Now That FinTech Has Unbundled Our Financial Lives, Can It Re-Bundle Them?
If you live in a highly-industrialized country, chances are that your bank is quite the financial supermarket. It holds your basic transaction account which typically comes with a debit card and a check book. It manages your longer-term deposits and savings accounts.
It offers you credit lines and loans, a Visa or MasterCard branded credit card, and a mortgage. It probably would love to manage your long-term investments in individual brokerage and retirement accounts. And it happily cross-sells insurance for home, car, or personal liability.
The right hand may not always know what the left hand is doing—and that can be explained by several factors, including regulatory and consumer protection, patchy legacy IT systems, and misalignment of incentives across silos. But you do get the full range of services under one roof.
In recent years, however, innovators have been building technology to target and disrupt the traditional financial services verticals one-by-one. As a result, consumers can now get a personal loan on a marketplace lending platform, build savings with the help of a behavioral insights-powered app, or invest their retirement nest egg with a new specialized robo-advisor.
In emerging markets, the starting point is different, but a similar dynamic is playing out. There, the traditional, broad-based, full service bank tends to focus on the urban, more affluent population segments. To reach more rural populations and move further down the income spectrum, technology-led innovation is required to lower costs so that they can meet the high-frequency, small-ticket transactions of lower income households often operating in the informal economy.
Mobile money as a standalone service is already doing this in sub-Saharan Africa, where there are 277 million registered mobile money accounts—more than the total number of bank accounts in the region. Globally, there are more than 270 mobile money deployments, now covering over two-thirds of low- and middle-income countries and boasting more than half a billion registered accounts.
In India, government and policymakers have taken the platform thinking to the next level, and invested in digital infrastructure consisting of biometric ID, electronic Know Your Customer and eSignature platforms, and an ultra-low cost retail payment system to bring down the costs for all financial service providers and lower the barriers for consumer-facing innovation—the so-called “India Stack.”
Although technology allows for new ways to conceive and deliver financial services, it doesn’t mean it’s automatically viable to do so. Standalone savings apps are a good example. A traditional bank can offer “free” deposit services and pay interest on top of deposited amounts because it redeploys that capital to fund its loan book and earns an interest margin on that lending. A standalone savings service can’t pay deposit interest; in fact, it will have to charge a service fee unless there are other sources of hidden income.
Technology can unbundle the wide array of services offered by the financial supermarket, but for these new solutions to be economically viable, something else has to happen to create both a truly superior consumer experience and a viable business model.
Incumbents Partnering with Technology Solutions
Across value chains, banks now have a choice of what to handle themselves and what to in-source from technology partners. For example, the Commercial Bank of Africa partnered with Safaricom to roll out M-Shwari, a mobile service that allows customers to borrow, save, and manage liquidity built on top of Kenya’s M-PESA. Since launching in 2012, M-Shwari has become the largest “bank” in Kenya measured by the number of loans. M-Shwari is an example of how companies are leveraging technology stacks—layers of open platforms that build upon each other, such as mobile infrastructure and digital payments—to compete on the application level.
Front-End Personalization and Service Integration
Another dimension of viable innovation is occurring at the customer interface. Take insurance, for example. Historically, your insurance premium was based on the actuarial tables calculated for your demographic group, not you as an individual. Now, the Internet of Things and machine learning are making it possible to design products that are highly personalized. Companies like Metromile and Insurethebox offer auto insurance prices based on your driving behavior, measured in real time by a wireless sensor in your car.
In emerging markets, a number of innovators are experimenting with similar to finance assets for customers and reach profitability, for example in residential solar energy. Globally, 1.3 billion people are off the electric grid and continue to use kerosene because the upfront cost of solar panels is prohibitive. Companies such as Off.Grid:Electric and M-Kopa are leveraging the mobile money infrastructure to provide pay-as-you-go services and help consumers acquire solar systems over time.
Bundled with credit underwriting for those without traditional credit histories, these are FinTech companies in disguise, built around a basic need. This model is also being replicated to finance water pumps on mobile money lending platforms for the world’s 663 million people without access to clean water.
Re-bundling Services that Improve People’s Financial Lives
Some FinTech visionaries are using these approaches to create entirely new customer-centric digital banks. Drawing on behavioral insights and mobile-first design principles, these “neo-banks” give consumers access to powerful financial management on their phones, or what we call a Pocket Einstein. They are also developing technological back-ends that allow them to plug into existing payment and banking systems as well as other FinTech solutions as needed.
The United Kingdom has already granted full bank licenses to some of these neo-banks and we’re seeing some early models being developed across the world.
As more solutions re-bundle our financial lives, the bank supermarket will transform into a highly-customized menu of options tailored to each of our specific needs and integrated seamlessly across multiple platforms—a win for consumers everywhere.