There was an interesting recurring topic at this year’s Lendit conference; the next phase of fintech start-ups will be the ‘re-bundling of financial services’, or, in layman terms, fintech companies will offer a multitude of financial products. This is interesting because if fintechs can meet all of the financial needs of consumers, we could witness the widespread disruption of traditional banks. Lendit is a flagship peer to peer lending (P2P) conference which initially focused on P2P and has since strayed into other forms of financial innovations such as robo-advice, digital banking and cryptocurrencies.
Prior to the rise of fintechs, consumers would typically rely on their bank to provide all financial services from mortgages to investment advice. However, fintech start-ups broke down bank services by offering customers very focused products that were built around their more specific needs. Examples of this include TransferWise, who focused on foreign exchange services, Zopa who focused on consumer lending and Nutmeg on wealth management. At this point, customers no longer relied on a single bank to provide all their financial needs. Instead they could hand-pick specialist services that provided a superior experience.
Renaud Laplanche, Co-founder of Lending Club, the largest US P2P platform, and current CEO of Upgrade, a new entrant to the US P2P market, discussed the un-bundling and re-bundling of banking in his Lendit keynote presentation.
Below he highlighted the key services a bank offers and gave examples of how fintech companies have disrupted each core function. Although these are largely American-based fintech companies, we have witnessed almost identical market developments in the UK.
Figure 1: Un-bundling of financial services
A consequence of this un-bundling has meant that the banking model has never been disrupted in its entirety by one large, full service fintech. With re-bundling this could change and it’s clear that the banks have taken notice. Goldman Sachs recently stated that they thought that the company’s fintech arm would be as profitable as trading in the coming years. Clearly the incumbents have started to fight back.
Figure 2: Great rebundling of financial services
Since 2015 Renaud discussed how fintech companies, who previously focused on specific services, have started venturing into new territory, serving their customers with further products. Similarly, in the UK, Zopa has applied for a banking licence giving the once focused P2P platform the ability to offer savings accounts and credit cards. Even with Orca, we are applying similar principals of bundling products. The P2P platforms are generally doing a good job of originating borrowers, performing credit checks and presenting these borrowers to lenders. However, building a diversified portfolio is time-consuming and requires expertise. We’re committed to solving this problem by presenting investors with a fully diversified P2P portfolio from the Orca platform. This will offer cross-platform, cross-borrower, cross-lending sub-sector diversification with just one click. A simple solution which delivers value to investors.
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If re-bundling reaches the point where one provider serves all the financial needs of the consumer, the question of who this provider will be is an interesting one. Perhaps this will be a forward-thinking incumbent bank or a relatively new market entrant. For most people the current account is the most common touch point for them and their finances. In this space, we have seen explosive growth from Revolut and Monzo, offering substitutes to the current accounts. Nikolay Storonsky, CEO of Revolut, announced during his Lendit talk that their prepaid banking app has now reached almost 1 million users in two years. Revolut’s strategy is to bundle innovate financial products into their banking app. This includes a partnership with the P2P Platform, Lending Works, to offer consumer credit and an integration with Trussle to offer mortgage advice. They are also offering phone insurance through the app and have plans to offer wealth management, cryptocurrency trading, savings accounts and travel insurance. The app is built with multi-currency functionality with associated foreign exchange fees drastically undercutting a typical bank. Similarly, Orca has heard the CEO of Monzo, Tom Bloomfield discuss ambitions to become the hub for all consumer’s financial needs.
The day of the banks is, however, far from over and to think they will be completely struck off is naïve. The reality is that behind each fintech there is a bank facilitating payments and holding funds. Although Revolut offers bank-like services, ultimately the funds are held within a Barclays account facilitated by the e-wallet provider, Modulr Finance. Through access to the Bank of England operated RTGS clearing system, the four major UK banks – RBS, Barclays, Lloyds and HSBC – control all real-time UK payments. Until access to the RTGS system is granted to more players (which has been announced by the Bank of England) all fintechs will have to rely on a bank to facilitate the functions of a current accounts.
The re-bundling of fintech services is a sign of the fintech landscape maturing. Until now, although elements of the incumbent banks have been disrupted, we have not seen one major fintech dominate the entire financial needs of consumers. By bundling fintech services into one common touch point, the current account, we may start to see wide spread disruption of banks, particularly once access to the RTGS clearing system is granted.