28 November 2020

Fintech Startups Broke Apart Financial Services. Now The Sector Is Rebundling

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As fintech companies mature, many no longer aspire to be the best at one thing. That could mean not only new revenue sources for fintech companies, but also additional venture capital to startups and even a surge in M&A activity.

One example of a hot startup that has drawn attention from a big financial services company is San Francisco-based Plaid, an early fintech startup that manages the connections between apps and banks. Earlier this year, Visa agreed to acquire Plaid for $5.3 billion.

Five years ago, that deal might not have happened. Early leading fintech brands like Lending Club, SoFi or Robinhood started out as “best-of-breeds,” essentially unbundling one aspect of financial services. Today, venture investors and leaders in the fintech space can visualize a future where such startups will move toward again rebundling services.

Unbundling was driven by a sensible bit of conventional wisdom, Ben Savage, partner at Clocktower Technology Ventures, told Crunchbase News. In the 1990s and early 2000s, banks were emerging as one-stop shops, essentially building a “supermarket of financial services,” he said.

However, many of those offerings represented a small amount of the bank’s overall business. The early wave of fintech startups settled on taking one of those bank functions and executing better.

“You can really only do one thing at a time as a startup, but if you do that really well and find product market fit, you win the opportunity to expand the features,” Savage said.

In addition, the barriers to entry were difficult: Any infrastructure or function required to execute had to be built internally. Fast-forward to today, and “the price of admission has come way, way down,” Savage said.

Indeed, there are now infrastructure businesses that help fintechs build in less time and with less cost, enabling them to expand their product footprint more easily. However, as it turns out, consumers eventually liked seeing all of their information in one place again and pushed fintechs to reintegrate.

“Profitability nudges you to open more product lines,” Savage said. “You see this in companies like Credit Karma, which used to do only credit checks, but now offers their own products. It is much easier to do it now, consumers expect it and it is a better economic model to offer more products.”

Credit Karma is also another example of a startup being acquired by a larger financial services company. The San Francisco-based personal finance platform is being acquired by Intuit, the financial software provider behind TurboTax and QuickBooks, for $7.1 billion, pending regulatory review.

Startup perspective 

With rebundling comes an opportunity to bring in new lines of revenue, said Alex Pomeroy, co-founder and partner at AGO Partners, in an interview.

One of his portfolio companies is Aspiration, a Marina Del Rey-based fintech platform that offers a range of products oriented around conscious consumerism, including spend-and-save, investing, retirement and giving products.

“Most of the fintechs are basing themselves off of savings and checking, but we are already seeing mutual fund products, as well as credit and insurance products,” Pomeroy said.

M1 Finance is another example of a fintech trending toward rebundling. The Chicago-based company, founded in 2015, recently closed a $45 million Series C round of funding and is one of the 995 U.S. fintech companies to receive a cash infusion this year.

Investors pumped just over $17 billion into fintech startups year to date in 2020, according to Crunchbase research.

M1 Finance is bundling investment, borrowing and banking products into what co-founder and CEO Brian Barnes coins a “finance super app.”

When fintech companies began unbundling, the tools got better but consumers ended up with 15 personal finance apps on their phones. Now, a lot of new fintechs are looking at their offerings and figuring out how to manage all of a person’s personal finances so that other products can be enhanced, said Barnes.

“We are not trying to be a bunch of products, but more about how each product helps the other,” Barnes said. “If we offer a checking account, we can see income coming in and be able to give you better access to borrowing. That is the rebuild—how does fintech serve all of the needs, and how do we leverage it for others?”

Traditional banking revolves around relationships for which banks can sell many products to maximize lifetime value, said Chris Rothstein, co-founder and CEO of San Francisco-based sales engagement platform Groove, in an interview.

Rebundling will become a core part of workflow and a way for fintechs to leverage those relationships to then be able to refer them to other products, he said.

“It makes sense long-term,” Rothstein said in an interview. “In financial services, many people don’t want all of these organizations to have their sensitive data. Rebundling will also force incumbents to get better.”

Policy perspective 

The concept of financial services bundling is driven by two U.S. laws:

  • The Banking Act of 1933, aka Glass-Steagall, which separated commercial and investment banking and created the Federal Deposit Insurance Corp.
  • The Bank Holding Company Act of 1956, which enabled the government to supervise bank activities.

“These laws prevent banks from operating outside the narrow realm of financial services, nor do they allow for companies to do banking and investing or banking and commerce at the same time,” said John Pitts, head of policy at Plaid.

Those laws don’t apply to commercial firms, which is how companies including Netflix, Google, Amazon and Apple are able to get into financial services, he said.

“These companies are big enough to do banking services and are interested in doing it,” Pitts added.

Traditionally, financial services did all of their competing and bundling based on the location of the bank branch. However, fintechs are not restrained by geography, he explained. As a result, he predicts the merging of fintech and commerce may be almost an undoing of both of those regulations, and if those were to change, rebundling will look different.

Where we go from here 

However, several experts say it is too early to know the right services to rebundle or exactly what rebundling will look like.

“As we see challengers become dominant players, they will have the opportunity to experiment digitally,” Savage said. “They won’t be burdened from history and will be able to start with a blank slate.”

He also expects more innovation in the customer experience over time. That could mean niche financial challengers coming on, similar to how credit unions operate today, and offering very targeted services like a bank for yoga instructors or one for people who travel frequently.

Meanwhile, Barnes acknowledges that not every fintech company will rebundle in the same way, but if a company does well, they will most likely be the predominant system in the future.

If federal regulations are amended, Pitts expects rebundling to have no restrictions from those two acts. He points to changes on the horizon, due in part from a request for comment in June by the Office of the Comptroller of Currency on updates for banks’ digital activities.

“Banks are moving to be more like fintechs, and as fintechs rebundle services, we will see banks doing their own unbundling and rebundling,” Pitts said. “The questions will be who is the best at meeting consumer demand, and what will those bundles look like?”

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