This is the second interview in The Braintrust series, where we find leaders in the FinTech and bank disrupting space and have them share their expertise with our members.
Since the Great Recession, the entire banking industry has seen a radical restructuring sparked by the rise of FinTech. For years, the banks had been fragmenting their institutions into different departments with their own financial incentives; they’d forgotten to put the customer’s finances first.
Bradley Leimer, co-founder of Unconventional Ventures, a consulting firm that helps companies drive innovation across the financial-services landscape, was prescient of these changes before most others. As early as 2013, he wrote about the risk of the banks’ decision to unbundle their many services — he recognized the opening that FinTech firms have pushed their way into over the last seven years.
We talked with Leimer right as the Corona Virus and the Saudi Oil-Price War had begun to send the markets into a tailspin. He couldn’t help but notice echoes of the Aughts’ financial crisis that had led to the FinTech moment.
Unifimoney: Where is FinTech winning in terms of real market impact and where isn’t it? What has stopped FinTech from changing the market the way digital did to commerce?
Bradley Leimer: It’s an interesting question to ask today, given the last couple of weeks. When the financial crisis first started hitting in 2007, and then when it was really bad in 2008 and 2009, there were not the type of dollars invested into this space, into FinTech, or anything that was really disrupting the financial-services model. But the last ten years have created this great incubator, which — in a way — has been the tail wagging the dog. FinTech companies have said, ‘Oh, you can actually have a business around that’ and the banks have taken notice. They’re creating venture funds to be involved in this investment and doing things through partnerships that were unheard a decade ago. So, to me, FinTech has completely changed the business model and the thinking for the next generation of people that are going to be leading these banks.
In every single market — even in places where it may not be taking the large percentage of customers away—I think we are just starting to see the beginnings of the unraveling of that relationship that other markets have seen fairly dramatically.
Unifimoney: In this first era of FinTech, these billion-dollar unicorns have sprouted by taking on the banks in one tiny segment of their financial-service offerings. Do you think the next step is a rebundling or do you think FinTech has instead led the banks to improve in those specific areas?
Leimer: There have been a couple things that I’ve written that were sort of watershed pieces from my perspective. In 2013, I wrote a piece in American Banker called ‘There Will Be Blood.’ It was about the fact that the changes that had been happening in banking over the first five years of what became FinTech were just the beginning of the erosion of the customer relationship. The second piece I wrote, in 2015, was called ‘The Great Rebundling of Financial Services.’ What I wrote about in that article is that for decades banks had unbundled the relationship and allowed for the idea that the banks were going to be your savings application, but that you’d have a relationship with seven or eight different places. The banks allowed that to happen, because you had the deposits for checking and certificates and money markets and everything being run in these large institutions, and as they grew bigger and more influential over the decades, these were people who had their own interests in mind. There was no relationship building. No strategy about customers across either side, even in between deposit products.
So that was the problem and that was what I wrote about in 2015: that banks unbundled themselves and basically created the environment that we see today. They enabled this first era of FinTech to happen. And even though market share of the five or six top banks in the US has actually increased, not decreased, since the Great Recession, there’s still an opportunity for so many companies to have a really great run in terms of growing to provide better value for customers than at any other time in the history of banking.
Banks are scrambling to figure out how to retain relationships across the balance sheet and it is a struggle. People are not used to a financial institution actually wanting more of the relationship. It’s always, ‘I’m gonna get my mortgage here. I’m gonna get a credit card here. I’m gonna get a savings account here. I’m gonna get a checking account here. I’m gonna do my payments through Venmo. Blah blah blah.’ So, banks really screwed up. If you’re Chase, you’re in a good position. But if you’re a mid-tier institution or, god forbid, a community institution, it’s gonna be tough until you are acquired or until you just have no customers left.
Unifimoney: A lot of challenger banks have focused on sub-prime customers. Do you see that as a strategy of focusing on markets incumbents are less invested in or is that just a cheap way to bring up your numbers?
Leimer: It’s an interesting question: how can you compete in the toughest part of the market, in terms of HENRYs, the High Earners Not Yet Rich kind of people? That’s a tougher market to compete in as opposed to giving credit to someone who in the past hadn’t been able to get that kind of credit. Are the most successful FinTechs ones that are developed into a market that was undeserved or is it that they’re simply doing something a little bit better with slicker UI and that’s really what the draw is?
I think it’s a little bit of both. You look at the success of Chime. You look at the success of trading apps or robo-advisors. It’s the bundling together of value-propositions that resonate more than just serving a demographic that hadn’t been served. If you talk to the folks at Chime, these types of business models are appealing to people in more than just one distinct tranche, because they’re looking at creating value in ways that banks hadn’t thought of before.
Unifimoney: Challenger banks have been very quick to talk about their volume of accounts, but rarely mention metrics like average deposits or active account levels. Some have suggested that’s because these metrics are very low and are calling into question the economic viability of this model — where do you sit on this debate?
Leimer: So when most straight venture funds — like Andreessen or Sequoia — back FinTech apps, they care about volume of users, because they have this idea that somehow a Facebook hockey stick-like trajectory of users is the end all be all. But when it comes to money, and when it comes to a time like this when there’s a huge market downturn, people aren’t going to rely on the trust of an app when it’s not, in all cases, backed by the FDIC. Customers still want trust and security when it comes to their money. This is why you’re not seeing the dollars move into all of these types of business models. People want to understand the value before they move over something as important as their day-to-day transactions, their payments, their life savings.
And so I think that traditional VCs are very, very different from corporate VCs from banks, because the latter knows that the metrics driving financial services are quite different than those that are driving social media companies or traditional technology companies.
Unifimoney: If you were to forecast out five years, what do you think will be most different about the way the average person banks?
Leimer: Well, we know trends about physical versus digital and those types of things are pretty obvious, right? I think the biggest thing is this idea of open data and open banking. The new norm will be these business models that are going to allow you to have a financial advisor or financial optimizer be part of your day-to-day activity.
I think the difference between where we are today in banking and FinTech and all of these applications is that it’s still too static. It may give you real-time updates but it doesn’t give you real-time actual movement of a decision that will optimize. It’s going to move from, ‘I’m going to have a couple relationships’ to ‘I’m going to enable data to flow into an engine that is going to optimize and have action in real time.’ It’s going to be more proactive than what we’ve seen.
Now, we’ve been predicting that for probably five to seven years, and I do think in the next five years that you’re going to see some very, very clever companies bundling together the ability to aggregate data from multiple sources and learn from what has happened, like the model at Alibaba. Because the value adds that are going to come across from that are going to truly make relationship banking come back, but in a digital form.
I don’t think that anybody has successfully done financial education to change behavior. I think it’ll be more so about the convenience in optimizing someone’s finances as part of their daily life. That’s what I think is so interesting in the traction with Asian models of combining commerce and banking and daily flow of activities and services. That, I think, is the long-term solution: to optimize someone’s daily life and finances just happen to be a part of it.