There’s a very interesting discussion to be had (and I’m having it in a number of different contexts at the moment) about whether the changes induced by the COVID-19 crisis are short- or long-term and to what extent those changes are an acceleration of existing trends (as I think they are, largely) or new directions for the sector. My good friend Ron Shevlin wrote an excellent piece in Forbes highlighting one element of strategic change, saying that “the new normal marks the end of fintech experimentation”. He goes on to point out, somewhat harshly, that banks have used fintech partnerships as a way of convincing themselves that they are innovating rather than actually doing anything transformational.
I completely agree with Ron. He is generally right about such things anyway, but in this case his informed view illustrates a more general point of my own. I gave some seminars to bank management on the impact of technology on the business a couple of years ago, and to set up a narrative to help the executives frame my approach, I said that I thought the “fintech era” would run through to 2020 when it would be overtaken as the shared paradigm. My prediction, which I stand by, is that we are leaving the fintech era and entering the open banking era. Visa’s multi-billion purchase of Plaid would say that I’m right, I think. The virus may have accelerated the transition between the eras, but it was coming anyway.
In the open banking era, fintechs will not vanish, but they will innovate and operate in a different way. They will not need to partner with incumbents, since they can use open banking infrastructure to get access to their customers’ data that the banks have, and their costs to market should be reduced through the use of standard interfaces. This means that the fintechs will be able to focus on the customer journey and user experience to bring new products and services into the market.
So what, then, should the banks focus on? Well, providing working infrastructure for one thing. I was listening to a techUK webinar on open banking recently and I heard the statistic that 98.5% of API calls on the UK open banking infrastructure are completing. That’s appalling and well below the level of service that is required to offer worthwhile “overlay” services. But as I said in The Economist (“Plug and pay”, 21st November 2019) talking bank products such as loans and mortgages being distributed through a bank sales force, the products are heavily regulated, as they should be, which is why they are unappealing for Big Tech.
And, a terminology break.The techfins are the technology companies who embed financial services to make their own products more attractive but whose business model does not depend on margin in those financial services (as that Economist article noted “Amazon wants payments in-house so users never leave its app”.). The fintechs are companies who embed technology to make their own products more attractive and whose business model depends on margin in those financial services (eg, Transferwise).
The techfins (as opposed to the fintechs) are more than happy to have banks, for example, do the boring, expensive and risky work with all of the compliance headaches that come with it. What Big Tech wants is the distribution side of the business, as shown in this old diagram of mine. They have no legacy infrastructure (eg, branches) so their costs are lower and the provision of financial services will keep customers within their low-cost ecosystems. If you use the Google checking account and Google pay then Google will have a very accurate picture of your finances. A very accurate picture indeed.
The business model here is very clear. What Big Tech wants isn’t your money (the margins on payments are going down) but your data and just as Big Tech has made ecosystems impervious to competition, so it could cross-subsidise (with data as well as with money) its financial services products to raise such a barrier to competition that no newcomer will be able to spend enough to gain traction.
That’s why when people talk about “challengers”, I think they should be talking about Microsoft not Monzo. If Big Tech takes over consumer relationships, banks will end up having to give away margin but, far more seriously, data. As Andrei Brasoveanu of Accel said, if Big Tech gets hold of the distribution side of the financial services business, then the manufacturers of financial services products will be “utilities, providing low-margin financial plumbing”. Well, that’s the lucky ones. The unlucky ones will be wiped out in a wave of consolidation and closures.
[This is an edited version of an article that was first published on Forbes, 26th June 2020.]
Snippings 