The most important narrative in the fintech ecosystem nowadays is arguably that of fintech-everywhere, more formally known as embedded finance.
The essence of the embedded finance concept is that, over the next few years, a significant part of the consumer financial services available today will not be distributed anymore by financial institutions; they will instead be natively embedded in other non-financial products and simply become an extra feature to the product. In other words, financial services will become features of other macro-products. To give an example, Uber may offer a checking account or a credit card to its drivers who, consequently, may not need a Barclays account anymore.
A lot has been written on the topic and you can find some useful links in the Resources at the end of the post. In this post, I want to reflect on where fintech consumer startups will sit in this new world, and what is a viable strategy for them when their products are being transformed in a feature.
The new unbundling: embedded finance
Gentlemen, there’s only two ways I know of to make money: bundling and unbundling.Jim Barksdale
The current fintech ecosystem was born in the last decade through the unbundling of the financial industry: every startup focused on one specific problem and solved it orders of magnitude better than existing institutions, mainly banks, would.
At the end of this first round, some clear winners emerged in each vertical: N26, Monzo, Revolut, Transferwise, Lending Club, Funding Circle, SoFi, Robinhood.
Over the last few years a different process, of rebundling, took place: many startups started to rebundle other financial products on top of the original core proposition, mainly attracted by easier upselling and revenues expansion. Neobanks like N26 or Monzo added lending products, a lender like SoFi added a savings account, Revolut expanded to trading, and so on.
The recent embedded finance trend looks to me like a new iteration of the eternal bundling and unbundling cycle. This time financial services are not unbundled by a new or younger financial institution, but rather decomposed into atomised features that are added to existing products by large consumer brands and technology giants.
How to survive when fintech is everywhere
Most of the fintech startups who succeeded so far did it essentially by using the same recipe: building a better and more modern user experience on a new distribution channel (smartphones) for an extremely focused product. This has been the real value brought by most fintech unicorns.
In a world of embedded finance, a better native mobile UX won’t be enough for them to survive, simply because that UX won’t be the best in class anymore.
In a world where Uber offers a bank account natively integrated in the app to its drivers, a shiny banking app with a fantastic user experience will inevitably be less competitive because it adds friction to the overall user journey.
First, the user will have to switch apps and remember how to navigate that app, with an obvious additional cognitive load. Second, and even more important, Uber will definitely have more margin to offer competitive pricing than any fintech startup, because the acquisition cost of that bank account will be much lower than that of a startup and also because the financial feature can be used as a loss/leader to subsidise the core product.
In this new world, I believe there are 2 possible moves for most of the existing fintech consumer companies:
- Move down the stack – become an infrastructure provider
- Move up the stack – become an aggregator
Move down the stack: Infrastructure provider
The financial infrastructure wave is exploding at the moment. “We are building a new piece of financial infrastructure” or “We are the Stripe of X” is the new “We are the Uber of Y”, and definitely one of the most powerful pitches to raise funds today.
In this scenario, startups will have to move down the stack, building a B2B product that will allow consumer facing brands to offer financial products with a trivial integration and with minimal resources. They would essentially expand the Stripe or Adyen model to other categories (more here on Adyen).
The assumption here is that essentially anybody who has a direct relation with the user will monetise also through a financial product, but won’t change its core business to refocus on finance. They will use a payment-as-a-service or banking-as-a-service provider to power these financial features (more here).
In this hypothesis, a plethora of B2B fintech companies will battle to enable the creation of financial services for more customer facing brands.
I believe this is the way forward for extremely specialised, mono-feature companies with low-frequency interactions product: firstly challenger lenders like Lending Club or Funding circle, or even an hyper focused product like Transferwise.
In low frequency interaction products, it will be very hard to compete with companies that interact with users on a daily basis, so they will probably have more chance of growth switching to become full stack service providers for more customer facing products.
They will have the experience in vertical (lending, cross-border money transfer, etc..), they are modern enough to be API first and they are young enough to adapt to mutated market conditions.
Move up the stack: Aggregator
For more customer-facing startups it will be extremely hard to battle only with the current approach, but I believe they can reposition themselves upper in the stack.
If people will directly take loans or create accounts through other large consumer products, then an emerging need will arise for the re-aggregation of these constellations of accounts and products under one single umbrella. Somebody will necessarily become the single financial touchpoint of the user: the aggregator of a fragmented experience.
To win this aggregator role, it would be essential to actually provide an extra value to the user, beyond the simple aggregation of multiple accounts: probably autonomous money and ecosystem creation will be crucial. A first flavour of this model is what Credit Karma started to build on Autonomous finance (more on CK vision on autonomous money here).
I imagine essentially all the neobanks will fall in these categories, as ultimately consumer businesses and for which a pivot to an infrastructure product would be technically, but even more, culturally, too complex.
The new shift in consumer behaviour is not very visible yet, but a number of new initiatives (Shopify ReUnite being only the most recent one) will only accelerate this trend. It is crucial for any company competing in the space to start moving down or up the stack now, as in a few years the first winners will start to emerge and it will probably be too late.
- HBR Bundling and Unbundling – LINK
- A16Z’s Chris Dixon on Bundling – LINK
- Mosaic Ventures – LINK
- CB Insight Banking Fintech Startup- LINK
- CBInsight European Banking and Fintech – LINK
Embedded finance/Fintech everywhere:
- A16Z Angela Strange – LINK
- Fintech fourth platform by Matthew Harris – PART 1 – PART 2
- Solaris bank on embedded finance – LINK
- Next Decade in Fintech on Techcrunch – LINK