Digitalizing Dollars & Cents: How Unbundling & Re-bundling is Transforming Financial Services
1st July 2019
Written by Clay Watson, Enterprise Innovation for GSVlabs.
Rapid innovations in computing power and a shift in consumer attitude are transforming the relationship between account holders and financial institutions. In 2018, overall investments in FinTech surged to $55 billion worldwide, with 20 of these FinTech startups now valued at $1 billion or more. Incumbent financial institutions manage an increasingly competitive landscape, in which digital natives of the Class of 2020 are drawn to new technology and are often skeptical of large corporations. With no recollection of the Dotcom Bubble, what’s etched into the class of 2020’s memory forever is their family, friends, and loved ones, losing a home to foreclosure during the financial crisis of 2007.
In these changing financial times, banks can take one of two approaches: 1.) They can resist the gravitational forces of changing consumer attitudes and technological innovation, and risk slowly losing market shares and disruption from the margins, or 2.) They can embrace this technological and cultural shift, leveraging intangibles (brand, customer base, balance sheet, and regulatory knowledge), to become leaders in these new digital financial services.
For decades, the modern banking system was characterized by aggressive consolidation and “too-big-to-fail” institutions that bundled together diverse portfolios of financial services. The strategy was to entice consumers and gain loyalty through geographic proximity, offerings like free checking accounts, and the perception of establishment players as trustworthy. With low barriers of entry, over 12,000 FinTech startups worldwide have engaged with new innovative solutions for every major product or service offered by legacy financial institutions. Most financial service providers now face dozens of competitors that are pushing innovation forward and gaining market shares while continually evolving customer expectations.
From big data, to artificial intelligence, to crypto-currencies to blockchain, FinTech innovation has captured the imagination of investors, incumbents, and consumers. It is no longer just the bank and the consumer — new technologies and business models in the finance world have gained traction through competitive advantages.
Companies like Acorn ($870M) that specialize in micro-investing and robo-advisory have profited from daily touch points with consumers and greater transparency. The brilliance of a company like Acorn, is in their ability to allow anyone to take control of their finances through investing. This ability to invest was formerly only accessible to the wealthiest consumers at legacy banks. By democratizing investing, Acorn has gained 4 million users since 2014.
Companies like SoFi ($4.8B) have disrupted lending verticals by offering low interest loans for top student applicants. With incredibly low acquisition costs and an ability to curate the top one percent of borrowers, SoFi’s business model will likely yield high returns on investments from their 7.5 million registered users.
Companies like Lemonade ($2B) have taken the burdensome process of getting insurance from a bank and made the task as easy as making a purchase on Amazon. They have raised the standards of user experience and increased consumer expectations of financial efficiency. Lemonade has profited from a more democratized infrastructure, becoming the first choice among first time insurance buyers.
Using technology to budget and manage savings over the long-term has gained popularity, and Millennials, GenX’ers, and Baby Boomers alike are also looking to technology for smaller, immediate savings on purchases. Now, startups like Honey (Valuation Undisclosed; $37.67M Raised) and Guru (Acquired) are aggregating discounts and rewarding loyalty to help users save both online and in-store. Overall, we are seeing a newly engaged consumer class thinking differently about financial services, focused on capturing every savings possible and, slowly but surely, building their wealth.
With these third party startups in the FinTech industry gaining traction and disrupting legacy banks, the stakes for incumbent financial institutions have been raised, pushing the financial services industry in a competitive direction that is now embedded into the lifestyle of the consumer and oriented around their demands.
(All valuation and funding information sourced from Pitchbook.)
As we just discussed, this exciting emergence of FinTech startups has sparked significant changes in the financial services industry. An industry that now offers specialized products, in turn, has increased the digital expectations of consumers. This positive feedback loop oriented around greater efficiency, user experience, and financial inclusion has culminated in a multitude of competitors focused on specific aspects of an individual’s finances — unbundling.
Currently, 75% of American account holders have relationships with four or more financial institutions. However, this fragmentation of money management naturally creates inconvenience and friction. The initial products, or unbundling, act as just the “hook” to acquire customers with a focused value. As the startups themselves have begun to build trust and brand name recognition, many are looking more like institutions, offering more and more services — re-bundling.
SoFi primarily acquired their 7.5 million registered users through a student loan product, but have now moved beyond just student lending. Now the company offers mortgages, wealth management, and life insurance. Robinhood ($7.5B), a company that formerly only allowed its customers to invest in the stock market from their mobile device, has taken its 4 million users and extended their platform to include cryptocurrency. Acorn, initially just a micro-investing and robo-advisory platform, has taken their similarly sized pool of 4 million users and diversified their services to now offer a debit card product.
It is clear: a Financial Renaissance is here. However, in the interim, the consumer’s desire for a “supermarket” of financial services and the friction implicated in maintaining multiple relationships with financial startups means that many still rely on incumbent banks, only experimenting with certain innovative products.
Looking at Amazon as an analogy, the multi-billion dollar corporation began serving only a niche consumer need — initially just an online book store. Rapidly, Amazon diversified its offerings and became one of the most dominant companies in the world. In the financial industry, the thousands of FinTech startups that address unrelated and specific financial needs will look to become competitive in a race against each other to have their own Amazon moment — to become the dominant digital bank of the future. This re-bundling of financial services will disrupt traditional banks at increasing rates and further squeeze incumbent’s profit margins as they scramble to keep up with the unfolding financial Renaissance.
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