In April, Unifimoney founder Ben Soppitt published an article entitled “No one needs another Neobank — so why are we launching one?” His piece was responding to a widely held belief that there are already too many neobanks flooding the financial space. Which is why we were fascinated to come across 11:FS, a challenger consultancy that believes the neobank and Fintech market is only 1% complete.
Last week, we connected with 11:FS Co-Founder / Head of Ventures Simon Taylor to better understand their vision of the neobank/Fintech space. He told us about the places challenger banks can still move into, the issue with attempting to innovate from inside an incumbent bank, and what finance will look like five years down the road.
He relayed a construction his friend Derek White uses when speaking about financial innovation: above the glass and underneath the glass. “Above the glass, we’ve certainly seen a lot of innovation at incumbent banks, but what people miss is how much innovation can still happen underneath the glass,” Taylor says. “Incumbent banks have not yet built great products, because great product comes when the underlying digital comes together with what’s above the glass. That’s how you can create amazing experiences.”
Unifimoney: We’ve seen a popular idea circulating about how the Fintech/neobank space is already oversaturated. And yet, as I looked through the 11:FS site, I noticed the tagline: “Digital financial services are only 1% finished. We’re building the next 99%.” When so many people think they’re already too many challenger banks or financial service offerings, why do you guys feel the opposite?
Simon Taylor: I think it’s a mindset thing, right? I mean, if you were to look at the Apple share price in 2009, a lot of people thought it was already overpriced. People consistently have underestimated the sheer impact the move to the digital economy is really having on the world and it always feels overpriced. So, there’s that side of it. There’s the macro picture.
And then secondly, I’ve actually got a thesis called Fintech is 1% finished, which argues that, so far, Fintech has really only played in better user experiences for mid-market retail for the under 35s. And that is a segment; it is absolutely a segment. But it’s addressing maybe 10% market share. If you look at that as a percentage of the retail market or as a percentage of the banking sector, it actually gets really, really small.
If you look at banking, you have retail, mortgages, savings, wealth investments, and everything beyond that: small businesses, commercial banking, corporate banking, investment banking, and all of the sub-products around foreign exchange, around trade finance, around all of these pieces. Fintech is starting to nibble away at the edges across all of those sectors, but it’s only just getting started. There’s so much more to do.
Unifimoney: In recent years, we’ve started to see incumbent banks finally improve their apps and make some other cosmetic/UX design changes. We certainly believe tech can change finance, but we think it will be more than an aesthetic facelift. In your opinion, how much of the next 99% of tech-enabled change in finance is going to be unseen?
Taylor: Banking is really about being able to manage risk, and tech can enable banks to do that in a completely different way. There is now a type of lender who just doesn’t use the FICO score. They look at data in a much deeper and richer way to really give you a personalized credit score and risk assessment. Banks can also be doing that from a fraud standpoint and for so much else. If you have a fundamentally different technology architecture, you have fundamentally different results in terms of your ability to manage risk, your ability to be profitable, but also your overall cost-income ratio.
We built these big industrial processes in banking for many years, where, to deal with volume, we built a process and outsourced it to the lowest, cheapest labor. Technology now allows us to potentially re-introduce personalization in a way that’s really powerful. You’ve got the ability for the data to drive deep, powerful insights, while human brains can be used for the empathy, creativity, and problem-solving sides of banking. And so, a lot of the changes to the industry will be about rethinking the business processes from first principles, knowing what you can do with these new tools.
My favorite metaphor for this is: around the 1860s, 1870s, the introduction of the iron railroad bridge was really seen as heralding an amazing technological advancement. You have this technology in iron that was a lot tougher and more tensile than wood. However, in the early days, they just tried to build a bridge that was crossing a gorge that a wooden bridge had been crossing and they put all of the pieces together in the iron bridge as if it was a wooden bridge. So, they had the same rivets, the same connectors, because they were very, very used to working with wood. But then, as soon as they came to run a train across the tracks, the bridge collapsed and the train exploded and nobody could figure out: why is it that this new, amazing technology created something not as strong? It’s supposed to be stronger than wood. Why doesn’t it work? Clearly, new technology is terrible.
I think this is what’s happening a lot with banks: they’re trying to use the new tools in old ways. Using machine learning in a credit committee just isn’t fundamentally going to fit. Using it when all of your documents are in paper just isn’t going to get you the kind of results that a modern tech platform can really give you.
Unifimoney: That’s fascinating. I just finished your article “Why banks need a new approach to innovation” which argues that in-house bank-funded labs and accelerators are innovation theaters that aren’t actually changing the experience for the consumer. How would you propose these incumbent banks approach innovation or is it impossible for it to happen from within?
Taylor: No, it’s not impossible. But I think it has to be seen as mission-critical rather than marketing. What percentage of revenue do you want innovation to be bringing to the organization or what cost-cutting target is it going to help you meet? What level of autonomy and empowerment is that person going to get as a P&L owner if they build a new business?
Because quite often in banks you have product-line owners and P&L owners that have a level of responsibility, and if something comes along that’s going to cannibalize them, then they’re not going to be very fond of that thing. So, the way banks are set up often creates internal conflict before these things even get off the ground.
But we’ve seen actually quite a good example with Goldman and what they’ve done with Marcus. It was clear that the investment banking approach that they had with a banking license wasn’t going to be the big key to growth for them. They needed to grow in different ways and they were able to do so because they built something new and they spent a sizable amount of money doing it. It was a big bet and they took it and they’ve succeeded. That is absolutely something the incumbent banks can do, but it needs that level of commitment.
Unifimoney: You guys are in the business of helping make banking services truly digital. How will consumers interact with their money differently in five years than they do today?
Taylor: Historically, in financial services, you have the infrastructure rails — Visa, MasterCard, Swift, ACH Wire — and then above that you had the people who provided services around fraud, onboarding, you name it. Above that you have the people who create financial products, which were the incumbent banks mainly: they would create a mortgage, a checking account, a savings account, you name it. Now, what we’re seeing is there’s a layer coming above that, where people are providing these more intelligent, more contextual services.
There’s a really interesting example in the UK called getnude.com, which is not what it sounds; it is safe for work. It’s just a hyper-focus product that does nothing but helps you save for your deposit for your first mortgage for your first house. It sits on top of your banking app and it will integrate into it, so it can pull money from your bank account and it can show your overall picture. These apps help you save; they’re more of a personal financial assistant. They sit above and on top of the banking app.
This layer above is a really interesting space. I wonder if in five years time has that just become more mainstream. I wonder if we’re managing our money as an abstraction from the underlying accounts a little bit more. If there’s an app for everything and we move away from thinking about financial products and instead think about the apps as services. Like, how am I going to buy my first home? This app will help me save for a rainy day. Things that solve those specific problems. Make me a better saver. Give me a view of my financial health.
The banks might not provide those apps; the banks might become more commoditized beneath them.
Unifimoney: A lot of Fintechs are focused on educating their customers on the world of finance, where the language has been purposely obscured. Should the goal be to give your customers a new financial literacy or is the solution to simply digitize and automize finances?
Taylor: I think it’s somewhere between the two, right? If you check out withplum.com, they’re one of these financial apps that helps you save. They’ve really got the best of behavioral psychology and machine learning kind of combined. What they do is similar to Acorns’ whole found-money thing, but they do this really interesting thing that I’ve not seen anybody else do: they’ll try and push you harder in your savings.
So let’s say, they look at all of their data and they think that you are gonna really feel like you can save a little bit more on a Tuesday around 9:00 AM, cause you just had a coffee and you’re all hopped up and you’re feeling great. So they go, ‘Hey, how about you save another $30? Click here to do it.’ Bang, you’ve just saved $30! A little celebration comes up on the screen. All of that stuff that social media has been using for the last 10 years to keep us scrolling and scrolling, they are doing that but to make you a better saver.
Now, they don’t have to educate you to do that; they just have to use behavioral psychology to nudge you towards a better outcome and make you feel good about it. But behind the scenes, they can be ambiently using some language, introducing some stuff. A lot of it’s in plain English, but it’s kind of gradually introducing these concepts to you. So, don’t try and instantly educate; work with the human over an 18-month or three-year time horizon and take them on a journey to being better with finances. In that process, they will become educated. They’ll just learn about this stuff. And they’ll suddenly see that ‘Saving is pretty fun!’ and ‘Holy crap, this compounding stuff’s pretty good when you get your head around it!’
So, I think that is more the model. It’s not that you just automate and digitize and dehumanize the whole thing. And it’s not that you end up going to the opposite extreme either. It’s finding that balance of where digital is in the user’s interest. Then you can start to solve customer problems in a completely different way.