online banking prefer to use self-service kiosks at physical branch locations.

Even back in 2015, a study by Source Technologies found that self-service retail banking kiosks improve operations, “reducing the time it takes to get an official check from nine minutes (using a teller) to 40 seconds – 13.5 times faster than a teller-conducted transaction.”

When banks invest in features like remote authentication and mobile deposits, it isn’t just customers who benefit — staff are able to better focus on more complex transactions, and developing relationships with clients.

“We see that more and more of our customers are migrating toward self-serve interactions, especially for the simpler, straightforward transactions,” explained Kyle Barnett, BMO’s chief operating officer for US personal and business banking, in an interview with PYMNTS. 

One of technologies implemented by BMO was a faster, real-time process for scanning and depositing cheques, saving customers from having to fill out a paper deposit slip. This has led to deposits clearing within hours instead of days. 

Another BMO implementation was its easy PIN authentication; instead of using a driver’s licenses or state-issued ID, customers use debit cards to verify their identities. The transaction is therefore accelerated, and data is aggregated instantly on the teller’s screen.

Both of these improvements were implemented in more than 500 branches by the end of 2019.

“If a customer walks in and opens up an account [during the] same interaction, they can actually leave with a fully functioning, embossed card that has their name on it,” Barnett said. 

And unlike before, when a customer was issued a temporary card and had to wait for the fully-functioning replacement to arrive in the mail, “they also get the PIN right there as part of the account opening, and can even set up a custom PIN if they want at the ATM.”

With the in-branch experience changing, and customers requiring fewer interactions with tellers, the result has been “really freeing up our branch bankers to have more time to dedicate to customers, and have better holistic conversations, and create more personalized recommendations.” 

One case study found that employees have saved between 15 and 30 minutes per day on processing forms. Multiply that by the number of employees within BMO, and you get a major win for efficiency and time saving. 

DX Journal Staff

Author: DX Journal Staff

DX Journal covers the impact of digital transformation (DX) initiatives worldwide across multiple industries.

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