Robinhood, Ally, Wealthfront, Transferwise, Venmo… I use a lot of financial apps.
It’s not that I want to.
I’d rather bank, transfer money abroad, and pay my tab from one place.
My ‘old’ bank, however, was bad at all of these things. So, like a lot of consumers I closed my account and went elsewhere.
It turns out I'm not alone.
According to a 2018 Bankrate survey, 40 percent of U.S. consumers have at least one peer-2-peer payment app on their phone, while 17 percent have separate budgeting or investing apps installed.
And like all things digital, the trend towards fractured financial lives isn’t confined to the U.S. When EY surveyed 20 global markets, they found that 33 percent of consumers are using two or more fintech apps. A further 13 percent, the research showed, are considered ‘super-users’ with five or more financial tools installed on their devices.
So, what’s a traditional bank to do? Assemble a team of engineers to build unicorn-killing alternatives? Focus on making their ‘core’ consumer and B2B banking services better? Double down on the free pens and breath mints (I’m looking at you, TD)?
If You Can’t Beat Them...
Instead, how about a little integration?
Imagine a scenario where my ‘ABC Regional Bank’ app lets me check my balance while also providing me with instant, frictionless access to an investing portal powered by Robinhood? Even better, how about if it had Venmo (or several other P2P payment services) built in? When I go to transfer money abroad, instead of being kicked over to ABC’s antiquated, slow, and expensive wire service (or worse having to stand in-line at a branch!), I’m seamlessly passed over to a white-label or co-branded Transferwise UI instead.
I get a better experience as a customer. The bank gets a cut of the transaction. Everyone’s happy.
Sound far fetched? It’s already happening.
The Future is Here… and it’s European!
Since 2015, banks in Europe have been preparing to open up their systems and customer data to third party products.
The reason behind this change is an under-the-radar (unless you’re in banking!) directive called PSD2 (or the Revised Payment Service Directive).
By September 2019, all European banks had to allow third-party services access to customer accounts through APIs, sandbox testing environments, and strong customer ID systems.
Banks no longer have a monopoly on customer data under PSD2. Instead, the idea is to create a free-flowing and open market where third parties will be able to create rival products that, with individual customer consent, can access accounts and carry out payment services hitherto reserved only for the bank itself.
Some banks have gotten in on the action early. NatWest, a large UK-based bank, has given its customers the ability to see account details from other institutions they bank with from their own NatWest app.
According to NatWest, this initial step is just the start: “This is an important step in our mission to transform our digital services, focusing on digital innovation and using the latest Open Banking technology,” said Frans Woelders, NatWest’s Chief Digital Officer for Personal Banking.
“This feature is the first in a number of innovations we are working on to help customers manage their money more effectively and improve their financial wellbeing.”
Banking in The USA
It’s happening in the U.S. too.
Alabama headquartered BBVA U.S. launched its very own Banking as a Service (BaaS) platform last year, called Open Platform Initiative (OPI).
In their own words, the OPI: “ ...enables third parties to easily integrate payments and complementary banking services into their own business models to create seamless user experiences….It is hoped that in the future this kind of initiative will enable companies to bring great financial technology ideas to life for both retail and enterprise clients across industry verticals.”
The ‘Other’ Scary Scenario
Take a look at the image below.
The image above is taken from a CBInsights Fintech presentation.
It shows a typical pay stub surrounded by Fintech startup logos. Each of the startups shown is vying to 'own' different parts of your salary, such as benefits, savings, debt financing etc.
However, while each of these companies may offer a vastly improved experience over a traditional player in the space, do I really want to login to five different apps/portals to manage my money?
Viewed another way what if, instead of showing the startups that are competing separately for parts of your paycheck, all of these startups were accessible from one place, say, within the portal of a non-traditional bank, such as ADP.
In this scenario, instead of being content to simply ‘pay’ 1 in 6 Americans, ADP decides they wanted to get into the banking business, applies for an (admittedly hard to get) banking license, sets up checking accounts, and offers startups a shot at accessing and managing customers’ cash from a centralized portal?
ADP - or any other player with a large customer base and existing financial infrastructure (*cough* Starbucks ) - could create their own marketplace to house third-party financial apps, just like with my smartphone.
I could deposit my salary into my new StarBuck$$ or ADP checking account and then control my entire financial life by adding on services (via an app download) from their ecosystem of startup providers, without ever having to use a traditional bank again.
ADP already has a marketplace where B2B customers can download third-party additions to their HR-focused software, so why not a B2C version too?
[UPDATE: Google announced on November 13th that they're setting up their own 'smart checking' account in 2020]
The Unbundling is Coming!
To fight off the challenge from newcomers and, potentially, incumbents, regional banks need to start opening their systems and integrating with third-parties.
In Europe, and around the world, traditional banks realize they have to give up some control to remain relevant in their customers' lives.
The message is clear, build a financial hub now, or suffer a slow but inevitable exodus of clients to rivals that do.