It’s looking increasingly likely that Covid-19 is going to continue into 2021 and possibly longer which creates a unique framework within which to consider the future of Fintech. In-store and cash payments will accelerate in their decline, as will the prevalence of physical checks. The psychological hold of the branch networks are unlikely to ever be regained, regardless of how many coffee shops and innovation centers the incumbent Big Brand Banks invested in previously. And of course, the accelerated adoption of all things digital will continue to advance. These broad themes seem pretty safe bets, but what it might all mean at a more granular level is what we look at here.
Credit Cards were once synonymous with affluence — for a time, they were the exclusive preserve of people with money. Issuers were quick to capitalize on this, and marketed credit cards became (somewhat bizarrely) as lifestyle products used to signal the affluence of the user. The metal card phenomenon is a case in point. The fact that some cards like Chase Sapphire Reserve and Citi Privilege are able to convince people to pay over $500 a year for something that has no more utility for paying for things than a free equivalent is proof that the marketing blitz has succeeded.
But during lockdown, no one sees your metal card or cares that you can apparently afford to spend $500 for no reason. On top of that, those affluent travel card points are entirely useless when you can’t dine out or travel. These cards sold themselves on exclusivity and rich rewards but, much like a casino, they don’t mind the odd winner (see: The Points Guy) as it encourages the rest. For every person who maxed out their rewards, there were 50 who did not. They paid for that free vacation, not the issuer. The credit card market was a zero sum game for the customers, and breakage (the delta between consumers promised rewards and those that they actually redeemed and benefited from) a core component of card profitability.
We believe we will see a normalisation of credit cards as a critical component of an overall personal financial management strategy. This will start with cards that provide critical protections, especially online, and automatic discounts on spend.
The recent Sofi MasterCard credit card is a good example of a credit card that delivers simplicity and value for money with a flat rate 2% cash back with no breakage. Very similar to the more established Fidelity Visa card, both these products integrate the card with the customer’s other financial services.
We believe that the Big Brand Banks will struggle to pivot effectively and Chase Sapphire Reserve, Citi Privilege and Amex Platinum will cease to be as relevant, like so many other lifestyle cards.
Consumer Fintech has for the last decade typically led by identifying a specific opportunity and solving for it. Banks did not offer good online apps, so challenger banks created bank accounts with apps. Then, Personal Finance Apps consolidated data and provided insight and analytics around your spend behaviour. But whilst these innovations have to a great extent delivered better value for money and choice in how people manage their money, they’ve had the unintended consequence of creating more cognitive load and increased the burden of choice. Automation of personal finance has very often meant the automation of notifications — telling you what you did or what you should do with your money rather than actually doing it. Unfortunately, cognitive load tends to drive people towards inaction and disengagement — the exact opposite of what was intended.
We think that there will be a strong focus on Fintech companies’ efforts to reduce cognitive load. True automation has the potential to take a lot of the manual labour and effort out of personal finance (it also has the ability to save us from our natural human biases which often cause us to make poor decisions). This leads us to believe that we will see the continued evolution of a growth in robo-advisors and Fintechs tackling issues such as subscriptions management. With everyone spending so much time at home, shopping online and watching The Mandalorian, subscription creep is a real issue for almost every household. Anyone who helps solve this is solving for cognitive load and saving us all money.
The innovation challenger banks brought to the market to date has largely been about access: making it easier and faster to see your bank balance but little else. Under the app and the snazzy debit card design, they really weren’t doing anything different than the old banks.
But we have seen the rapid feature acceleration of many of these original providers. SoFi is a case in point — originally offering loans to students, it now has a very broad range of services, features and functionality. Others are following suit. Square’s Cash App is another good example and a likely contender for Superapp status. In the past, we called this “re-bundling” but “Superapps” sounds a lot better.
Remember pre-Covid when everyone was launching high-interest savings accounts? We had Marcus, then Robinhood (twice, due to a false start), Wealthfront and Personal Capital all within a very short space of time. APYs were high and you could easily get 2-3% better return than any Big Brand Bank. It looked like the future. Then, interest rates plummeted and the delta between what the new entrants were offering and Big Brand Banks largely evaporated.
So now what are we meant to do with our money? The right answer is pretty much anything except cash. You could just park money in a Vanguard ETF or you could go wild and embrace one of the more interesting evolving hybrids — high-interest crypto accounts, accounts where you can store your money as equities but spend them like cash (Finch), accounts where the interest is invested (Save).
There seem to be almost as many Bank-as-a-Service players as there are direct to market customers for them to serve. At the same time, actual banks are (painfully slowly) transitioning to create and manage their own APIs while, at the other end of the market, many challenger brands are getting bank licences. Just recently, we have had significant funding rounds announced by Moov, Bond, Railsbank and Productify and, if that was not enough, Fintech gigagiant Stripe is entering the market as well.
Something has to give here. Hopefully, we will see competition based on value for money, tech quality and scope of service offering. It’s not going to be enough to be able to launch a debit card and an app any longer.
For the last 2 years, the Challenger Bank Story has largely been about speed and scale: how many countries, how many accounts and how much money raised? That can only last so long and investors' willingness to provide an open-ended checkbook will decline at some point, as Monzo’s last funding round would seem to suggest.
This means that many challenger banks are going to start looking increasingly like old-fashioned banks with fees and a migration to more affluent consumers. We predict a bifurcation of the market based not on tech but on value for money — between those that pursue the old model where the financial services company seeks to get consumers to adopt behaviours that benefit the bank and those who seek to create behaviours that benefit the consumer. There will naturally be more of the former than the latter, but we hope over time that value for money will become a cornerstone of the market and not just a marketing claim.
There are simply too many challenger banks chasing the same small group of mass market/underbanked consumers. Something has to give. Whether its European competitors withdrawing from the US (e.g. Monzo, Revolut, N26) or high-profile, well-funded challengers withdrawing, consolidating or somehow blowing up, time will tell. We predicted this last year as well and, whilst there were some stumbles, we called it wrong. But we are doubling down for 2021 on this prediction.
This feels like cheating given the new high that Bitcoin has currently reached. We called this “goal hanging” when I was at school. But whatever the underlying reasons for the current high, it's clear that crypto has graduated from the niche market it once was into the mainstream (even putting aside Facebook’s Libra initiative — not every initiative is going to be a success).
The well-publicised increase in retail investing during Covid-19 will continue and we will see a migration to more esoteric asset classes. Less because consumers are seeking diversification and higher returns than because they are bored. The spike in alcohol and cannabis home delivery is in significant part a function of boredom. A healthier way to pass the time is moving money around in the many weird and wonderful new apps that facilitate investing in everything from collectables to farm land. Based on the small collection of these below, it's only a matter of time before there is an app to micro invest in cannabis as well (if there is not one already).
Precious metals - OneGold
Wine - Vinovest
Farmland - Acre Trader
Collectables - Rally Rd
Art - Masterworks
Real estate - Yieldstreet
How long these remain standalone apps vs being embedded into Superapps remains to be seen.
Embedded finance has become something of a word of the moment in 2020. It seems to most often mean that a company outside of financial services launches a deposit account and debit card. The launching of such propositions has become radically easier with the rise of Bank-as-a-Service. But just because you can launch a debit card, does not mean you should. Whether end users are as keen to adopt these remains to be seen. Lyft and Gusto certainly seem to think so.
Consumers are notoriously reluctant to change banks as we all know — the perceived pain in doing so far outweighs the perceived benefit. After all, aren't all banks the same?
If you look at lifestyle changes they tend to cluster. It's not unusual for little change to happen for years and then, all of a sudden, someone you know is moving to the city, buying a house, changing jobs, having kids, and getting married.
Covid has been the mother of all lifestyle changes for everyone all at the same time and all over the world. We are reassessing all sorts of assumptions and previously strongly held opinions and positions.
That includes finance.
We think this will lead to a fundamental reassessment of the nature of our relationship with our financial-services vendors. The historical exploitation of consumers by Big Brand Banks faces its biggest challenge yet. It’s not the beginning of the end — this will be a long story — but it is the end of the beginning.
The big digital wallets from Apple and Google had already largely withdrawn from actively investing growth for in-store payments. The US in particular is so far behind the rest of the world in contactless acceptance and dual interface card issuance that the growth, whilst good, is still very slow. It's unlikely given Covid that many big merchants are going to be making big POS infrastructure investments any time soon, which means widespread contactless adoption may take even longer than expected. But online and in-app purchases will continue to enjoy explosive growth and GPay and Apple Pay will naturally rise with it as they have pivoted to enabling these some years back.
However, we think Samsung Pay will be shuttered, at least in the US. Based on an early misguided and expensive bet on “MST” — a proprietary technology that spoofed magnetic stripes — it failed to capitalise on the growth of NFC in store and never built an online solution or meaningful scale in 6 years. We think Samsung will continue its progressive withdrawal from its struggling software and services division and sell what assets it has left to Google. Samsung Pay will follow the path set by Milk Music before it.
We also believe Fitbit Pay will disappear, subsumed into GPay given the acquisition. It makes no sense to maintain two separate wallets.
It's still unclear what Amazon might do in this space if anything at all. It’s the sleeping giant in Fintech. Another great unknown is what Facebook might try.
Whatever happens and regardless of the accuracy or otherwise of these predictions, there is no doubt that 2021 is going to be a very interesting year in Fintech indeed.
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