I recently read a couple of excellent blogs/papers on what how the banking industry might evolve. One of them, a blog on “Why Fintech Banks Will Rule The World” by Philippe Gelis, was written some time ago, in early 2015, whilst the other was a great thought piece on “Modular Financial Services” by Oliver Wyman from early this year. Each of these papers postulated a model of Banking that seems very compelling to me: a single Financial Market Place that unifies a broad range of “product” providers, by providing some critical functions that somehow unify the experience for the client. Oliver Wyman calls this model “Modular Supply” and if you are a Bank, this model is actually quite appealing, provided you can turn yourself into the financial market place and continue to maintain the client relationship. Its actually an extension of the strategy most banks currently pursue with the simple difference that the distribution Bank (Financial Market Place) would also sell competitor products. The key is what sort of unifying experience a central market place can create and what the “product providers” would be willing to give up in terms of relationship with the end-user in order to gain more distribution.
When Bankers like me imagine the financial market model, we usually think of a supermarket, like Tesco or Amazon with “shelves” full of different financial products. And in a sense, this model has existed in both a physical and an online world for quite some time: in both the US and UK (and probably elsewhere) there have been brokers and advisors in pre-internet world and comparison sites and online brokerages in the internet world. In this model, the broker, advisor or comparison website is basically a distribution network and lead generator. You, the customer, self-identify the need for a financial product, and then go the distribution point you most trust to obtain it. This works for both the distribution network and the product provider: the distribution network simply optimizes the marketing dollars and the product providers onboard the customer and maintain the tail client relationship for the specific product purchased. Put another way, the product provider maintains their relationship through the experience of the product during its lifecycle (loan servicing, credit card query, insurance payout) and the distribution has the initial contact and generates the lead. The business model also follows the logic of a distributed sales force. The distributer effectively receives marketing commissions from the eventual sale of these products, while the product providers generate fee (and other) revenues to pay for servicing etc. The advent of the internet simply allowed for the automation of some aspects of distribution and the possibility of additional revenue through advertising for the distributer, and the ability to streamline service interaction for the product provider. The advent of the mobile phone and the way it is being used brings the expectation of a different type of customer experience. The expectation is that the services that you need will be provided for you at the moment you need them, and that those services will be designed around making your hopes and dreams a reality. This is beyond a simple sales force. This is about developing a personal experience and it is not clear to me if the Tesco or Amazon analogy still works.
So what could be different about the service of a mobile/digital Financial Marketplace from what I described? One answer could be to change the nature of the ongoing relationship between the Financial Market Place and the customer. A new type of Financial Market place, that understood your overall (financial) context, could start recommending financial products to you at the appropriate time. It could be an “always on” financial advisor, that checked your situation or context and recommended the best solutions or services for you at the right moment. It could identify or predict problems so you could handle them before they became serious. It would be your interface into the underlying financial products. It sounds compelling, but there are at least three issues that would need to be thought about more deeply: first, how would the interaction between the Financial Market place and the Product Providers be impacted by this new model; second, could a single entity create the multiple deep experiences for the very diverse use cases for which different financial products are used; and, third, would the business model create the right incentives for the trust relationship between client and financial market or does a new business model need to be found? To start to answer the first question, we first need to be more careful about our definition of “product provider” and indeed, our definition of “product” As Philippe says in his blog, the Fintechs are “re-inventing the user experience, the user interface, or the business model but not the whole thing”. To me, this means that many Fintechs are essentially turning the client experience itself into their product. Oliver Wyman has a super cartoon at the start of their paper that illustrates this in the context of real estate: Essentially a lady walks into a real estate agency to buy some property and is able to choose the property, the funding methodology and make the payment at that moment using her wearables to establish identity and act as a kind of financial concierge. Of course this simplifies many things (like surveys, conveyancing, choosing the mortgage etc), but the concept is exactly right. In this scenario, the client obtains a financial product (Mortgage) using a service that is also effectively a product (think Siri or Cortana). Thus for me, there are two types of products from a customer perspective: Financial Products such as loans, mortgages, insurance, payments etc, and Services, like the concierge, where the product is actually the client experience. With Financial Products, and some of the innovations to produce financial products (such as peer to peer lending) there should be no issue around the initial sale of the product, but what about servicing the products? What happens if there is a problem with your loan after three years? Who will provide the help desk (real or virtual) and how will it be paid for if the answer is both marketplace and product provider? The question becomes even more difficult where the product is the user experience. How would the user experience between the financial market place and the product provider be integrated. A good way to understand the problem here is to think about payments. Payments as a financial product were commoditised a long time ago and the focus of payments from an end user perspective is almost entirely on the experience (if we exclude Bitcoin/Blockchain). So would the client want to use a service like Venmo on top of the financial marketplace? Would Venmo want the marketplace to somehow re-create the payment experience and only be used as a technology provider? This is where it starts to get complicated for me. Even for some of the financial products I mentioned before, new providers are not providing the ultimate financial product, they are “re-inventing the client experience”. So while they might be willing to have a distribution network beyond their own App or website, it seems unlikely that they or their clients would want to pass up on the experience they have developed.
The second question is whether a financial market place can actually create compelling experiences across a multitude of different financial product use cases. Part of the answer depends on how deep you expect the experience to go. If the answer is to go deep in every use case, this quickly becomes very complex. For example, imagine a pensions related app: the financial market place would provide access to all the myriad savings and investment vehicles and guide you through the changes you would need to make based on your goals, your life stage, your risk appetite, your tax situation, your market view, etc. Frankly just a single app to do all of that would be an enormous undertaking and would be vastly different from the app required for, say, car buying. So maybe the answer is something much lighter than that so that the deeper interactions take place in the apps of the product providers. The problem then becomes that a much lighter service would still have to somehow generate sufficiently high usage in order to obtain the data required to understand the context of the client and to make the appropriate recommendations. The third problem is related to the this usage problem. Existing Banking business models require transactions and deposits in order to generate revenues. The vast majority of people purchase financial products relatively infrequently (with the notable exception of payments). Would a financial market place, that depended on encouraging transactions in order to make money really be trusted by the users (and would the regulators ultimately have something to say about this)? In order to create an experience beyond brokerage, the Financial Market Place would have to find a business model that doesn’t create the incentive for it to churn its clients. One such model, would be to extend beyond Financial Services and provide a concierge for other types of service in addition. The business model for this could be more like the Google/Facebook model, based on advertising. It would also have the benefit of generating more usage and thus more data to improve the overall financial services. However, I’m not sure taking on Google and Facebook is a winning strategy for a bank — you would have to find some killer hook like free search!
I believe that even the most digitally inclined consumers want to acquire and manage all of their finances holistically at some level and would welcome some sort of centralising service that allows them to benefit from the holistic view and service at the appropriate moments. However, I also believe that customers will want great user experiences for specific use cases that focused companies can provide. I think that Fintechs would be happy for a centralising entity to take care of non-core activities, like KYC etc (and there are several companies already doing this), but would not be happy with that entity owning their client experience. Moreover, I think that it would be very difficult for a Financial Market Place to create fantastic client experiences across all the different use cases. Finally, I think that profiting from a business model that depends on transactions executed, will make it hard for trust to be established. All this leads me to the conclusion that Banks cannot own the client experience in its entirety and, if they wish to develop a financial market place, need to develop a business model that incentivizes behaviour aligned with their clients interests.