Open data begets a partnership-first approach
The value chain that traditionally plays out in banking and financial services is being upended. Open data has generated a more partnership-driven approach to value creation and value capture. The era of closed consolidation in financial services amongst a small group of giant institutions, where each display a high level of vertical integration, is shifting. We’re seeing movement towards an open ecosystem standard — with a focus on increased specialization alongside more layers in the value chain.
Breaking down the open banking and finance value chain
The open banking and open finance value chain can be mapped roughly into five key categories: embedded journeys, intelligent services, financial products, capabilities, and transactional rails (11:FS, 2021). As fintech matures, the boundaries between these areas become clearer. This represents an unbundling of the previous state-of-affairs, where a handful of institutions were vertically integrated across each of these categories.
It has never been easier to build a new company and develop new products in banking and financial services. One needs to identify which category of the value chain they will operate in and identify a problem that needs solving. ClearBank’s unique selling proposition, for example, is that they are the only clearing bank in the UK that doesn’t offer retail banking services. It's easy to understand why that proposition is so compelling, especially to retail banks in the UK – they no longer must compete with their supplier.
How the growing importance of CAC:LTV cements partnerships as a strategic imperative
The commoditization of banking and financial services is spurred by favorable market conditions. Higher customer expectations, regulators championing open data policies, and a maturity in technologies that improve the customer experience have all been influential. The profitability equation that sticks top-of-mind for industry leaders is the relationship between customer acquisition cost (CAC) and lifetime value (LTV).
It's a simple determination. If a business can reliably and predictably acquire customers at a cost less than their lifetime value, they can invest more into sales and marketing to boost profitability. This principle remains true irrespective of which category of the value chain the company lies in — even if that straddles multiple.
The World Fintech Report (CapGemini & Efma, 2021) outlines the phased profitability journey fintech companies undergo in the graphic below. Nascent fintech companies first must strive for product-market-fit in one (or more) of the five categories described previously. Once achieved, the goal is to diversify and grow a loyal customer base. A key driver will be the ability to build or join existing ecosystems and increase the surface area of their products or services – partnerships as opposed to a buyer & vendor relationship is key. A fintech company’s competency in generating sustainable partnerships will become a big determinant of their value proposition to existing and potential customers. Driving customers’ LTV and scaling beyond their core market will be critical to success.
Turning competitors into potential collaborators
The market ‘pie’ for banking and financial services continues to expand and has long ceased being a zero-sum game. As technology intensifies – with blockchain, progressive regulation, and higher customer expectations – this sector will become a positive-sum game whereby collaboration will eclipse competition as a key business imperative. Competition will scale from being a firm-à-firm affair to being an ecosystem-à-ecosystem affair.
End users – be they consumers, businesses, or public sector organizations – will judge and spend their money on the financial services that offer the best customer experience. This has not necessarily changed from past situations. What has changed, however, is the composition of these services. 20+ years ago, we could reasonably expect a customer experience in financial services to be supported by one firm i.e., banks. Nowadays, it’s reasonable to expect that there are 10s to 100s of firms in an ecosystem which supports a customer’s experience in financial services.
One company likely owns the customer-facing embedded journey. They will be supported by a group of third-party developers offering their flavor of intelligent services to power the customer experience. Further, the product and capabilities layer of the service may require partnerships with yet another group of developers, each adopted to bring specific skills to the table. Finally, there may be others that offer services relating to the transaction rails (to enable payments) which power customer experiences in financial services. To deliver a single streamlined and personalized customer experience, there is a first-degree ecosystem that powers it. This is still excluding the second-degree ecosystem which powers the first-degree players.
Take Venmo in the USA, they enlist the help of several suppliers and technology vendors to create their customer-facing embedded journey which enables peer-to-peer payments. Plaid offers Venmo’s users the capability to connect their bank accounts to the service. Plaid would be an example of a supplier in Venmo’s peer-to-peer payments embedded journey, part of that first-degree ecosystem. Who powers Plaid? The answer are many suppliers and technology vendors, and they represent the second-degree ecosystem that indirectly powers a Venmo customer’s peer-to-peer payment.
These are the ecosystems that will be collaborating with each other — and competing against each other. As such, a company's ability to build long-lasting and mutually beneficial partnerships will only grow in importance.
Ensor, Benjamin, and Puneet Chhahira. Rep. Developing Innovative Digital Banking Business Models. 11:FS, 2021. https://content.11fs.com/reports/digital-banking-business-model-innovation/
Ghanem, Elias. Thakral, Chirag and Vivek Singh. Rep. World Fintech Report 2021. CapGemini & Efma, 2021. https://fintechworldreport.com/