PART III: The Battle for Middle Earth: We’re in the End Game Now
FinTechs Versus Traditional Financials Services
In Part 2, we talked about the big categories of software disrupting traditional financial services firms through directly competing with them. In Part 3, we will be discussing the ways in which banks are fighting back against these newfound competitive pressures, and which categories of software are lining up to help them. Every Tony Stark needs their Jarvis. Let’s dive in.
Customer Experience
One of the main areas where traditional financial services fall short is on customer experience. It’s on this basis that we see Fintechs beat out the incumbency time and time again. Same commodity financial product + better customer experience = winner winner chicken dinner. If you are an incumbent financial services firm, CX is a naturally area for further investment and improvement. One strategy is to partner with (or acquirer) CX technology platforms such as i) customer journey orchestration, ii) customer support, iii) digital onboarding, iv) conversational banking, etc. Nearly 2/3rds of consumers prefer interacting via messages or emails relative to calling, which is still the primary medium for customer support as a bank. Nailing next-gen customer support can help traditional financial services firms start to fend off FinTech disruption. Customer support tools aside, incumbents must leverage new technologies and digital processes to compete with FinTechs who were born with mobile compatibility and a consumer-friendly UI/UX. Allowing consumers to seamlessly bank online and via mobile with extremely low friction (via voice, text, with workflows and automation, etc.) has become table stakes. Punchline = traditional financial services can and should invest in their customer experience. There is an alternative not mutually-exclusive approach, not-involving having best-in-class CX, which we will discuss further in our final section on Banking-as-a-Service.
“Vertical-Focused” Technology-Enablers
Within the BFSI space, we see a plethora of sub-verticals, each embodying varying levels of antiquation. At a high level, we break the ecosystem up into i) banks, ii) financial services and iii) insurance providers and then on a more granular level, within financial services, we see micro-verticals such as: i) credit unions, ii) loan providers, iii) wealth managers, and iv) collections agencies, to cite a few examples. These more specialist firms don’t necessarily have the “banking as a service” opportunity described below (due to TAM constraints) and thus will need to double down on tech adoption and digitization to compete and survive. There are more and more software vendors emerging to partner up with the aforementioned categories of financial services firms including companies like BankJoy (credit unions), Ocrolus (mortgages) and Asset Map (financial advisors). With a continued heightened interest in vertical SaaS, we suspect BFSI institutions will have plenty of options to partner with innovative software platforms to provide the proverbial iron-man suits to these technology deficient subsectors.
Consumer FinTech
Distinct from category #1 where we discuss the importance of a consumer-friendly UI/UX, we have seen NEW technologies come to market over the years which traditional banks haven’t yet to offer. Let’s start with Peer-to-Peer payments. Venmo has become so popular that its now a verb. “I’ll just Venmo you for those Justin Bieber concert tickets!” The best example of banks fighting back is Zelle, a payments network owned by a combination of Bank of America, BB&T, Capital One, Navy Federal Credit Union, JPMorgan Chase, PNC Bank, Ally, US Bank, and Wells Fargo. Zelle is growing rapidly, with transaction volume growth ~50% YoY and more than double the volume of the next P2P payment network competitor. This is the power you get when the P2P network is directly integrated with (apart of) the bank of the consumer. We expect to see more innovation in P2P from all sides (banks and fintechs) as the stakes are extremely high. Another example of a consumer FinTech category is BNPL. Most know the BNPL market via stories like Klarna, AfterPay and Affirm. However, if you look into your credit card statement online — you will most likely find the option to turn a purchase into a BNPL payment plan. Why? Because banks and credit card companies are the most naturally well positioned to do BNPL. What we’ve seen with the likes of Klarna is a case study on customer experience and marketing. The financial service is no different, just the way it is presented. Further, we see categories like robo-advisory or early wage access as areas for banks to build or partner in order to remain in the good graces of their consumer customers who expect the same financial services but offered in a next-gen way and where often-times, additional software expertise is required.
B2B Software
As highlighted in part 1, we recently saw Capital One announce a major push into B2B software. We expect to see more and more of this as the business banking sector is increasingly being disrupted by platforms like Airbase, Intuit and Shopify. For a small business merchant who is already being offered 75% of your technology via Shopify, why wouldn’t you move to adopt Shopify Balance or Shopify Pay? Intuit is similarly diving deeper and deeper into the tech and banking stacks. Last year, Intuit introduced Money by Quickbooks, a mobile banking solution designed for small businesses. Airbase represents one of many players attacking the office of the CFO with a combination of best-in-class software (in this case, budgeting, spend management, expense reporting, etc.) paired with financial services such as credit cards. If you don’t think Shopify, Quickbooks and a host of other SMB services providers are going to be duking it out for small business wallet share then you are fooling yourself! The finance sector should be terrified by the moves these software behemoths are making. They touch an extremely high volume of GMV, have earned sticky customer relationships and have armies and armies of the best engineers. The only missing ingredient until now have been the financial services themselves which have become easier and easier to attain through partnership or white-label (e.g. Shopify will eventually be the bank, the lender, the cc provider and much more!). The software solutions helping financial services firms fight back include the likes of Chargezoom (white-labeled B2B payments and invoice automation for SMBs). Examples of homegrown solutions include HSBC’s virtual card offering which effectively competes with platforms like Airbase through offering budgeting and expense management solutions to HSBC’s customers. Whether it be homegrown or white-labeled — the financial services sector will increasingly be offering B2B software to their business banking clients.
Banking-as-a-Service
As we talked about in part 2, technologies/platforms such as neobanks, BNPL, integrated corporate cards, payment processing and wallets — are all eating into the customer bases and long-term viability of traditional banks and financial services firms. Some might say the rise of FinTech platforms and encroachment on financial services firms by software is inevitable and we would agree. Even with investments in digital processes and customer experience, it’s still tough to see a world where financial institutions are not disrupted by technology. Back to that Shopify example…S.C.A.R.Y! If you have a small e-commerce storefront. Would you rather Shopify offer you an end-to-end business management platform or would you rather have to go to Shopify and Bank of America to stand up your business? And that was just one example: Facebook, Apple, Amazon, Walmart, the list goes on.
Some firms have adopted the “if you can’t beat them, join them” mentality. Essentially, leveraging their banking licenses/infrastructure and actually helping power software companies, FinTechs and non-financial services firms. A recent example would be Goldman Sachs teaming up with Apple to offer BNPL on Apple products. That’s surely an account that [Klarna/Afterpay/etc.] will miss dearly. The tradeoff is simple, up and coming tech disruptors get to leverage the required banking infrastructure with rapid time-to-market and financial institutions are able to drive significant revenue with very high margins through allowing next-gen tech-enabled firms to do all the heavy lifting on the innovation and distribution fronts. This is already playing out in market. Examples include i) solarisBank (powers Tomorrow), ii) Bankable (powers SpendDesk), iii) Bank of Kansas City / Central Payments (powers Ceridian’s Dayforce), iv) BBVA (powers Xero and Digit) and Green Dot (who powers Uber, Walmart, Paypal Stash, and Apple). This trend continues to heat up with HSBC announcing their banking as a service offering. Companies like FIS are also starting to play this game, having announced an embedded finance offering through a partnership with Treasury Prime who helps connect FinTechs with banking partners via their open banking platform. Most recently, Deutsche Bank announced plans to develop a white label BNPL product for merchants. More than 70% of traditional financial services providers (the ones with the banking licenses, etc.) expect to offer corporate banking BaaS as a use-case in the future, even though volumes are currently low. Finastra estimates the value of the BaaS market to be $7TN by 2030. Examples of offerings that can be white-labeled by software companies include: i) savings and checking accounts, ii) debit and credit cards, iii) online payment transfer systems, iv) employee payroll and iv) loans, mortgages, insurance, etc. As software investors, we love the possibilities being presented by these trends. However, for the financial services firms, it will be important to act fast. Banks and FIs need to decide what combination of “beat them” and “join them” they will be pursuing. Certain firms such as JP Morgan are betting on themselves while others are eyeballing the $7TN embedded finance opportunity. Either way, we see both of these roads colliding in the next decade and we’ll surely see the lines between technology firm and financial firm blend together and become inseparable.
And that wraps up our three-part series. To anyone still reading. Thank you. The final punchline as we see it as such:
- All software companies will have the opportunity to offer financial services if they chose
- Many are choosing to do so, and as such — financial services providers are in trouble. Trouble!!
- In response, financial services providers will invest in innovation, acquire, or partner with technology companies
- Conversely, we also expect to see traditional bank business models fully or partially pivot to “banking-as-a-service” in order to drive growth via powering the financial technology ecosystem
- All of these factors will lead to convergence of financial services and technology. We will see many incumbents lose their dominance while at the same time, we will see new market leaders will emerge
Fin!
