Re-bundle or Die

In the first wave, start-ups ‘unbundled the bank’. After years of unbundling financial services, banks and early entrants have already begun consolidating.

We are fast entering the second wave of FinTech.

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 throughout your relationship.

Banks have understood the value of bundling in providing relevant products to improve customer loyalty. In the past, companies strived to serve the financial needs of a consumer across insurance, lending, wealth management, banking, cards, and mortgage, yet it proved difficult for a single entity to provide all relevant financial products across every asset class, personalized to each customer.

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.

Traditional banking revolves around relationships for which banks can sell many products to maximize lifetime value

To understand a bank, you must first understand the six primary services it provides:

  1. Payments (incoming and outgoing)
  2. Tracking and budgeting finances
  3. Keeping your money safe
  4. Lending you money (overdrafts, loans, mortgages)
  5. Paying you interest on savings
  6. Offering other products

As you read through that list, how many different companies came to mind?

I am willing to bet more than one, and I believe this shows how far removed we have become from the traditional banking model.

The coming of the internet has diminished this model over the last few years. New channels and platforms have emerged to tempt customers away from the comfortable embrace of their banks.

Since 2015, over 75 fintech solutions have emerged to eat away at incumbent market share. Notable companies span across payments (Paystack. Flutterwave, Interswitch), alternative lending (Carbon, Evolve Credit), personal finance (Risevest, Bamboo, Trove, Chaka), savings (Piggyvest, Cowrywise), neobanks (Kuda, ALAT, Kuda, Rubies, Eyowo, V by VFD, and Sparkle), and numerous other categories. After securing millions in capital and customer bases, these companies are no longer viewed as afterthoughts.

They wanted to do very specific things. And do them better and cheaper than incumbent banks.

To unbundle a given function of the bank, fintechs of the past specialized in a given function.

Paystack and Flutterwave specialized in payments. Piggyvest & Cowrywise specialized in Savings. Risevest & Bamboo specialised in investment. Evolve Credit & Carbon specialized in finding consumers the most attractive rates on various loans.

However, many of those offerings represented a small amount of the bank’s overall business. The early wave of fintech startups settled on taking one of those bank functions and executing better.

When fintech companies began unbundling, the tools got better but consumers ended up with 15 personal finance apps on their phones. Now, a lot of new fintechs are looking at their offerings and figuring out how to manage all of a person’s finances so that other products can be enhanced

The challenge with so many new financial products is that consumers have become overwhelmed with accounts, and they have struggled to optimize across them effectively. Setting aside money into your Piggyvest is simple, but understanding how that allocation impacts your ability to pay down long-term debt becomes more complex. As every part of banking has become disintermediated, consumer data has become siloed across various accounts, and the lack of a central hub has left consumers more confused about their finances.

The separation of financial services has reached maturity, and the narrative surrounding the next decade will revolve around consolidation.

You can really only do one thing at a time as a startup, but if you do that really well and find product-market fit, you win the opportunity to expand those features

At the end of the day, most individuals do not think about their financial lives in silos. When people receive their salaries, they rarely optimize it to determine where it ought to be distributed: e.g. allocating #150,000 for Piggyvest, #40,000 for Risevest, #50,000 for paying down debt, #20,000 for Bamboo and #10,000 for Buycoins. For most consumers, the process is basic: there are inflows (income) and outflows (expenses), there are needs for today, and goals for the future.

In other words, the unbundling of the bank has run its course. Bundling and unbundling is cyclical, and we have moved on to the era of re-bundling financial services.

Welcome to the second wave of FinTech. When start-ups re-bundle the bank… and try to do it better.

Fintech companies have begun the process of alleviating these concerns, and these specialists are now broadening their offerings.

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 the audience, focusing on specific groups such as Risevest and people who want to watch their investment.

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.

If they offer a savings account, they can see income coming in and be able to give you better access to borrowing. That is the rebuild — how does fintech serve all of the needs, and how do we leverage it for others?

Re-bundling will become a core part of the workflow and a way for fintechs to leverage those relationships to then be able to refer them to other products.

Traditionally, financial services did all of their competing and bundling based on the location of the bank branch. However, fintechs are not restrained by geography

Several experts say it is too early to know the right services to re-bundle or exactly what re-bundling will look like.

As we see challengers become dominant players, they will have the opportunity to experiment digitally. They won’t be burdened by history and will be able to start with a blank slate.

Not every fintech company will re-bundle in the same way, but if a company does well, it will most likely be the predominant system in the future.

The questions will be who is the best at meeting consumer demand, and what will those bundles look like?

By expanding product features and capabilities, these companies are effectively creating holistic banking experiences for their segmented targeted groups; they are re-bundling services for those that they unbundled for.

Aside from simplifying the financial journey of the customer, there are business reasons to expand offerings as well. Like all banks, fintech companies make money through margins and fees, yet unlike major banks, many notable fintech names are still not profitable. Each additional product feature creates an additional stream of revenue, and these supplementary services allow these companies to subsidize operations rather than continuing to rely on outside funding at a time when investors are conservative with their cash.

An expert puts it this way “some of them(FinTechs) know, while others will find out soon. But you’ll need to add more revenue streams and as you do that, you become more of a traditional bank. Carbon went from just issuing loans to adding a wallet to savings/investment products to getting an MFB license. Nobody makes any money from just savings accounts or just loans. eventually, everyone realises this.”

Perhaps this is just about survival and providing what the market wants or maybe because digital finance lends itself to expansion both horizontally and vertically. Regardless, the entire financial services industry is moving onto the internet.

Banks are moving to be more like fintech, and as fintechs re-bundle services, we will see banks doing their own unbundling and re-bundling

The most likely scenario in my eyes is for these FinTechs and banks to continue to broaden their product offerings through partnerships with existing players. This approach allows for each player to stay true to their core competencies while still offering an expanded product suite to their customer’s bases. Each side of the partnership will benefit through either commission fees, enhanced platform stickiness, or an expansion of the user base.

The winners of the past won customers through specializing in a narrow service and producing it better through deep customization and a seamless experience.

These same winners are now realizing that venture capital does not last forever, and auxiliary high margin offerings allow these businesses to become self-sustaining and monetize customers more effectively.

Consumers reaped the rewards with lower fees and friendlier interfaces, but they lost as more solutions emerged and their data became siloed across various channels. The next era of financial services will be about reconfiguring the consumer journey through a central hub, and the future will be even friendlier to consumers.

Link to Case Studies

‘Business as usual’ is no longer a luxury of our big banks.

However, there is admittedly still some distance to cover. Market capture has not quite been the great big bank heist that was promised — at least not yet.

And when combined with the world of pain that banks are definitely now facing, I predict a new hybrid model is likely to emerge soon.

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