Bales of hay loaded on to a wagon on Wellshot Station, 1937 Haymaking at Wellshot Station, 1937. Source: Wikipedia Commons
There are only two ways to make money in software. Bundling and unbundling
Jim Barksdale
Web 2.0 has been marked by the rise of the consumer internet. With Metcalfe and Moore’s law driving the 4 horsemen of the internet apocalypse, we’ve seen innovation and disruption happen in most industries. FinTech is no different, although much slower in adoption and arch. Software has no doubt had a big impact in the industry, first seen by entrepreneurs attacking the bloated cost structures of traditional vertically integrated financial firms. Using technology, massive amounts of fixed and variable costs could be stripped out of existing business models. On top of that, the finance industry loves complexity (it usually allows for higher fees) and technology, and the rise of mobile provided the ability to offer seamless and engaging native experiences along with 24/7 access on our phones. Perfectly in line with Clay Christensen’s Modularity vs Interdependent Theory, this saw consumer FinTechs creating modular, specialist offerings to challenge and unbundle the incumbents. You might be a bulky Swiss army knife that does everything, but it’s hard to compete with a saw when the client wants to cut down a tree. As business strategy and technology aligned, software-defined businesses like WealthFront, Mint, Stripe and Transferwise were created.
In the United Kingdom, this unbundling phase has seen many innovative competitors enter the market. Regulators were also incredibly encouraging in fostering new digital offerings in order to increase financial access for consumers, increasing competition (both from startups and incumbents). With the latest push for Open Banking, we seem to be moving into the next phase within consumer FinTech: the great bundling. With APIs providing oil to the system, startups and incumbents are partnering in order to create mesh networks of personal finance offerings. Interestingly, we are not seeing the creation of new vertically integrated banks but new “ modular financial institutions”. Similar to software-as-a-service we are seeing personal finance-as-a service, providing access and services to individuals when they need it.
This is a wonderful development within the industry and allows for startups to reach scale and profitability while competing with the incumbents (who have the distribution and are fighting back fiercely with their own digital offerings and startup acquisitions). A race between modular integration reaching scale versus the incumbents become software-defined is taking place. This benefits the consumer with lower fees and better online experiences.
The bundling trend will no doubt continue with more and more partnerships happening in the industry. Downloading a simple budgeting or savings app, for example, could provide access to banking, insurance, wealth management and payment services at the click of a button. As many of the largest most successful FinTech startups have received strategic investment from traditional Finance firms, integrating into a bundle will continue to prove valuable for new players.
Choice and transparency are core pillars of democratising personal finance however and one has to wonder how modular integrated businesses, similar to the vertical behemoths that preceded them, will offer clients true free choice and transparency. For example, budgeting, banking and wealth management are natural allies, but independent financial advice or guidance followed by the freedom to choose seems to mostly be missing in these integrations. Similarly integrating restricted financial advice and investment management, leads to dramatically lowers fees but also reduces transparency and independence. We can access these services far quicker and easier than ever but are they right for us, how much should we allocate to them, which offering, when and why seem to be mostly unanswered questions.
With all this incredible progress there is also a small sense of irony. The great hope that consumer FinTech would completely “disrupt” the way we transact online have resulted in the almost similar large businesses offering almost similar services. We’ve almost come full circle. Yes, we use far better websites, apps and have incredible user experiences coupled with dramatically lower fees. However, we’ve not (yet) really solved the underlying problem of democratising personal finance, information and education to such an extent that we have fundamentally different consumer behaviour. Speak to the average person on the street and they still, mostly, have absolutely no idea of what to do with their money. Financial literacy in the UK is considered a crisis.
Peter Thiel’s venture capital firm’s slogan reads “we hoped for flying cars and instead we got 140 characters”. It’s a tongue in cheek commentary on the disappointment in sustaining innovation. One has to be excited and optimistic about the future of consumer Fintech. Just like Twitter’s 140 characters drove the Arab Spring, the initial modular phase followed by the current bundling (along with incumbents trying to become software-defined) is making personal finance seamless and accessible for thousands more. Yet, one can encouragingly argue that we’re still in 140 characters phase. Perhaps the next unbundling (driven by new business models, new technology and re-inventing parts of the system entirely) will be our flying cars moment.