Ben Soppitt

The Great Re-bundling of Financial Services

The last decade has seen Fintech companies carving out specific niche markets in financial services like round-up investing (Acorns), Insurance (Lemonade), loans (Sofi), fractional investing (Stockpile), Savings (Marcus) and checking (Chime).

This has provided consumers with more choice and increased accessibility (e.g. via mobile apps) and in some cases, better economics but has also created new problems. 30 years ago if you counted the number of financial institutions the average person interacted with it would be 1 or 2. In today’s world, it’s not uncommon to have well over 10 — it even has a new term, the “financial stack”.

The burden of managing the natural friction and complexity of so many discrete and unconnected relationships has fallen to consumers, and we are not dealing with it well.

Money is a strange subject eliciting strong emotions but also great indifference. We all want more of it but very few of us will put the effort in required to manage it properly. Optimising for return on savings, dollar cost averaging and efficiently using our rewards points is for many people a chore that would rather avoid. Despite the enormous positive economic impact of these activities, we suffer a host of psychological biases that create a substantial barrier between us and managing our personal finances well.

One of the most significant of these is a tendency to value small payoffs now rather than a large payoff in the future. This is called hyperbolic discounting in behavioural economics.

Almost the entire marketing of financial services is reliant on exploiting this human weakness. We can date its use to the 1950s when free toasters and wall clocks were given out by banks as incentives to open accounts. There was very little differentiation between banks as it was so highly regulated so they had to find non-financial means to incentivise customers.

Plus la change.

With so little real product or financial differentiation between conventional bank’s, they have to rely on other means to attract our attention and convince us to move, because there is little genuine reason to do so. So they offer us cash bonuses that require minimum deposits to stay in the account, these earn little or no interest but earn the bank a great deal as they resell these deposits as loans to others. The economics seem great in the immediate term, its “free money” after all, but statistically, you will lose out significantly. Only a tiny minority of people game the system, banks really hate these people. They take the money out as soon as the bonus is paid and move on. The rest of us have made the move typically stay with our banks for up to 16 years by which time they would have recouped their initial incentive several hundred times over in fees and interest arbitrage.

As successful as FinTech has been in delivering improvements as point solutions we are beginning to see a change in approach and a re-bundling of services under a single brand. Initially, this started more as aggregation than integration and it was driven by an economic need to diversify and increase revenue streams. Savings accounts would be added to the portfolio of a company offering Robo investing. Or transaction accounts would provide salary advance as part of its offering and other loans.

More recently we have seen true integration where historically different products are integrated into a single holistic experience to the consumer. Integration brings significant advantages to the company as well as consumers.

For companies, it provides multiple revenue streams and a more efficient cost structure as acquisition costs are only incurred once for multiple products. Lower costs mean more can be given back to consumers in higher returns.

With integration comes the opportunity for automation. The biggest mistakes people make in personal finance are largely ones of omission, not commission. Its what they don’t do that harms them more than what they do do. Staying with the wrong bank for too long, automatically renewing insurance without looking at alternatives, not maximising or redeeming bank benefits and rewards, not maximising deposit interest by moving money between low APY transaction accounts and high APY savings accounts, the list goes on. Automation can replace the need for manual intervention and allow technology to take on the repetitive, hard boring tasks that are the bedrock of optimal personal financial management.

Automation and integration also allow for new features and functionality to be built that look at the consumer more holistically. It allows for more seamless account management and support services for consumers so that when they have to contact the bank a single representative can actually resolve any issues.

For consumers, this means substantially less complexity and friction in managing their personal finances. It also means that they can secure better value for money and returns from their own finances with less effort, time or stress.

What this is likely to mean is the emergence of two distinct markets.

  1. The conventional banks, for whom there is no economic interest or pressure to change given the extremely low cost of deposits that they currently enjoy from retail and SMB consumers.
  2. Full-service FinTechs offering a rich portfolio of integrated and automated services, substantially better returns for consumers and better customer experience

Ultimately the second model will win — at some point it will force the conventional banks to change when the cost of change is lower than the cost of not changing. The speed and timing of this will be determined by the speed at which consumers change how they think about banks and banking.

Conventional Banks have dominated this messaging for decades, from free toasters to “free banking” attention has been deflected from real product innovation and value for money. The more voices and the louder they are that seek to move the debate to value for money and product innovation the more society and the economy will benefit with more money flowing back to consumers and building their long term assets, not the banks.

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