I, Aki Ranin, have been in Fintech now for around 5 years, based out of Singapore, but travelling across the globe. I’m the co-founder of Bambu, a B2B startup that serves the Wealth Management industry. Over the past few years, I have met 500+ clients and 200+ investors. Completed 5 accelerators in Hong Kong, Geneva, Bangkok, and Singapore. I’ve pitched hundreds of times and heard other startups pitch even more. Spoken at dozens of events and panels. So basically, I’ve seen some stuff when it comes to Fintech.
This exposure has almost oversaturated my senses, whereby it becomes hard to see any big picture. Everything becomes so nuanced at this level of detail. It’s hard to regain the fresh perspective of a newcomer. A few weeks ago, I had such a moment. Suddenly, I could see the pieces fitting together as if it was planned all along. Mushrooms, magical or not, were not involved in any capacity.
Now, I may be wrong about all of this, so I welcome commentary and criticism. I had originally planned to keep this pitch under wraps, only doing closed-room presentations to potential clients. How lame. But, then I thought to myself that the likelihood I’ll personally get to implement all of this through our clients is pretty slim. It will irk me if competitors use some of my own thinking against me, but more than that, I can’t shake the disappointments of what Fintech has and hasn’t achieved. Plus, I can just send people the link. Open-source thinking, then.
So, for what it’s worth, if anything at all, here is what I think is happening in Fintech beyond 2019. Let’s start from the state-of-play and work our way up to the Fintech End Game.
The Digital Banking Gold Rush
Most startups shouldn’t waste time on writing research reports, and neither do I. So why do it this time? Well, the Digital Banking Gold Rush has put everyone in Fintech on notice. These platforms are becoming the core of Fintech in a way, or at least they have the potential to become the orchestrators of all Financial Services. The Fintech Mega Apps, if you will.
Right now in Hong Kong, Singapore, and Abu Dhabi, there are Virtual Banking licenses up for grabs. In many jurisdictions, these are the first new banking licenses given out in decades, so it’s a big thing. More interesting than that, many of the hopeful applicants have nothing to do with Financial Services, at least until now. Ridesharing apps, eCommerce platforms, even gaming companies are getting in on the action, just to milk the fat Fintech cow. As of 2019, Fintech is the ultimate tech battleground.
Initially, given my focus on Wealth Management, there hasn’t been much overlap or interest in this specific segment of banking. But when one of our existing banking clients was awarded such a license, we were basically invited to pitch them. So, we needed to do a bit of research, and here we are. Ta-da.
The Great Convergence
Now, I know the Wealth Management space pretty well. Or to be more precise, I know the Robo-advisory (“Robo”) space inside-out. Some of the early platforms have been in the market for a decade, so this isn’t emerging tech. It’s on pretty solid footing at this point. Many Robo platforms have evolved to broaden their scope in the past few years, however. Mostly to keep investors engaged in the growth narrative by expanding use-cases to attract a broader audience.
So… when doing my little report, I picked up on the fact that there was a common element in the product expansion strategies of both Robos and Digital Banks. Hmm…
NOTE: There might be a worthwhile distinction between Challenger Banks, Neobanks, and the new Virtual or Digital Banks, but for the sake of simplicity I’m going to just stick with “Digital Banks” here to describe them all.
Robos are moving into savings.
The two original Robos that have really separated themselves from the flock are Betterment and Wealthfront. Started around the same time roughly a decade ago, there’s really not that much that separates the two, if we’re honest. They’ve sort of defined what a Robo is, and stuck to it, largely. Wealthfront is in Silicon Valley, Betterment is in New York. Different flavors of ice cream, but still ice cream.
SIDEBAR: A LOT of people misunderstand the value proposition of these services, even after a decade of non-stop growth. Even people within the industry. Even leaders of other Robos. It boils down to two things, neither of which is price or investment returns. First and foremost, it’s about UX, or rather the convenience it affords the user. They were the first to introduce digital onboarding, when any bank would have you pop into the nearest branch to scan and/or fax your passport and physically sign about 50 documents. Bring extra quill ink. When it comes to customer acquisition, UX is king. The incumbents continue to not get it, and the startups continue to bank on this asymmetric UX arbitrage. The second part of the value proposition is brand. Not being a bank. People in the industry are so convinced that finance is about trust, transparency, and relationships. It’s just not. Cool matters as much in Finance, as it does in cars and retail. In fact, Apple is banking on UX and Brand with their entrance into Finance with their credit card and Wallet app. I’ll take any Apple product over anything that’s ever come out of a bank, and so will the masses. You can take that to the bank!
The Robos are still playing the classic Venture Capital game of LTV / CAC, and depending on who you ask, either totally smashed it or totally burned hundreds of millions in desperation to get to the elusive holy grail of scale. I lean towards the former, as they certainly have reached a scale where the big old boys have taken notice. They’re like the Tesla of Wealth Management, half are calling them visionary, the other half delusional and betting on imminent self-implosion.
Yet, after a decade in business, they must be pretty exhausted from fighting for the same Google keywords, and as the big boys also now have digital toys, the cost of acquisition surely isn’t trending down. So you have to fight on new turf, to avoid an all-out war of CAC attrition. So what is that greener pasture that they seek?
There are a few new types of new products as we see, including credit (ugh!), but the main theme is savings. There are two main drivers for this, I believe. First is the economy: long-term low interest-rates combined with the end of the linear bull market. Pretty much nobody in the Western world is getting much above 0% on deposits, while many emerging markets still offer deposit rates above 5%. The old adage of 10% annual returns on equities has gradually eroded closer to 5% if you’re lucky. The risk-to-reward ratios aren’t a no-brainer like they were for almost a decade since the housing crisis. That’s left a gap in the market for some creativity, which is now being solved by high-yield interest accounts and money market funds. While 2–3% isn’t rocking anyone’s world, it’s pretty significant considering the low risk and protection compared to even fixed-income products.
The second reason we’re seeing Robos move into savings is that it lowers the acquisition threshold. Even if nowadays you can technically open a Robo account with a dollar, that’s not gonna get you very far. The same goes for really anything short of $10,000. Your returns look more like a rounding error than the 8th wonder of the world. So how do you attract those smaller, less committed users? Savings, of course. The benefit is that you can put in money and take it out whenever you want. As long as it sits in the Robo account, at least you get 2%. Better than nothing at the bank, and less commitment than investing. Win-win for all.
As we’ll see later, this has fueled massive growth in the past 18 months.
Digital Banks are moving into savings.
The Digital Banking movement really started in the UK, due to new legislation allowing purely “virtual” banks to be licensed. Many startups backed by venture capital war chests took up the offer. Some like Monzo and Starling started out purely as banks, or rather mobile wallet apps with a physical debit card. That became the template. Some like Revolut have evolved into that space starting from remittance or other payments related use-cases. One of the cool features that has attracted early adopters, besides the convenience of UX, is the analytics around your spending, or Personal Finance Management (“PFM”).
These platforms, having been in the market for a number of years now, would have all picked up on the same opportunity created by low interest rates and choppy stock markets. People wanted to park their spare cash somewhere, rather than just spend it immediately. So now the Digital Banks are also jumping in on the high-yield savings train. It’s worth noting that some of them just settle for parking cash, paying no meaningful yield as of yet.
For what it’s worth, it isn’t just Robos and Digital Banks getting into savings. Credit Karma, Robinhood, and Coinbase just announced their own high-yield accounts in October. So did one of the major U.S. telcos in T-Mobile. Savings is sexy in 2019. Said no-one ever before or after.
The interesting thing here is that the Digital Banks started from day-to-day payments and budgeting, and the Robos started from long-term investing. They are miles away in more sense than one. In fact, they’re on opposite ends of the timescale. One is about what to buy today, the other about covering living costs in decades from today. So what does it mean that we’re seeing convergence towards savings? Does it mean anything at all? We’ll get to it in The End Game below.
Product expansion is driving growth.
So, how’s this all working out? Well, it’s been an absolute monster year for a lot of the leading platforms. Now, it’s not all 100% due to savings, but as a common theme, it’s making waves. You see it on both sides of the Fintech Timescale.
Wealthfront has doubled its AUM in 2019 to $20B. Revolut has doubled its customer base in 2019. These are gigantic numbers. The European Digital Banks are now also expanding to Asia and the US with N26 and Revolut leading the charge, hungry to capture global market share as the incumbents are sleeping on the rapid transformation of their industry.
From transaction to subscription pricing.
Okay, so there are some common features on various Fintech platforms. Whoopee-Do. Well, it doesn’t stop there. Pricing models are converging, too. Traditionally, all branches of Financial Services have charged on transactions. Either directly or through volume. It’s relatively transparent, so the regulators like it. Other than that, there’s no real justification for charging $20 for a stock trade. It’s entirely fictitious. For the customer, it’s not always that easy to translate transaction fees into perceived value from the service. To say the least.
Think about it. If you’re a Wealth Management client with a $10,000 account or a $100,000 account, you’re still getting the same exact service but one is paying 10x more for it. In today’s digital world of apps and subscription tiers, that just doesn’t compute.
So the first thing we’ve seen is the emergence of tiered pricing, a hallmark of more mature online business models. Think Slack or Amazon Web Services. You pay as you go, and the more you pay, the higher the quality of service you receive. Hard to fault that in terms of fairness!
Now, perhaps the bigger leap here is actually to do away with transactions and volumes altogether as the basis of fees. One driver for this is simply that it’s possible. The real cost of transactions has become negligible due to the digitization of the underlying digital infrastructure.
That has led many of the Digital Banks to opt for an all-inclusive subscription fee instead. Think Netflix or Spotify. Providers like N26 and Revolut have used this as an additional branding opportunity, with the introduction of the metal card. Personally, it makes zero sense to me, but I get it. The FOMO is real. Metal cards and Yeezys go together like two peas in a pod! It’s very inclusive in a way. You don’t need to be rich to qualify for the best service, just make a lifestyle choice and fork up the $19.90 each month. Unlike flying on business class, this is a premium experience within the reach of most consumers.
This subscription pricing trend has also now started to trickle into Robos, starting with one of the original industry price-slashers in Charles Schwab. Many are following suit, especially as the product offerings evolve beyond investments into savings it becomes confusing to apply AUM fees across different account types.
The Fintech End Game
Now, this is all very good, but that’s just stating facts so far. What’s the big story here? Where are we going with this narrative?
Saving is the glue between tomorrow and the future.
Perhaps with this long-winding intro, it’s to be expected, that the convergence will continue even deeper. A useful framework to examine this convergence is a timescale of the user’s life, from what I need to do today to the some-day category most never worry about decades into the future. Let’s call it the Fintech Timescale. Sounds epic.
So what we start to see here is that the two major camps of disruptors have started on either end. Digital Banks started with spending today, Robos with investing for retirement. Now both approach the middle, which is of course savings territory.
Digital banks haven’t connected the dots, yet.
One of the triggers of this thinking was a great report by 11FS on the customer journey of the Digital Bank users, and how that was evolving. It’s not too long and worth a read on its own.
One clear takeaway was that despite some rudimentary savings-pot kind of thinking, few if any had shown real effort and commitment in stretching out the timescale from near-term needs to any kind of planning. Not at least at the systematic level of structure the Robos provide.
Goals are the lens of real-life into finance.
What also becomes apparent is that goals are a concept frequently applied by both Digital Banks and Robos to allow the user to segregate their real-life needs.
“Goals should be the UX of all finance .”— me just now
This to me, goals is a KEY concept that is greatly overlooked in finance across the board, despite some adoption on consumer platforms. Even with startups, there is an inherent assumption that people want and need financial products of various sizes and shapes. Not true, at all. Period. Financial products are simply tools to facilitate actions in real life. Yes, goals are also tools, but the difference is that goals allow you to interact with the user in a common language void of financial jargon that has meaning in their actual life. Goals should be the UX of all finance. You can quote that. Please do.
Further, the Robos that have also introduced savings accounts somehow have missed the timescale opportunity to extend their goal-based planning to short-term needs using goals. This may be a temporary issue stemming from the complexity of managing multiple goals and account types with the custodians. We’ll work it out soon.
Overall, we’re still scratching the surface on goals, and much opportunity exists in helping the user here. More on that later.
Real customer value requires advice.
If you can follow me here with goals, that still doesn’t really solve anything directly for the user. Goals are a great tool, but still just a tool. It doesn’t help if you don’t know how and when to use the tool. Enter advice.
One of the main reasons I’ve dropped “advice” from the common name Robo-advisor, is because they’re all heavy on Robo and light on advice. They haven’t earned the right to use “advice” yet, in my book.
What we really have today is mostly on the bottom layer, as in just automation of transactions so the user doesn’t need to learn and click around to get money to move in and out of financial products. This applies to Digital Banks as much as Robos. Swipe to fund. Swipe to spend. Swipe to invest.
Both have also added some swank pie charts and line graphs to tell you about compositions and trends in your transactions, whether about spending or investments. The human still needs to do the high-level thinking here. Analytics isn’t advice, either.
So what is real advice, then? Well, to me the keyword is judgment. If you allow the user to do whatever they want, that isn’t advice. When it comes to money, the more you understand about the user’s financial situation, and goals of course, the more judgmental you can be. Is your budget unrealistic? Is your savings plan falling short? Is your spending out of control? This is what your human advisor would tell you, so we need to digitize that to make it available to everyone independently of means. Ironically, the rich need that advice much less than the poor do. So let’s get it out there!
From passive to proactive advice.
You might argue that risk profiling is a type of advice because judgment is passed on how you answer some questions. The advice is the risk score. That’s passive advice in the sense that the user needed to take action to receive said advice, but also in that it is static. At most you might revisit that questionnaire annually.
Some Digital Banks have safe-to-save features, which steps in the right direction. Rather than wait for the user to take action, we should be running the numbers 24/7 like a personal CFO and notifying the user of their reckless behavior. Hopefully, those nudges eventually start to modify behaviors towards financial wellness.
The ideal type of advice should cover the entire spectrum of the timescale. In fact, that is where the value really kicks in, because we all need to make choices between short-term needs and long-term priorities. The sad truth is that most have no visibility on the long-term, so they’ll always choose today over tomorrow. Why worry about tomorrow if you’re screwed today?
This is why we don’t have more Warren Buffets. The time-value of money and compound interest doesn’t compute in our daily lives. A dollar today isn’t a dollar tomorrow. We need that personal CFO to do that job on our behalf and bring those tradeoffs we make from our subconscious to top of mind. At least you’re making those same bad decisions consciously. Guilt and remorse can be powerful tools, too.
One-click financial planning.
The downside of all this amazing value we’re adding is that we’re complicating something that is meant to be simple. Again, most industry players STILL don’t get UX. It’s not about the pretty pictures and sans-serif fonts. It’s about making something complicated simple, and as Steve Jobs would say, that’s the hardest thing to do. Apple’s whole brand is built on that premise.
So we don’t want to destroy the simplicity that has driven the whole digital transformation and disruption of Financial Services. Remember, as long as we’re doing good things for the customer, this is a worthy purpose. Yes, we can get rich along the way as we unlock tremendous value, but at the end of the day, it should be a result of solving hard problems for consumers.
Enter Machine Learning. What can ML do to simplify UX? Well, even a few years ago there was some media coverage of the potential entry of the tech giants into finance. One such article proposed that were Google to enter Wealth Management, they could do away entirely with the risk profile questionnaire. How? Well, because they already have a much more nuanced behavioral profile of you than any questionnaire could hope to accomplish. The same goes for Facebook, probably including Instagram. A little cool, but a lot scary though.
We should be able to take that concept much further and apply it in much smaller datasets. And be less creepy about it, generally. Rather than use that data to serve you ads, we can serve you value instead. It’s easier to see in the context of Digital Banking because they have more data on users thanks to that spending piechart. Now, I’m not just thinking of risk profiling. I’m thinking more about advice, and how we can extract information about your life circumstances, behaviors, and goals. Ultimately, to deliver you a one-click financial plan, all filled out neatly and ready for your approval. If I know your spending, I know your financial plan. It’s doable. It’ll happen, and go much beyond that, I foresee.
The Price War to end all Price Wars
If I’m right about the convergence, then we should start seeing some interesting crossover in M&A, too. Robos acquiring PFM platforms. Digital Banks snagging up struggling Robos. So in some sense, we’ll probably come up with some snazzy name for these Mega Fintechs. We already have Super Apps. I was never a fan of the Financial Marketplace concept because it implies we’re shopping for products like in a supermarket. Who needs a catalog of mutual funds in their life? Ugh. We have to stop thinking backwards from products and transactions, and start thinking up from the data and adding value through advice.
Meanwhile, prices have been continuously slashed in Financial Services pretty much since Financial Services was invented. Discount brokers. Online brokers. Free online brokers. Index funds. ETFs. Management fees. Fee-only advice. Free Robo-advice. Well, if we’re being perfectly honest there’s no free lunch here. Anyone labeling the “free” sticker is also adding some fine print somewhere. Free brokers sell flow, i.e. allow institutional players to front-run and make money off their retail sucker users. Kind of poops the party, but then again those sucker users don’t know what any of that means anyway. Free Robo-advice, namely by Schwab, is also not really free. They force you to keep a significant portion of your portfolio in cash, so they can sweep the interest. Not to you, to them. Again, the user is none the wiser. Free is more about creative license in marketing than anything else.
So how is this price war going to end? Can it end? Is it going to bounce at zero with opaque not-free models, then bounce back up to some more transparent low-cost model? I suspect the latter, with GDPR and other regulations aiming squarely at transparency and privacy. That issue isn’t going away anytime soon.
So how does anyone make any money? What is this, philanthropy? How do bankers buy yachts in the future? How do startup founders lease their Lambos? Surely, there must be a way. I have a few ideas, and the gist of it is that we make money, indirectly, when we provide extra value for the customer. Monetization of data, but not with that get-in-the-van kind of vibe.
That way, the service itself could be made free at least for the lowest tier. You can still charge premium subscriptions for premium service, but at least it will limit your losses on the acquisition. Again, you’re welcome to implement any and all of these for the good of your customers. Just toss me the keys to your Lambo when I’m in town, it’s the least you can do.
Monetize rewards and partnerships.
One of the greatly underutilized datasets of all in Finance is spending data. It really does tell the story of the user’s life. Not only do we see where the money is being spent, but we also see trends and statistics on changes in that spending. Even better, we can compare your spending data to a segment of similar households.
So we could monetize those categories, differences, and changes. If we know you shop at Tesco, then we could offer you their rewards card and even do the math on how much you’d save each month extra. We just take a small lead-gen fee from Tesco. Win-win. Maybe rather than just order Ubers every day, get one of their monthly passes. Win-win. Ka-ching. Maybe your utility bill is more than usual or more than similar households. Check for better plans or switch providers. Win-win.