Will integrated finance do away with traditional banking? Actually yes!


A market research survey of more than 1,000 senior decision-makers in the UK, Belgium and the Netherlands, commissioned by Vodeno, a Polish banking-as-a-service (BaaS) platform provider, found that two-thirds of them they said BaaS is transforming financial services for the better (I’m surprised a third haven’t, frankly) and, interestingly enough, half of them said it will eventually make “traditional” banking obsolete.

This may seem like a radical prediction, but I think it’s completely reasonable. Banking is not fun or interesting and most people (including me) really don’t want to spend any of their valuable time or attention on what is essentially a heavily regulated public service. Most people (including me) would prefer to have their financial services delivered to them in the moment of need without interrupting their experiences. As Christina Melas-Kyriazi (partner at management consultancy Bain) observes, if you want to provide financial services to a person, in some cases the best way to reach that person may be to “through software, where they are doing their job”.


Europe and the US are going in the same direction here: Bain estimates that all types of financial services (not just banking) embedded in software accounted for $2.6 trillion, or nearly 5%, of total US financial transactions. The US in 2021 and will roughly triple to $7 billion in 2026. Keep that point in mind: This is all kinds of financial services and not just banking. While the market is currently dominated by payments and loan services, the upward trajectory will also attract adjacent value-added services. Bain suggests insurance, tax and accounting as obvious candidates.

But what will this mean for fintechs? On the one hand, the ability to deliver financial services within consumer-centric experiences means better customer experiences, but on the other hand, it means serious competition from techfins. As Sophie Guibaud and Scarlett Sieber wrote in their 2022 book Embedded Finance: when payments become an experienceIt makes sense for tech players to move in this direction because they are companies that know their customers, have strong relationships with them, and can use their data to predict their needs, offering the right products, at the right price, and at the right price. hour.

Techfins are more than happy to let banks, for example, do the boring, expensive and risky work with all the compliance headaches. Big Tech doesn’t care about manufacturing financial products, it wants the distribution side of the business. Since they do not have legacy infrastructure (for example, branches), their costs are lower and the provision of financial services helps keep their clients within their ecosystems. It’s easy to imagine a future where you use an Apple
checking account (actually provided by JP. Morgan) and an Apple credit card (actually provided by Goldman Sachs) and using an Apple loan (actually provided by Wells Fargo
) to buy your Apple glasses, then Apple will have a very accurate picture of your finances. A very accurate image indeed.

It’s all about data, again

The business model here is clear. as I have written here before, what Big Tech wants is not your money, but your data. After all, the margins of the money are shrinking. According to McKinsey, “traditional” banks face stagnant or reduced revenue and profits. They report that the return on average global bank capital was around 9.5% in 2021. This is a sharp decline from 15% before the 2008 crisis and on track for a projected 7% by the end of the decade.

One particular segment where this is having a big impact is small business lending. A working paper of the Bank for International Settlements (not. 1041, September 2022) points out that fintechs (note Funding Circle and Lending Club) lend more than banks in areas where there appears to be a poor credit environment. The paper identifies the competitive threat to banks and concludes that such players can “create a more inclusive financial system, allowing small businesses that were less likely to receive credit through traditional lenders to access credit and do so at a lower cost.” under”.

Why? Well, unsurprisingly, it’s all about technology. Fintechs can assess credit risk using information beyond basic credit scores to emulate (and improve on) the local knowledge that used to be the domain of local banks. They cite the ability to access customer ratings and reviews as a good example of “soft” data that can help inform credit decisions. As Jonathan Katz comments on this in The financial brandbanks that access such data will benefit from the business information it provides, but keep in mind that this is information that giants like Amazon
already have access to.

Imagine how much more accurate Big Tech’s decision-making can be by feeding machine learning algorithms with its accumulations of data. If we want a better financial services industry, we need to find ways to create a more competitive industry, and that will mean moving to some kind of open data environment that provides not just financial services, but also financial health, which is one of my favorite topics. .

Boosting financial health

There was a good article in the Harvard Business Review a couple of years ago where Todd Baker and Corey Stone explored interesting ideas about the transition from individual financial services to integrated financial health. In that article, they noted that the prevailing paradigm (of markets and choice) created a regulatory system that “largely assigns responsibility, in the absence of the most egregious abuse, to the individual consumer” and advocates for a radically different regulatory structure to connect more directly the success of financial service providers to the financial health of their clients.

(They draw an interesting analogy by comparing this approach to experiments in the US healthcare marketplace that pay providers to improve the health of patients, “instead of simply paying them to treat patients regardless of the outcome of medical intervention.” .)

Headlines have a problem here too. Not only do they not have the data that the big tech companies do, but according to the results of the JD Power 2022 US Retail Banking Advisory Satisfaction Study (based on responses from 5,177 US retail bank customers), US last 12 months), overall customer satisfaction with the advice and guidance provided by national and regional banks has declined over the past year.

In fact, less than half of US customers use some form of financial health tool offered by their bank, which is a bit disappointing considering how much banks invest in their digital apps, especially since research show that customer satisfaction with the way their bank supports their financial health increases considerably with the use of such tools.

Given that financial education is generally poor and the financial landscape is complex, you have to ask yourself whether it makes sense to try to use tools to educate consumers, especially when a substantial fraction of those consumers have low digital literacy and skills, it doesn’t matter. financial literacy and money skills.

Perhaps it would be better to provide consumers with intelligent agents to act on their behalf! I spent several hours researching, applying for, and financing a new savings account, and I’m still not sure if I made the best decision or not. I would rather have a bot operating under a regulated duty of care do this kind of thing for me!

Refocusing the sector on providing financial health, rather than financial services, has implications that go far beyond choosing better credit cards or spending less on coffee and more on pensions. To do this, financial health providers will need a better picture of people and their circumstances. They need the raw data to work.

(This is where the connection to open banking, open finance, and open data comes from.)

When you look at the trends in this context, it seems pretty clear that when a bot can access the relevant banking services via APIs and do all the boring banking stuff that pretty much nobody wants to do themselves anyway, then the idea that people will access “traditional” banking services seems really quaint.




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