After much anticipation, 2019 was the year “techfins” finally burst onto the scene. First, Facebook announced its Libra cryptocurrency. By the summer, Apple had launched the Apple Card with Goldman Sachs. Then Uber announced its forays into financial services. And Google said it was developing a checking account, called Cache, with Citigroup. The big U.S. tech platforms are making a renewed effort to own the retail front end of finance, something industry experts have expected. As Arun Krishnakumar notes in a 2019 Daily Fintech post, these tech giants, inspired by the success of the Chinese platforms, want to leverage their massive customer bases and their data and promise better services, lower costs and seamless transactions — the same value proposition that fintech startups have pioneered and proven.
The retail financial services front end is ripe for disruption with a lot of value at stake. The nexus between payments, consumption credit, goal savings and point-of-sale insurance is data rich, with plenty of opportunity to provide better, cheaper, more convenient services. Banks have traditionally owned this front end. As they gingerly partner with tech platforms, they worry about losing the customer relationship and becoming utilities or “dumb pipes.”
The “pipes” of finance are running through more and more digital services. We are entering a phase where finance is becoming more deeply embedded in our daily lives. Ride-hailing, mobile games, chats and shopping apps all now have embedded payments. Car-share and ride-hailing services include both embedded credit and insurance.
Matthew Harris, in a recent article, described the emergence of embedded fintech as the fourth platform in the technology stack. Looking back at the emergence of three earlier platforms (internet, cloud and mobile), he points out that it always takes a while for companies to build truly new products and services. Early TV put radio announcers in front of the camera. Early internet sites posted company brochures. It takes a while for entrepreneurial talent native to the new technology to realize and capture its power.
The Race To Own The Consumer Relationship
As tech platforms, incumbent banks, fintech challengers and other affinity players race to “own” the retail front end of digitally native services in the years to come, the innovation and renewed competition should lead to far better financial services at lower costs. Consumers should win.
In fact, who ends up owning the front end may be different across geographies. It will depend on culturally ingrained consumer preferences, incumbent industry structures, regulatory constraints and the quality of digital infrastructure:
• In the U.S. and Latin America, challenger banks are nearing a tipping point in market penetration, because interchange fees are high enough to essentially pay for the digital account.
• Already in Europe, you need credit to make the economics work.
• In China, the walled garden super-app WeChat captured the consumer class as it emerged. Right place, right time.
• It seems Indonesia is developing its own digital financial ecosystem that, unlike China, still needs cash-in/cash-out through agents and partners. That ecosystem could be dominated by the rapidly expanding logistics platforms Go-Jek and Grab.
• India has created a very different industry environment with its open-architecture, digital public infrastructure stack lowering barriers to entry for all players.
Consumers Should Win
As all these players rush to build new embedded fintech services, the creative destruction is renewing retail financial services. Reinvented for the fourth platform, financial service providers could return to doing what they are supposed to do: helping people improve their lives, better manage the inevitable ups and downs, and capture new opportunities.
But that is not guaranteed. Regardless of who owns the consumer relationship, all players should have an explicit view of what a better and fairer financial system would look like.
My firm believes financial services must have consumers’ well-being at heart. They should be user-friendly, transparent and easy to understand. New business models should align profits with improving consumers’ financial health. People should have control over how their data is collected and used.
To create lower-cost business models, companies will need an open infrastructure and shared standards — like India has built. And regulation should allow innovation to progress while protecting consumers. In this open-architecture environment, with many players across different industries competing to embed financial services, regulation should be based around the consumer, rather than the provider. That will require another paradigm shift.
