Disrupting Banks: Re-bundling and Rise of Finance Super-Apps
We’ve seen the proliferation of asset-light, scalable, easier to use versions of everything: whether it’s shopping, hotels, news, content, banking or credit.
Despite the strides the fintech ecosystem has made over the past decade, I think we’re in the early innings of a paradigm shift in the sector. We’re finally witnessing the genesis of finance-super apps and the disruption of traditional banking institutions.
Intro
Today, the fintech landscape is riddled with inordinate complexity and an abundance of choice. Where we think of 3–5 bank brands that solve all of our typical financial needs, there are dozens of fintech apps in the each of the above verticals, which causes immense consumer confusion. To solve for this, there needs to be a “bundling” that bridges each vector of the ecosystem. Square has realized this, with CashApp enabling users to transfer money, deposit paychecks, earn rewards, invest in stocks/crypto and even file taxes from one coherent place.
This bundling will be accelerated by the compounding value of data across these services that will drive value by leveraging extensive data to give users real-time insights and personalized offerings unique to their goals. In doing so, these giants will be able to more meaningfully solve a multitude of user pain points and create a walled-garden that deeply embeds users in their ecosystem.
This shift will be furthered by a number of macro tailwinds:
1.Democratizing financial services for the 1.7B underbanked across the world
2. $70 trillion inter-generational transfer of wealth to Gen Z which have grown up engaging with these fintech platforms before traditional banks (e.g. Step).
We’re in the early innings of this shift, but we’ll see the genesis of these finance super-apps and big-tech start to enter the landscape in strides.
Where We Are Today (Super-Apps)
The broader social, infrastructure and AI/ML layers of the above diagrams are especially interesting. The infrastructure layer, (e.g. the Plaid’s of the world) will continue to drive interoperability and solve the fragmentation of data across traditional banks to fintech apps and in between these apps. The social, AI/ML layers will be critical to driving engagement, building a moat around data and embedding users more deeply into an ecosystem.
Sample Areas of New Vertical Opps
Deep Dive: What Will Drive The Rebundling?
I’ve split the deep dive into three parts:
Industry Specific Tailwinds
1.) Abundance of Choice and Complexity
2.) Creating a Virtuous Cycle and Walled-Garden Ecosystem
3.) AI Insights: Value of Data Across Verticals
4.) Acquiring Distribution to Justify Heightened Public Valuation
Macro Trends
1.) 1.7B Unbanked or Underbanked Individuals
2.) Proliferation of Asset-Light, Scalable Models
3.) Large Intergenerational Transfer of Wealth
The Rebundling
1.) What The Re-bundling Looks Like (Square/Venmo/Chime/Robinhood + Big Tech)
2.) Areas of Opportunity for Fintech Giants
Fintech Tailwinds
Abundance of Choice, Disparate Data and Complexity
Most of the fintech platforms solving for traditional needs exist in disparate, siloed platforms driving an abundance of complexity in managing one’s finances. Having to manage multiple credit cards, digital bank accounts, brokerages, wealth advisors, tax solutions has become too cumbersome a task for many individuals.
If we take the example of digital banks vs traditional banks, we see that even with one vertical in the ecosystem there’s an enormity of options that renders consumers confused on which to choose and why.
Thus, there needs to be a unifying layer that connects on each layer of the ecosystem that solves for the complexity of managing across multiple services.
Virtuous Cycle: Creating a Walled-Garden Ecosystem
As with any well-built walled-garden ecosystem, the deeper you can embed a user and the more pain points you can solve through multiple products without having them to leave, the stickier they become.
There’s a positive feedback loop that exists here which Square has done an incredible job in manifesting. As fintech platforms are able to acquire users, gather data and insights, they’re able to uniquely upsell them to other parts of the platform. Solving for an enormity of user problems in leveraging data unique to the ecosystem in order to do it more meaningfully means that the user never has a reason to leave the platform. This drives engagement, and also builds a defensible moat around the value that can only be created with the wealth of data the ecosystem uniquely has.
Square’s CashApp is emblematic of this, as we see engagement, ARPU and customer acquisition rise meaningfully as they’ve begun to embed more services into CashApp.
AI/ML: Compounding Value of Data Cross Verticals
The ability to leverage data from different parts of the financial value chain and drive unique insights while ensuring users adhere to their goals is a huge benefit of an ecosystem at this scale.
For example, if CashApp can plug into your student loans, direct deposit, credit, expenses, they can accurately guide you in building a budget, income-focused asset allocation that helps you pay off debt and even underwrite credit in an individualized manner.
I think we’re still in the early days of exploring the depths of this layer, but it’ll be interesting to see the AI-driven personalized solutions and insights that are increasingly catered to the end user.
I think the future of finance isn’t broad-based financial products offered to the masses based on rigid credit requirements, but rather individualized products that leverage extensive data on users to underwrite solutions that are specifically built for each consumer. Again, this inevitably creates a value proposition unrivaled by other platforms outside the ecosystem (Affirm has done an incredible job at this)
Acquiring Distribution: Heightened Public Valuations
With the proliferation of SPAC’s, and the 0 yield environment we’ve seen a significant flight to growth equity. Whether it’s the influx of capital into the derivatives market or IPO valuations, we’ve seen capital chase high growth tech names that retail investors have a strong brand affinity towards.
The fintech ecosystem is no stranger to this. As the Robinhood’s, Stripe’s, Chime’s, Affirm’s of the world join Square, Paypal, Afterpay in becoming public and build on the same valuation trajectory, two things will happen.
- First, given the current affinity towards high-growth tech names, we will see an increased number of these fintech giants see similar valuation ramps as the Doordash’s and Airbnb’s of the world.
- Second, as a result of heightened growth expectations, the fintech behemoths will begin leveraging their lofty equity value to acquire tangential parts of the value chain. This will allow them to gain access to significant distribution into their ecosystem and meaningfully expand product flywheels to current customers.
Macro Landscape
1.7B Unbanked or Underbanked Individuals
There are 1.7B Unbanked or Underbanked individuals across the globe. We had witnessed a meaningful shift when users without bank accounts were first to adopt a digital-wallet to deposit stimulus checks. With the ubiquity of phones across the world, we’ve seen the digitization of every industry and financial services is the latest to fall in this trend.
Proliferation of Asset-Light, Scalable Models
We’ve seen the propagation of asset-light, scalable banking models that have minimal consumer friction relative to incumbents (e.g. typical bank KYC’s, traditional onboarding, physical branch requirements). These platforms are uniquely scalable and democratize access to the underserved audiences that either a) cannot access traditional banking infrastructure or b) find it too complex.
The marquee example of this is Robinhood. The platform has been able to scale and bring $20B into the retail brokerage industry. The democratizing effect of making some of these traditionally complex services painfully simple meant an influx of younger users that began to use the platform.
Largest Intergenerational Transfer of Wealth
Over the next decade, as the baby boomers inevitably retire, we‘ll see an exorbitant inter-generational transfer of wealth to the tune of about $68 trillion dollars. The vast majority of the dollars will be given to Gen Z and millennials.
This is the same audience that has grown up in the digital age, typically own smartphones at the age of 12, and is a group that fundamentally thinks about finances differently from prior generations.
They’re already accustomed to fintech platforms (Apple Pay, Cashapp, Venmo, Robinhood, WealthFront) that have strong brand affinity, have limited consumer friction, and are free. In fact, we’re already seeing vertical solutions built specifically for teenagers (e.g. Step), that interfaces with users substantially earlier than traditional banks. Robinhood is representative of this shift with the average user is aged 30.
At the same time, Gen Z will become the largest consumer population by 2026. The intersection of these dynamics over the next 5–10 years will lead to a significant increase in users, ARPU and assets managed by these fintech platforms.
Finally. . . What Does The Rebundling Look Like?
SoFi is the closest to building this bundled fintech solution
Square has stronger distribution and is in the early innings of developing a similar bundled solution
( the scalability factors given the inherent network effects of the Venmo’s/Cashapps/Google Pay’s of the world will continue to drive compounding distribution vs others)
Venmo is following close behind
The Robinhood’s and Chime’s of the world will endeavor in a similar direction
Google has taken a different approach, building a broad layer for managing finances without building in each of the verticals
But, the super-apps are still in the early innings of building on every vector of the ecosystem
. . . and it’s the most crucial and ubiquitous part of the customer journey that FAANG hasn’t fully capitalized on yet
Sample Areas of Opportunity:
All in all, it’ll be exciting to witness the rise of these super-apps and see these behemoths enter new verticals in strides.
Notes and Inspiration:
https://digitalnative.substack.com/ (Rex Woodbury’s articles were hugely informative when thinking about rebundling/unbundling)
https://a16z.com/2020/12/07/social-strikes-back-social-plus/
