.As they mature, digital startups are now turning their attention from customer acquisition to becoming profitable. With no branch networks and legacy IT systems, digital challengers have a substantially lower cost-to-serve than incumbents of £20-£50 per account compared to £170. Meanwhile, deposit balances for challengers have increased from £70 to £350 per customer. However, this is still dwarfed by the £9000 average for incumbents.However, the majority of new entrants are still not profitable, with the average digital bank losing £9 per customer
That’s according to TransUnion’s “Auto Insurance Shopping Index,” which found that 21.7% of consumers shopped for personal auto insurance in 2018, versus 20% in 2017. With 44% of their cohorts shopping, Millennials and Generation Z consumers shopped for auto insurance than other ages.
The reason? Digital distribution and marketing seem to be huge drivers to increase shopping for Millennials. According to David Drotos, VP of insurance solutions at TransUnion, “Technology is fueling the experimentation and development of new business models for insurance that cater to the Millennial lifestyle.”
Barcelona, Berlin, Brussels, Budapest, Chicago, Dublin, Hamburg, Helsinki, Kaohsiung, London, Los Angeles, Lyon, Madrid, Mexico City, Montreal, New Taipei City, Rio de Janeiro, San Francisco Bay Area, São Paulo, Toronto, Vienna, Warsaw, and Zurich.
In such scenarios incumbents risk ending up as “dumb pipes”, holding bloated balance-sheets and originating products such as mortgages and loans that someone else sells to consumers. If they were to lose the ability to build a brand and the transaction data needed to understand their customers and cross-sell, their wares would become interchangeable. Margins would be driven down, even as they continued having to abide by onerous banking regulations and hold balance-sheet risk.
There is an old-timey model in which the key elements of banking are, like, having a local branch, looking customers in the eye and giving them a hearty handshake, knowing their parents, etc. But in modern banking the importance of having a website and a payments app and, uh, “keeping track of customer deposits” is relatively higher, and the handshaking is relatively less important. For big banks, this means that they are increasingly and self-consciously becoming tech companies, building apps and hiring developers and blathering about blockchain. For small banks, it means that they are increasingly and unhappily becoming franchises of tech companies.
When you browse select posts from those brands, you’ll now see a blue “Checkout on Instagram” call-to-action. Click it, and you can select your size, color, billing and shipping details. Instagram will take an undisclosed cut of sales.
Makes a whole lotta sense:
For fashion brands in particular, Instagram shopping adoption has jumped from 12% to 42% year-on-year, proving that the industry is ready to leap at the opportunity to link content and commerce. It’s not just lower price points that are getting in on the action, with adoption rising to 25% among high-end prestige price-point brands. Notably, Louis Vuitton was one of the first fashion brands to leverage shoppable stories during the World Cup in 2018.
Disrupters gonna disrupt, loans edition:
This type of loan is typically reserved for retailers who bring in more than $1 million in revenue, and requires a lot of paperwork.
Original source: Square expands its bank-like offerings, letting sellers charge customers in installments
“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
‘Amazon has “all the tools to succeed” and is a bigger threat than Alphabet Inc.’s Google, which also made a play for the U.K. price-comparison industry a few years ago’
For the change or die files.
Original source: Amazon takes aim at U.K. insurance market | Digital Insurance
All the tech-driven competition in hotels:
“We have seen more and more business shift to our direct channels. We’ve seen loyalty continue to drive a higher share of the business that is coming into our hotels. And we think we’re competing or we compete against these platforms quite well.”
Original source: Marriott CEO on Tech Giants: ‘We Are in an Absolute War for Who Owns the Customer’
“Amazon’s Indian venture is probably a springboard for a move towards more established markets. India is some way away from Amazon’s key US and European markets, suggesting that it’s using India as a test lab for expanding its insurance operations. However, Amazon’s decision to flex its insurance muscles in India is probably also down to the fact that Amazon has stronger competition in this market in the form of home-grown rival Flipkart — which has also begun stepping into insurance. In Europe and the US, meanwhile, Amazon has fewer real competitors. As such, it’s likely that if Amazon’s venture with Acko succeeds, we’ll see it striking similar partnerships closer to its core markets to bulk out its insurance presence there. If this were to happen, legacy insurers and smaller insurtechs would be up against some stiff competition.”
Original source: Amazon pushes further into insurance with its latest investment
“While UK insurers are investing in tech and providing digital services, the majority are light years behind Amazon,” noted Davies. “If insurers are not careful, they may be pushed out of having a direct relationship with customers and be relegated to the role of a price-driven risk carrier at the back end (assuming Amazon doesn’t want to hold the risk too).”
Original source: Amazon is coming for the insurance industry – should we be worried?
Eventually every advisor will be a robo-advisor, which means there will be convergence.
Without some marketshare numbers, it’s tough to tell if the banking startups are making a dent against incumbent banks. Josh Brown suggests that banks are quick to catch-up and have nullified any lead that companies like Weathfront could have made:
It wasn’t long before the weaker B2C robo-advisors folded, the middling players were acquired and the incumbents launched their own competing platforms. The miscalculation on the part of the disruptors may have been the idea that they had years of lead time to scale up their assets before the lumbering giants of the industry would be able to fight back. Turns out they only had months, not years. Charles Schwab and Vanguard launched their own versions of the service and the mindshare / market share battle was joined.
From what I see out there, banks are quick to adapt and adopt new ideas into their businesses. While they’re beset with endless legacy IT and technical debt, they churn ahead nonetheless, e.g.:
While past performance is no guarantee of future results, and even though all the company’s results cannot be entirely attributed to BBVA’s digital transformation plan, so far many signs are encouraging. The number of BBVA’s digital customers increased by 68% from 2011 to 2014, reaching 8.4 million in mid-2014, of which 3.6 million were active mobile users.
Acquisition isn’t always failure, or victory
On the narrative framing side, it’s easy to frame a startup being acquired as “failure” and success for incumbents. That’s not always the case, and suggests a zero-sum view of innovation in industries. Acquisitions can have winners and losers – as with valuing anything, like real estate, the valuation could be wrong and in favor of the buyer or seller.
However, in the ideal case of an acquisition, it makes strategic sense for the buyer to spend their time and money that way instead of trying to innovate on it’s own. For the startup being acquired, they’re usually near the end of their gamble of sacrificing profit in favor of innovation and growth and need someone to bring them to the black.
Thus far, it seems like the large banks are fending off digital disruption, perhaps embracing some of it on their own. The Economist takes a look:
- “Peer-to-peer lending, for instance, has grown rapidly, but still amounted to just $19bn on America’s biggest platforms and £3.8bn in Britain last year”
- “last year JPMorgan Chase spent over $9.5bn on technology, including $3bn on new initiatives”
- From a similar piece in the NY Times: “The consulting firm McKinsey estimated in a report last month that digital disruption could put $90 billion, or 25 percent of bank profits, at risk over the next three years as services become more automated and more tellers are replaced by chatbots.”
- But: “Much of this change, however, is now expected to come from the banks themselves as they absorb new ideas from the technology world and shrink their own operations, without necessarily losing significant numbers of customers to start-ups.”
- Back to The Economist piece: “As well as economies of scale, they enjoy the advantage of incumbency in a heavily regulated industry. Entrants have to apply for banking licences, hire compliance staff and so forth, the costs of which weigh more heavily on smaller firms.”
- Regulations and customer loyalty are less in China, resulting in more investment in new financial tech in Asia:
- As another article puts it: “China has four of the five most valuable financial technology start-ups in the world, according to CB Insights, with Ant Financial leading the way at $60 billion. And investments in financial technology rose 64 percent in China last year, while they were falling 29 percent in the United States, according to CB Insights.”
- Why? “The obvious reason that financial start-ups have not achieved the same level of growth in the United States is that most Americans already have access to a relatively functional set of financial products, unlike in Africa and China.”
- There’s some commentary on the speed of sharing blockchain updates can reduce multi-day bank transfers (and payments) to, I assume, minutes. Thus: ‘“Blockchain reduces the cost of trust,” says Mr Lubin of ConsenSys.’
Fixing legacy problems with new platforms, not easy
- The idea of building banking platforms to clean up the decades of legacy integration problems.
- Mainframes are a problem, as a Gartner report from last year puts it: “The challenge for many of today’s modernization projects is not simply a change in technology, but often a fundamental restructuring of application architectures and deployment models. Mainframe hardware and software architectures have defined the structure of applications built on this platform for the last 50 years. Tending toward large-scale, monolithic systems that are predominantly customized, they represent the ultimate in size, complexity, reliability and availability.”
- But, unless/until there’s a crisis, changes won’t be funded: “Banks need to be able to justify the cost and risk of any modernization project. This can be difficult in the face of a well-proven, time-tested portfolio that has represented the needs of the banking system for decades.”
- Sort of in the “but wasn’t that always the goal, but from that same article, Gartner suggests the vision for new fintech: ‘Gartner, Hype Cycle for Digital Banking Transformation, 2015, says, “To be truly digital, banks must pair an emphasis on customer-facing capabilities with investment in the technical, architectural, analytic and organizational foundations that enable participation in the financial services ecosystem.”’
- BCG has a prescriptive piece for setting the strategy for all this, from Nov. 2015.
- A bit correlation-y, but still useful, from that BCG piece: “While past performance is no guarantee of future results, and even though all the company’s results cannot be entirely attributed to BBVA’s digital transformation plan, so far many signs are encouraging. The number of BBVA’s digital customers increased by 68% from 2011 to 2014, reaching 8.4 million in mid-2014, of which 3.6 million were active mobile users. Because of the increasing use of digital channels and efforts to reconfigure the bank’s branch network—creating smaller branches that emphasize customer self-service and larger branches that provide higher levels of personalized advice through a remote cross-selling support system—BBVA achieved a reduction in costs of 8% in 2014, or €340 million, in the core business in Spain. Meanwhile, the bank’s net profits increased by 26% in 2014, reaching €2.6 billion.”
- And a more recent write-up of JPMC’s cloud-native programs, e.g.: ‘“We aren’t looking to decrease the amount of money the firm is spending on technology. We’re looking to change the mix between run-the-bank costs versus innovation investment,” he said. “We’ve got to continue to be really aggressive in reducing the run-the bank costs and do it in a very thoughtful way to maintain the existing technology base in the most efficient way possible.” …Dollars saved by using lower-cost cloud infrastructure and platforms will be reinvested in technology, he said.’ JPMC, of course, is a member of the Cloud Foundry Foundation which means, you know, they’re into that kind of thing.
The app, scheduled to launch in summer 2017, is designed to make it easier for truck drivers to find shippers that need goods moved, much like the way Uber connects drivers with riders. It would also eliminate the need for a third-party broker, which typically charges a commission of about 15% for doing the middleman work.
This is one of those “software is eating the world” things that I would have thought existed already.
[T]he broader goal is to improve the “middle mile” logistics space, which is largely controlled by third-party brokers that charge a hefty fee for handling the paperwork and phone calls to arrange deliveries between shipping docks or warehouses. It would make shipping more efficient and cheaper not just for its customers, but also for Amazon, which
the tech community is celebrating the massive return for Dollar Shave Club’s investors, but $1 billion for a 16% unit share of a market dominated by a brand that cost $57 billion is startlingly small. Indeed, that’s why buying Dollar Shave Club was never an option for P&G: even if their model is superior P&G’s shareholders would never permit the abandonment of what made the company so successful for so long; a company so intently focused on growing revenue is incapable of slicing one of their most profitable lines by half or more.
The point being: that’s a really low valuation and could cause all sorts of annoying and “value destructing” side effects in the spreadsheet.
Compare the state of play in 2013 versus 15 years ago. 33% of the world is on the Internet on average of 3.1 hours / day. There are 138 million smart phones in the US alone and … wait … 99 million tablets. Insane.
2008 App ecosystem on iOS = $0. 2013 = $25 billion of which Apples stage is more than $8 billion at > 90% gross margin. Credit cards = less friction = more purchases = cha ching.
In other words, an upgrade to an over-serving product will be deferred at the slightest excuse while an installation of an under-serving product that attacks an unsolved problem will be rationalized no matter the circumstances