1. Fintechs – still interesting?
Fintechs have been around for more than a decade and many bank executives are tired in discussing them. So was I!
Digging deeper into it over the last couple of months, I have found a number of startling facts, that – in the end – convinced me, that Fintechs are and will remain an integral part in restructuring the banking industry.
Even more interesting is the question, how large universal banks try to reinvent themselves, which innovation strategies they follow and finally what is ahead of us in terms of big techs entering the banking market or China taking it strategical from a state perspective.
So enjoy a well orchestrated mixture of recent learnings from the US, indepth analytics as well as inspiring input for your path of innovation and restructuring.
2. Current incumbent trends
Less Fintech investments
Since early 2017 the following three trends could be considered with major US banks.
First there was a (slightly) reduced level of investments in Fintechs with Goldman Sachs, Citigroup and JP Morgan being the most active (see Figure 1). A similar trend could be seen with the major European banks with Santander, Credit Suisse and UBS leading the market.
In both continents, there was a clear priority on infrastructure investments such as Plaid, Openfin or Symphony rather than pure technology plays particularly with respect to blockchain such as ripple, Chain or Circle.
Little purchase of Fintechs
During the period from 2013-2018 only 10 out of the top 50 US banks have acquired Fintechs completely. It totaled to 18 transactions, out of which 30% have been done within the last seven months. Among the biggest is JP Morgans purchase of WePay for US$ 400 m. Why is that so little? First of all Fintechs are expensive and the return on investment is difficult to calculate in the first instance. Secondly, only if the bank has a clear strategic vision and if the Fintech fits into the overall strategy, it makes economically sense. Two acquisitions where predominantly driven by the good team, banks can hire.
Banks like to build
Incumbent banks still like to build models. The majority of banks likes to build new solutions, but is still horribly slow at it. Often build strategies are still very much driven by regulatory topics. After Mifid and GDPR, PSD2 and Open banking will become the next two major trends.
Thriving and successful Fintech models
At the same time, dedicated Fintech models remain successful. Looking at the 2018 VC-funding rounds, a few core highlights might offer ideas about the path of the future
- Affirm (n.a.) – Max Levchin has created a transparent credit product for customers to overcome humblesome credit card processes. It is easy to understand and fairly priced excludy hidden fees. Based on a cooperation with more than 1500 dealers, they have created significant growth over the course of the last year. Client satisfaction is measured via the net promoter score, which is 83 and therefore the highest among US banks. They have just finished their series E financing round.
- Credit Karma (US$ 500 m): Kenneth Lin started with credit scores in 2008. Since then he has extended the offering towards a scoring model based upon 2000 variables from internet usage, LinkedIn as well as tax accounts. It is an automated system, that focuses on the private consumer only. Their major purpose is, to establish themselves as trusted independent advisor. With US$ 500 m they recvieved the biggest VC financing in 2018 so far. From a German perspective, this is a threat for quasi monopolies such as Schufa for private as well as Creditreform for corporate customers in the SME segment.
- Robinhood (US$ 363 m): Vlad Tenev has acquired more than four million customers over the last four years for its digital wealth management solution. Again the business model is transparent with a flat monthly fee and no additional transaction costs. Major drivers were the introduction of option trading as well as a crypto trading facility in early 2018. Each product solution is tested on small scale first and then introduced on a broader scale. Again, success is driven by a better customer experience as well as transparent and lower pricing. At an annual turnover of about one hundred million US$ they closed their series D financing by raising US$ 363 m based upon a multi billion evaluation.
- Revolut (US$ 250 m): The UK based start-up has added more than 2 million customers to their mobile banking app and has therefore outperformed its peers N26 (1 million customers) and monzo (500 tsd. Customers) by far. Revolut offers free international money transfers, fee-free global spending and the ability to exchange currencies in more than 90 currencies at the interbank exchange rate. The have also added crypto to the platform and plan to provide commission free stock trading. Again an easy and transparent, clearly lower priced product with superior customer experience.
Which learnings can be taken from the above mentioned models and their approaches:
- Inprove a clear customer need in a large and high margin market
- Most of the products are transparent and charge no fees and therefore income has to come from additional sources (interest, data usage, etc.)
- Focus on a narrow, clearly defined value proposition
- Crypto usually functions as a boost in the number of customers.
If one compares these success stories, it becomes clear that new attackers start with a superior customer experience, much lower costs, increased transparency and high degree of agility to add new products to their platform. In addition, they are willing to tackle regulatory undefined territories such as crypto.
3. Two successful incumbent approaches of the recent past
3.1 JP Morgan Chase
Within the consumer business, JP Morgan Chase has created a new offering called Chase Pay. It is a digital only solution that follows a three steps customer onboarding journey
- Digitally create an account with the bank
- Gain access to their payment network
- Bundle digital financial services.
The key trigger has been the access to their payment network which includes POS offline, POS online as well as P2P.
- POS offline: Combined with loyality programs Best Buy stores offer 10% cash back and Shell repays 35cent per gallon if paying with Chase Pay.
- POS online: Chase Pay offers an online functionality similar to Paypal in an increasing number of internet stores.
P2P: They offer services via Zelle and Chase Quick Pay. With a total transaction volume of US$ 75 billion in 2017 they are more than double the size of the perceived innovation leader venom.
Coming back to our initial discussion on Fintech participation, the acquisition of innovative companies as well as building our own functionality, JP Morgan Chase walks along all these lines (see Figure 4). Based upon a clear strategy and closely linked with customer needs, they use their financial resources to be fast along all lines. In addition the leverage partnerships with established retailers – online as well as offline.
3.2. Goldman Sachs
Goldman Sachs has pursued a three pillars strategy based upon investing, buying and building (see Figure 5). While the focus of investing has been in the credit arena – namely for mortgages as well as SME credit, 50% of their acquisitions was driven by their objective to get access to exceptional talent in the Fintech arena.
The most remarkable story is about Marcus – a purely digital bank, which they have started to build from scratch within the last few years. Three parameters where set from the very beginning: Focus on customer needs, digital only solutions and fast growth. To achieve this, they developed the following, very focused product strategy for consumers:
- Loan product (attack inefficient credit card side and loan bureau judgements)
- Deposit platform
- Personal financial management app.
In terms of pricing, Marcus takes the transparent, no additional fee approach. With no origination fee as well as no fee for late repayments, modest interest rates at the lower end of the rating scale as well as longer maturities, they address customer needs.
Harit Talwar describes acquisitions, investing as well as partnering as key levers to keep the high growth rates:
- Acquisition of clarity money allows to build upon existing functionality. Valuation of US$ 100 per existing user is second highest after mint (US$ 113) but before HelloWallet (US$ 53), Check (US$ 36) and BillGuard (US$ 23).
- Partnering with Apple to provide Apple-branded Goldman credit card. Two further extensions are discussed: (1) Offer in-store Marcus loans to Apple customers and (2) integrate Apple Pay and Clarity Money
- Investment into payment card Marqeta to foster POS lending. This would be a direct attack on Affirms offering as described above
- On the mortgage side, Goldman has invested in concrete businesses as well as multipliers to access the market. Among them are (1) “better mortgage”, a direct mortgage lender in the US, (2) MFS, a mortgage matching consultancy service in the US as well as (3) Trussle, a free online mortgage broker.
- On small business, Goldman has invested in “nav”, the Credit Karma for business.
- The acquisition of Ayco builds websides for company employees to better understand and manage their finance. It is considered a lever to enter into wealth management.
The result after slightly more than three years is remarkable:
- Marcus needed only eight month to acquire the first billion in loans – faster than any other platform (e.g. it took Lending Club 65 months to achieve this)
- The loan volume as of Dec 17 has mounted to US$ 2,3 billion, while deposits are up to US$ 17 billion.
The above list shows, that based upon a clear strategy, no legacy structures in place and deep financial resources, Marcus is able to build an integrated, international Consumer and SME bank that replicates the best from the Fintech market and adds existing business, that Goldman Sachs acquires, to it. As a consequence, technical talent has become the scarce resource for Goldman Sachs.
3.3 Resulting learnings for European & German Banks
Overall the following findings can be drawn:
- Fintechs remain catalysts in driving customer centricity, efficient processes as well as transparent and clearly lower pricing with fees evaporating
- Established institutions need a clear strategy on their customer offering and have to overcome the limitating effects from their legacy system. The partnering with Fintechs and underpinning investments as well as the purchase of selective Start-ups can effectively add to the overall solution.
Nevertheless the ability to integrate the solutions towards a digital only platform is a key capability, each incumbent has to develop for himself.
4. Looking ahead
There are two strong indications of what will drive the market next (see Figure 6).
Amazon: Big techs are increasingly mentioned in the quarterly earnings calls of stock listed US blue ships. While Apple, Google, Microsoft, Facebook and Amazon have been on even line for the last eight years since 2008, 2017 has shown a steep increase for Amazon. They are considered the strongest platform to change market mechanisms. Their entraine of financial services as well as healthcare are two of the major threats.
China & Alibaba: Alipay has grown much faster than Skype, Twitter or Facebook over its first four years with now 250 m customers in place. Ant financial is the most valuable Fintech company valued at almost US$ 150 bn in 2017. Ablibaba offers the whole suite of banking products via one App. 300 m middle class Chinese people enter the internet market. Taking these aspects together clearly makes China and thereby Alibaba a threat even for the large US tech companies.
We will hear more about this in our next newsletters.
For the presentation of the detailed report, contact Dr. Udo Bröskamp.