Before smartphones, the corporeal world had a much more relevant role in building solutions to essentially any human problem. Physical constraints strongly influenced the ideation and implementation of these processes. This was obviously reflected also in the banking space.
Originally, the banking industry solved the problems of storing money, delivering payments and acquiring liquidity, in a fairly standardized way: it created facs-simile banks and credit unions in essentially every location (banche popolari, volksbanks, credit unions). These banks run a sustainable business for decades, to the point of becoming crucial institutions for their communities.
As time passed by and the industry evolved, banks started to consolidate and merge. The time of global universal banks came. A number of huge ‘too big too fail’ institutions became oligopolists market players in most Western countries.
These companies were essentially providing commoditized services to their customers, but on a global scale.
This new model totally lost the personal touch of the previous wave, and lost its grip on customers’ needs to the point that banks have largely become considered customer-unfriendly and greedy bankers have become one of the most common cliches in fiction (I even found a video game called Evil Bank Manager).
At the same time, a new tech paradigm evolved (via the Internet and smartphones) which completely relinquished information services (financial services included) from physical constraints.
These parallel dynamics (banks completely detached from their customer base plus digital technologies) unleashed a wave of innovation in the industry intercepted by fintech startups that started unbundling the business of traditional banks.
Fast forward to today, the trend of removing physical constraints is in motion, more than ever. We live in a world where physical barriers are falling down, as nation-states lose some of their grip over power and new state-less actors emerge.
The same trend is happening to banking: local generalist banks don’t really make sense anymore and the banking experience is getting restructured on new parameters, not only geographical, but more lifestyle-driven and socio-demographic ones. If 50 years ago you had the Berlin Sparkasse, Yorkshire Bank, etc… today you have the bank for teenagers, the bank for environmentally-concerned individuals, the bank for seniors, etc..
This phenomenon is what I defined the rise of lifestyle banking, and the goal of this post is to elaborate more on its dynamics.
A NEW PARADIGM OF BANKING
To me, the re-segmentation of retail banking, based principally on lifestyle and not anymore on geography, is a major explanation for the boom in VC fundings for neo-banks of any sort. The bet is that the vast majority of existing banks will be wiped out and the new wave of digital banks will take over, but segmented on social and demographic factors.
This trend is clearly in action: in 2019 there were 5,581 banks in the EU, 30% less than in 2008. In the US things are getting even worse for commercial banks with their number halved in the last 20 years.
On the neobanks side, VC-backed funding rounds directed to neobanks have passed $10B over the last 15 months.
As I’ve argued in “The Apple moment for finance” and “The Amazonization of retail payments”, I’m firmly convinced that consumer finance has stopped being a commoditized product and this is something that will inevitably apply also to retail banks.
BUILDING A LIFESTYLE PRODUCT
The common denominator to the successful lifestyle banks of the future is that they are not really banks, in the traditional sense. They don’t offer a group of undifferentiated financial products to their customers, or at least that’s not the way they market themselves.
These new banks are offering a super commoditized financial product (debit card + a saving deposit), but they are customizing it for a specific target audience: they speak the same language of their audience, they understand the specific life events of that audience and build dedicated products for those, using the right channels to distribute them.
Examples of this new lifestyle-first approach are emerging constantly: Tomorrow is a German-based bank targeted at environment supporters which built a flagship wooden card; Step is a bank for teenagers which onboarded TikTok super-star Charli D’Amelio among its investors, opening up a massive acquisition channel; Stir is a new bank purposely built for creators.
There are opportunities in the market for many other verticals and I’m convinced we will see further examples over the next months. But this is only the first step.
We live in the world of meme stocks, NFTs and DAOs. In this new world, communities and conversations are much more relevant than before. I believe that the successful players in retail banking over the long run will be the ones that push their lifestyle vocation to the extreme, to the point of completely rethinking their product to take advantage of network effects, something that nobody really did so far in fintech.
My expectation is that they will ultimately build their competitive advantage around the community that they will grow on their products – not very differently from what is going on with crypto protocols or meme stocks.
How this is gonna happen is not a trivial question, but from my perspective there are a few key trends that these new banking players will have to intercept.
The first one is aligning incentives between the users and the organization. DeFi protocols have demonstrated that we live in a world where the alignment of the incentive mechanisms can create enormous value. I believe this trend will stay and expand to multiple domains.
The second one, not less important, is to understand the new social coordination that is emerging in the community around money. Traditional retail banking was usually developed around individuals or families and that is still the target customer for most of the products built today. This binary view of the world doesn’t exist anymore: banking products will have to evolve to serve different human organizations: wealth squads and DAOs.
CONCLUSIONS
Banks are a temporary solution to universal problems. The removal of physical constraints has opened up a re-aggregation of the customer base around new variables: not geographical but socio-economic.
I believe that these new banks will wipe out many of the traditional banks and that a plethora of financial services, built around specific communities and identities will emerge.
In the “Century of the self”, giving customized and personalised financial experiences to each community will be the key of the new banking paradigm.
