The unbundling of the bank has begun.
Just 10 years ago, the average consumer had very few financial relationships and interacted with just one or two institutions to fulfill all of their financial needs. But fintech companies are breaking up the old guard by focusing on specific things that banks have done and simply doing them better. As a result, the average consumer now has numerous financial relationships, each with a clear-cut purpose.
The fintech revolution started after the 2008 financial crisis, and was driven largely out of frustration with the existing establishment. Facing heavy scrutiny, banks pulled back dramatically on a lot of their activities to reduce risk, which left a significant gap in the marketplace. Fintech companies stepped in and brought new ideas to an industry that had seriously lacked innovation. But now that the economy has rebounded, banks are aggressively running straight into that gap to recapture what they lost.
The established banks are focused on copying the best of what fintech has to offer. They’re moving slowly and are a solid five years behind, but their goal is to provide a just-good-enough mobile experience to ensure their customers stay with them. Banks know they don’t need to be better than the fintech companies; their advantages of scale and distribution ensure they can maintain their substantial customer base with a sufficient product.
Those advantages prevent fintech companies from truly competing against banks. If a bank really wants to be in a certain business, it can dominate a fintech company every single day because it has lower cost of funds and can afford to pay more per customer. That makes me generally pessimistic about any fintech company whose only wedge is serving a market that banks don’t serve. Most of those companies will find themselves unable to grow beyond a certain level in the long-term because they will be copied by the establishment.
Thinking about how to stay relevant as a fintech company, the only defensible, long-term strategy is driven by automation.
Automation is the ultimate reduction in friction because it allows optimizations to happen perpetually.
The next 20 years are going to be defined by the way automation transforms the average person’s life. An intelligent service will make, and then execute, most of an individual’s financial decisions in the not-so-distant future. That service will collaborate with the person to understand their human objectives — when they want to retire or where they can afford to send their children to college — and use its super intelligence and its ability to execute things in microseconds over and over to put the entire financial system to work for the person. The individual may not understand how or why the intelligent service is doing all of these things, but he or she knows the actions are completely in the service of improving his or her life.
Imagine a scenario where a person ports their entire financial profile wherever they want it. With the push of a button, all of their accounts are transferred from one place to another, much like porting a phone number.
The cellphone industry, for example, fought very hard to prevent the porting of numbers because not allowing it created stickiness. That stickiness reduced people’s willingness to switch carriers, which allowed the carriers to charge higher prices. In 2003, when the government forced the industry to allow the porting of phone numbers, cellphone plan prices went down. Excess profits evaporated when this friction was eliminated.
Automation is the ultimate reduction in friction because it allows optimizations to happen perpetually. Automation allows optimizations to happen at zero marginal cost. Automation allows optimizations to happen without human involvement, and when you’re able to do that, the customer is always matched with the ideal financial situation.
This is a nightmare scenario for banks: Once automation reduces enough friction in the financial industry, banks lose their relationships with customers. They become a utility; a provider of pipes and wires that allow money to be stored and moved from place to place. Then, specialized fintech companies swoop in and use their data expertise to make decisions for people and execute on those decisions. The end result is an invisible, intelligent service that figures out everything for the customer and does it for them.
In this sense, the power of automation goes beyond an intelligent service’s ability to decide what’s best and take action on behalf of a customer. Automation’s ability to reduce friction allows for a more competitive market, and those actions can create additional wealth for the customer by matching them with the best available product in the marketplace.
Figuring out how to weave intelligent automation into a product experience, a manufacturing process or a product development process is crucial to growth and success for fintech companies. Those that fail to recognize the changing technological landscape run the risk of losing their market share and their position in the marketplace.