Banking “disruption,” or whatever – part 01

There’s near universal sentiment that traditional banks need to shift to improve and protect their businesses against financial startups, so called “FinTechs.” These startups create banks that are often 100% online, even purely as a mobile app. The release of Apple Pay highlights how these banks are different: they’re faster, more customer experience focused, and innovate new features. 

The core reason FinTechs can do all of this is because they’re good at creating well designed software that feels natural to people and allows these FinTechs to optimize the banking experience and even start innovating new features. People like banking with them!

These FinTechs are growing quickly, For example, N26 grew from 100,000 accounts in 2015 to 3.5m this year. Still, existing banks don’t seem to be feeling too much pain. In that same period, JPMC went from 39.2m digital accounts to 49m, adding 19.8m accounts. Even if it’s small or hard to chart, market share is being lost and existing banks are eager to respond. And, of course, the FinTechs are eager to take advantage of slower moving banks with the $128bn of VC funding that’s fueled FinTech growth.

I wanted to get a better handle on all this, so I’ve put together this “hot take” on digital banking, FinTech’s, whatever. My conclusion is that these new banks take advantage of having a clean-slate – a lack of legacy baggage in business models and technology stacks – to focus most of their attention on customer experience, doing software really well. This is at the heart of most “tech companies” operational differentiation, and it’s no different in banking. 

Large, existing banks may be “slow moving,” but they have deep competitive advantages if they can address the legacy of past success: those big, creaking backend systems and a culture of product development that, well, isn’t product development. Thankfully, there are several instances and case studies of banks keeping transforming how they do business.

That Apple Card sure looks cool

As with you, I’m sure, I’m curious about the excited around the Apple Card. It looks cool, with features like quick activation and tight (perhaps too tight!) integration with the iPhone. The card benefits aren’t too great compared to what’s widely available: the Apple Card gives you 1% to 3% cash back on purchases, with 3% only for Apple purchases.

Two other features got me thinking though.

The cash back amounts show up in your account by the end of the day. In contrast many credit cards offer cashback, it can take weeks or even months for that show up on your account – that cash back period, is perhaps not surprisingly hard to fine for cards. 

The Apple Card has a really quick activation process. Traditionally, getting your account setup, activating a card, can take days to weeks – usually, you need a card snail mailed to you. But once you setup your account, you can start using tap-to-pay with your phone. When I moved to Amsterdam, I setup an ABN AMRO account, and last week I setup an N26 account. In both instances, I had to wait several days to get a physical debit card. I could start transferring money instantly, however. 

There’s no guarantee that the Apple Card will be a competitive monster. Per usual, the huge customer base and trust Apple has boosts their chance. As Patrick McGee at The Financial Times notes: “JD Power survey published last week, before the card was even available, found that 52 per cent of those aged between 18 and 29 were aware of it; of those, more than half were likely to apply.” Apple usually has a great attach rate between the iPhone and new products. Signs point to the Apple Card working out well for Apple and their partners.

Shifting the market with innovation…right?

That snazzy UI and zippy features make me wonder, though, why is this new? Why aren’t these boring, commodified features in banking yet? Let’s broaden this question to banking in general, mostly retail or consumer banking for discussing here. 

Perhaps we have an innovation gap in banking, something that’s likely been ignored by existing banks for many years. These FinTechs, and other innovation-focused companies like Apple, have been using innovation as crowbars to take market share, coming up with better ways of servicing customers and new features.

Is that innovation getting FinTechs new business and sucking away customers from existing banks? To get a handle on that kind of market share shift I like to use a chart I call The Dediu Cliff to think about startups vs. incumbents. It’s a simple, quick way of showing how market share shifts between those two, how startups gain share and incumbents lose it. You chart out as many years as you can in a 100% area graph showing the shift in market share between the various players. Getting that data for banking has so far proved difficult, but let’s take a swag at it anyhow.

Whatever the business models, financial services executives seem to think so as one PWC survey found: 73% of those executives “perceive consumer banking as the one most [banking products] likely to be disrupted by FinTech.” Being lazy, I found a pre-made data set to show this, in Sweden thanks to McKinsey:

Sweden - Screen Shot 2019-08-14 at 4.55.06 PM.png
Sources: “Disruption in European consumer finance: Lessons from Sweden,” Albion Murati, Oskar Skau, and Zubin Taraporevala, McKinsey, April 2018; “New rules for an old game: Banks in the changing world of financial intermediation,” Miklos Dietz, Paul Jenkins, Rushabh Kapashi, Matthieu Lemerle, Asheet Mehta, Luisa Quetti, McKinsey, Nov 2018. 

As the report notes, Sweden is very advanced in digital banking. In comparison, they estimate that in the UK the “specialist” firms have less than 20% share. In this dataset, “specialist” isn’t exactly all new and fun FinTech startups, but this chart shows the shift from “universal,” traditional banks to new types of banks and services. There’s a market shift.

If I had more time, I’d want to make a similar Dediu Cliff for more than just Sweden. As a bad, but quick example, comparing JPMC’s retail banking customer growth to N26’s:

100% area - Screen Shot 2019-08-14 at 4.55.09 PM.png
Sources: “How JPMorgan Is Preparing For The Next Generation Of Consumer Banking,” CBInsights, August, 2018; JPMC 2018 annual report; “N26 is now one of the highest valued FinTechs globally,” N26 Blog, July, 2019.

 

This chart is not too useful because it shows just one bank to one FinTech, though. And JPMC is much lauded for its innovation abilities. At the end, in the summer of 2019 JPMC has 62m household customers, with 49m being “digital,” and N26 has 3.5m, all “digital” we should assume. Here’s the breakdown:

 

bar chart - Screen Shot 2019-08-14 at 4.55.11 PM.png
Sources: “How JPMorgan Is Preparing For The Next Generation Of Consumer Banking,” CBInsights, August, 2018; JPMC 2018 annual report; “N26 is now one of the highest valued FinTechs globally,” N26 Blog, July, 2019.

Growth, as you’d expect, is something else: JPMC had a CAGR of 8%, while N26’s was 227%. If N26 survives, that of course means their growth will flatten, eventually.

Even if it’s hard to chart well, we should take it that the new bread of FinTechs are taking market share. Financial services executives seem to think so as one PWC survey found: 73% of those executives “perceive consumer banking as the one most [banking products] likely to be disrupted by FinTech.” 

To compound the fogginess, as in the original Dediu Cliff, charting the dramatic shift from PCs to smart phones, the threat often comes from completely unexpected competitors. The market is redefined, from just PCs for example, to PCs and smart phones. This leaves existing businesses (PC manufacturers) blind-sided because their markets are redefined. Customer’s desires and buying habits change: they want to spend their computer share of wallet and time on iPhones, not Wintels. 

Taking this approach in banking, there are numerous FinTechs going over underserved markets that are “underbanked” and usually deprioritized by existing banks. This is a classic, “Big D” disruption strategy. One of the more fascinating examples are ride-sharing companies that become de facto banks because they handle the money otherwise bankless drivers earn.

There’s also a hefty threat from behemoth tech companies outside of banking that are stumbling into finance. Companies like Alibaba and WeChat have huge presences in payments and Facebook is always up to something. These entrants could prove to be the most threatening long term if they redefine what the market is and how it operates.

Differentiating by focusing on people

So, there is a shift going on. What are these FinTechs doing? Let’s simplify to three things:

  1. Mobile – an emphasis on mobile as the core branch and workflow, often 100% mobile.
  2. Speed – from signing up, to transferring money, to, as with the Apple Card, faster cash back. While it’ll take awhile to get my card, actually signing up with N26 was quick, including taking pictures of my Netherlands residency card for ID verification. I signed up at 11:29am and was ready to go at 4:05pm, on a Sunday no less.
  3. Innovation – sort of. It’s not really about new features, but innovations in how people interact with the banks. N26 let you create “spaces” which are just sub accounts used to organize budgets and reports; bunq lets you create 25 new accounts; many FinTechs (like the Apple Card) bundle in transaction type reporting and budgeting tools. All of those are interesting, but not ground breaking…yet. 

From a competitive analysis stand-point, what’s frustrating is that feature-by-feature, traditional banks and FinTechs seems to be on par. Throw in services like mint.com and all the supposedly new features that FinTechs have seem to be available don’t look so unique anymore. Paying with your phone amazing, to be sure, but that’s long been done by existing banks.

For all the charts and surveys you can pile on, the difference amounts to a subjective leap of faith. FinTech companies are more customer centric, focusing on the customer experience. When you look at the broader “tech companies” that enterprises aspire to imitate, customer experience is one of the primary differentiators. Their software is really good. More precisely, how their software helps people accomplish tasks is well designed and ever improving.

There’s a sound vision to be plucked from that for banks: “Live more, bank less,” as DBS Bank  in Singapore puts it.

Unshackled

Responding to all of this seems easy on the face of it: if these FinTechs can do it, why not the thousands of developers with their bank-sized budgets do it?

As ever, banks suffer from the shackles of success: all the existing processes, IT, and thought technologies that was wildly successful and drives their billions in revenue….but hasn’t been modernized in years, or even decades.

In part 2, we’ll look at what banks can do to unshackle themselves, and maybe slip on some new shackles for the next ten years.

(There are some footnotes that didn’t get over here.  For those, and if you want to see me wrastlin’ through part two, or leave a comment, check out the raw Google Doc of this.)

Link: Investors Have Misdiagnosed Amazon’s Push Into The Pharmacy Business

“The preponderance of drugs in the U.S. is consumed by an older population, whose habits change slowly or not at all. Accordingly, it’s likely that Amazon’s online pharmacy will not significantly impact the existing drug industry…. Here’s why: Americans currently spend $450 billion a year on drugs. Walmart is the fourth-largest pharmacy in the U.S., with sales of $21 billion, or 4.6% of the company’s total sales. Let’s say that over the next five years Amazon gets to Walmart’s sales level of $21 billion. If the U.S. pharmaceutical industry grows 2% a year over that time, total drug sales will have increased by $45 billion, or the equivalent of two Walmarts (we are ignoring compounding here), to $495 billion. Walgreens, with its pharmacy selling about $70 billion a year, would barely notice Amazon’s presence.”
Original source: Investors Have Misdiagnosed Amazon’s Push Into The Pharmacy Business

Link: On Salesforce’s acquisition of MuleSoft

“[H]aving a decent integration platform in its arsenal enables Salesforce to tell better stories about the seamlessness of its own application portfolio, even as this continues to expand through acquisition (which, note, was where Oracle was with its Fusion Middleware portfolio and strategy when it bought BEA). It also potentially helps Salesforce further develop its Einstein proposition, by making it easier to get access to corporate data from more systems in more locations…. However, just as was the case with BEA, many of MuleSoft’s customers made that investment precisely because it could demonstrate its ability to connect anything to anything without bias, and nurture customers’ own heterogeneous ‘application networks’. I hope Salesforce can take MuleSoft’s existing value proposition forward as it creates the Salesforce Integration Cloud.”
Original source: On Salesforce’s acquisition of MuleSoft

Link: On Salesforce’s acquisition of MuleSoft

“[H]aving a decent integration platform in its arsenal enables Salesforce to tell better stories about the seamlessness of its own application portfolio, even as this continues to expand through acquisition (which, note, was where Oracle was with its Fusion Middleware portfolio and strategy when it bought BEA). It also potentially helps Salesforce further develop its Einstein proposition, by making it easier to get access to corporate data from more systems in more locations…. However, just as was the case with BEA, many of MuleSoft’s customers made that investment precisely because it could demonstrate its ability to connect anything to anything without bias, and nurture customers’ own heterogeneous ‘application networks’. I hope Salesforce can take MuleSoft’s existing value proposition forward as it creates the Salesforce Integration Cloud.”
Original source: On Salesforce’s acquisition of MuleSoft

Seeking the simple answer considered harmful

“This ties to our species’ well-documented, frequently harmful distaste for uncertainty. All too often, people latch recklessly onto easy and straightforward answers that happen to be quite wrong. It’s yet another human foible Trump has expertly exploited, and is himself victimized by.

“That’s one of the real prices we pay for not being comfortable with uncertainty,” said Lewis. “We end up seeking out charlatans, people who will tell us with total certainty stuff that is unknowable, and so you end up with bad financial advisers or quacks in medicine — and Trump, who appeals to that need for total certainty, and seems to preserve it in himself by never acknowledging he made a mistake.”

Source: “Michael Lewis on the Psychological Quirks Trump Exploited to Become President”

Coté Memo #078: Spiceworld 2015, Spiceworks Momentum, Enterprise Use, and DevOps

Tech & Work World

I was at Spiceworld, briefly, last week. This is Spiceworks’ big user, annual conference in Austin; they have one in London as well. I’ve followed Spiceworks for many years (from RedMonk to 451 Research) and have always liked their IT management approach: their business model is to be the Facebook of IT by giving away the systems management software for free and then selling access to the users to advertisers, vendors, and others. They also have a data practice which has some interesting, deep pools of data.

Last week they announced several new services and features, and also made some exiting ones free. They have a hosted (cloud!) offering that I’d missed seeing; that’s one of the things they made free (down from $10/month). As ever, I think their ambition is to monitor and manage as much IT as their user base wants. They don’t always provide the deepest functionality (saving that for their “real” customers who can sell more sophisticated tools into the user base), but they balance the “you get what you pay for” product management track well as their user momentum shows:

Spiceworks momentum, as of 2015//embedr.flickr.com/assets/client-code.js

The numbers from there are not entirely consistent as they’re a mix of “users,” “monthly unique page views,” and whatever Spiceworks told me in briefings. That is, the thing counted has likely changed over time. I feel like getting a million “users” over a year is high (from 5m to 6m), but, whatever: just check out the general shape of the thing and you realize there’s something going on there.

Some other momentum figures:

  • One good, recent figure is “2,000 new members a day.”
  • Another one from Sep, 2014: Spiceworks being used by 1.8m organizations.
  • Spiceworks currently has “over 400” employees, up from 225 in Nov 2013.

One theme this year was the expansion, up-market into “enterprise.” If I recall, Spiceworks considers “enterprise” to be 500+ employees, and the rest is “SMB.” For them, that’s fair, but be warned if you think of enterprise as something more like 10,000+ employees.

Over time, the share between “small” and enterprise has been growing:

  • 2009: 13% enterprise, 87% small (from my notes)
  • 201?: 20% enterprise, 80% small (“previous to 2015”)
  • 2015: 40% enterprise, 60% small (from SpiceWorld 2015)

This year, they reported 71% penetration into F500 accounts.

The phrase “DevOps” was flashed up on the screen a few times and mentioned in meetings. In general, I see “DevOps” as only being applicable to organizations who are working on and deploying custom written software, their own software. (Sure, you could adopt the same principals for packaged software, SaaS, etc….but would you?). As it expands more, Spiceworks could concern itself with managing custom written software – somehow – which would be interesting and consistent with their general strategy of grabbing as much IT department land as possible.

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