The Future of Finance … in a world where Paypal is more valuable than Bank of America, and DBS wants to be invisible

June 25, 2021

When the CEO of Santander stood up and asked employees “How can Paypal have become 4 times more valuable than our bank?” there was an embarrassed silence. Paypal is now almost 3 times more valuable than HSBC, as valuable as Bank of America, and outperforms most investment banks too. Visa is much bigger, twice as valuable as Paypal.

What’s the future of banking, insurance and money?

In a world of rapid and relentless innovation, most financial services have become the laggards of change. While Tesla transforms mobility, Impossible reimagines food, and NextEra ignites clean energy, most of the large financial service companies have stayed wedded to their old world, either believing that their markets are impermeable to change, with either arrogance, or ignorance.

Of course there are disruptors who grab the headlines. Cryptocurrencies lead the way – the drama of Bitcoin and many other emerging models that are yet to prove sustainable. More generally, fintech has focused on the so-called neobanks – the mobile-centric start-up banks and related money management services, who are largely automating old practices in a slightly more consumer-centric way.

Yet for the large companies – retail and corporate banks like Bank of America, HSBC, Santander – nothing much has changed. Same in investment banking – JP Morgan, Credit Suisse, Goldman Sachs do what they’ve always done – and same in insurance. Of course there are sparks of ideas, but they are usually imitative, or derivative.

Yet there are some incredibly interesting and innovative companies in the financial world.

Next Generation Innovators

Consider Brazil’s Nubank, for example, which has just attracted $500m investment by Warren Buffett – or Sweden’s Klarna, reinventing advance payments online. In South Korea, Hena Bank is exploring a new loyalty network model, as is Ant Financial with its brilliant Ant Forest in China. Akbank in Turkey is playing with robots and Alior is innovating with business. And then there is the long list of neobanks – Atom, N26, Revolut, Starling, Varo, and many more.

Here’s a great summary from CB Insights on how start-ups are disrupting, and in many ways “unbundling” the conventional activities of a bank:

CB says “Tech companies are chipping away at the traditional bank’s market share. For example, stock trading app Robinhood’s commission-free approach to investing has forced incumbents to follow suit, while products like Venmo and Cash App have disrupted peer-to-peer payments”

Startups are using consumer payments products like money transfers and peer-to-peer payments to chip away at banks’ payments market share.

International money transfers and remittances are expensive to complete, and they make up a massive market: Remittances are worth an estimated $743B

  • Remitly and TransferWise are digital platforms that facilitate international money transfers. TransferWise is valued at $5B, as of July 2020.

Products enabling peer-to-peer payments are also targeting the traditional bank’s hold on payments systems.

  • Venmo, owned by PayPal, and Cash App, owned by Square, offer P2P payments as their primary offerings. However, both brands have expanded to additional products, such as Venmo’s credit card and Cash App’s stock investing offering.

Investment banking services are more difficult to unbundle, given significant regulatory restrictions for the industry. However, some startups are enabling the digitization of traditional banks or are providing auxiliary services directly to banking clients like institutional investors.

Though equity research services used to be offered for free to clients as part of a bundle with trading services, regulations like the EU’s MiFID II now require that banks must charge for research directly. This has provided an opportunity for other research providers to gain market share among banking clients.

  • Sentieo and Koyfin aim to help with investment decisions by providing data and equity coverage for a variety of assets, from stocks to currencies to fixed income.

Companies in the asset management arena are assisting with or replacing traditional asset management divisions by providing software and services for businesses, institutional investors, and more.

  • Companies like Fount and Liqid are digital asset managers with robo-advising capabilities. Liqid has raised a total of $44M in disclosed equity funding.
  • Addepar is a platform that helps financial advisors leverage data and customizable reports to communicate portfolio performance. Valued at $594M, Addepar most recently raised a $117M Series E round in November 2020.
  • Ethic is a digital asset manager that helps institutions create custom sustainable investment portfolios.

Sales and trading operations within banks can be lucrative. Now, alternative brokerage platforms and software that provide access to stock market information and stock brokerage are gaining traction, potentially eating into bank revenues.

  • For example, Trumid is an online trading platform providing corporate bond market professionals with direct access to liquidity. Trumid raised a $200M Series E round in July 2020 at a $1B valuation.

Consumer deposits and savings are the bread and butter of any traditional bank, and Bank of America is no exception. The company is the second-largest lender in the US based on assets, and it made $3.3B in net income on deposits in the first 3 quarters of 2020. This makes the sector an attractive target for fintech companies.

  • There is no shortage of startups aiming to grab deposit market share from traditional banks. Companies like Chime, Monzo, N26, Revolut, Varo Money, Current, and Dave all offer digital banking services to consumers.
  • Other companies focus on savings accounts. Goldman Sachs’ Marcus offers savings accounts and personal loans — a departure for the investment bank, which did not have a consumer arm until recently.
And a broader summary, also from CB Insights, of the many different types of disruptive start-ups attracting attention and investment right now:

Yesterday we hosted a Headspring Lab for financial services, where Financial Times columnist Michael Skapinker joined me to talk about the transforming world of financial services, the challenges and opportunities.

Here is my summary of the discussion:

Context of change – driven by the disruption of markets, by new technologies, new audiences, new entrants, new business models, new agenda – and accelerated by pandemic. Neobanks are just a start, digital is just an enabler of more profound opportunities for change. In general FS has lagged behind in exploring transformation beyond automation. As Jane Fraser, new CEO of Citigroup says, now is the time for FS leaders to embrace 4Cs – context, curiosity, creativity and courage.

Customer as your future guide – not just to understand and serve them, but as your guide to uncertain futures and new opportunities, like DBS – reframing your business around customers eg from car insurance to driving better – is more valuable and engaging to the customer, but also opens new revenue streams for business growth. Superapps like Grab and Jio are incredibly customer-centric, using thei4 customer intimacy and insight, embracing FS in a way that integrates with everyday life.

Sustainability as opportunity –  moving on from CSR as compliance, or ESG as governance – to harnessing business as a platform for positive change. Social issues, even more than environmental ones, engage customers emotionally – access, inclusion, equality, locality, and more. Unlocking the assets and interactions of FS to change behaviours, and solve big problems, as a competitive advantage. Examples from Aspiration to Lemonade, Nubank and Greenwood.

Unlocking the talent inside – the pandemic has driven radical behaviour change, and desire for new ways of working; young people already wanted to do more meaningful work; the old ideas of work life balance are being challenged. How to align business and personal purpose, how to find your “ikigai”, how to find work that enhances life. Like Microsoft’s Satya Nadella says, rethink organisations as platforms for talent, enabling people to unleash their ideas, rather than seeking to fit them to the needs of the organisation.

The opportunity of finance – most FS conversations focus around fintech, the disruption of start ups and the need to catch up. More powerful brands and customer integrators can all embrace finance, particularly if FS remains largely a utility inert to change. Yes, start ups from N26 to Robinhood challenge, but their are big opportunities for FS too. PingAn, China’s largest insurer, for example, asked how it could leverage its customer base and digital platform to be more. Today it has created  Good Doctor, serving a billion subscribers, embracing the power of humans and technology, a digital and physical model, and the world largest and most innovative healthcare business.

Read more in the section FutureBank together with a range of interesting case studies.

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