Because it is the gateway into all kinds of financial products and services. From accessing credit to investing in savings products, the bank account feels like the ideal point of access: everyone needs one and consumers have to look at it – at least sometimes - to check they haven’t run out of money.
Traditional banks offer the bank account as a means to sell their own products but the bank account of the future will be owned by an aggregator that can offer the right products for the user, and be impartial about where the ultimate funds come from. The future bank looks more like a technology business rather than a balance sheet business.
Look at Uber, which does not own any taxis but instead aggregates drivers. This model will become commonplace in banking.
We are already seeing this with WeChat, which integrates all kinds of products and services with its payments system. It has become so integral to the lives of its users that most of them open the app more than 10 times per day.
The winning aggregator will have a slick interface that consumers love. Many people are sick of the clunky systems that big banks offer today. They may be updating their technology, but the pace of change is glacial.
The problem that any prospective aggregator faces is that the cost of customer acquisition is very high. This industry is fiercely competitive: there are 360 lenders in the market for SMEs alone. The cost of acquisition roughly matches the value that you can extract the customer, and that’s if you own the whole value chain.
If a new player opts instead for an aggregation model and only makes an introductory fee for connecting a new customer to one of the products it offers, the lifetime value of that customers will be far below that currently achieved by the banks, which only offer their own products. You could only succeed by supersizing, and having some control over the third-party providers you are bringing in.
"The problem that any prospective aggregator faces is that the cost of customer acquisition is very high. This industry is fiercely competitive: there are 360 lenders in the market for SMEs alone. The cost of acquisition roughly matches the value that you can extract the customer, and that’s if you own the whole value chain."
I think Revolut has attacked the market in the right way. It has supersized very quickly, adding revenue lines spanning crypto and payments and current accounts. It is also serious about generating revenue. I think that Revolut may win this race.
To survive, the major banks may start selling off pieces of their businesses. But you have to be careful not to bring down the whole house of cards. Banks need all the pieces to work together in harmony to make the model work whereas the new banking start-ups tend to pick one segment and work it really well.
Open Banking will accelerate this trend too. It’s a great initiative but one that is limited to transactional banking data right now. The quality of that data just isn’t quite there yet and much is dependent on the banks themselves embracing the system and making the customer experience really positive.
In the business banking ecosystem, the point of aggregation is already maturing in the form of cloud accounting. It’s highly likely that the business bank account of the future is a bucket of money attached into the likes of Sage, QuickBooks and Xero.
The final point to consider is visibility. How do consumers find out about the new players? The major banks have these branches with eye-catching signs on the high street that remind you they are there. I wouldn’t be surprised if some of the challengers and fintech open venues of their own. These will be experiential stores, like Apple or Samsung have and where Halifax has just opened at store at Tottenham Court Road, rather than functional banks – a way to touch base with the customer.
People are also spending more and more time in virtual worlds and on social media, so the brands that have a foothold in these areas will gain visibility. I can imagine that in future, you’ll see brands appearing on virtual reality quests and in games.
It takes time to build trust, however, so challengers will have to be smart about their strategies. Many of the new entrants are still investing heavily in acquisition without matching the revenues but I still think those aggregating and controlling distribution, rather than providers of capital or financial products, will win the day. We’ll have to wait and see.