It’s a term that has been bandied around in tech and financial circles for what feels like a lifetime. But if we are honest, it has been a bit of a damp squib so far. The banks have complied and basic account aggregation exists but it’s hard not to feel a slight pang of disappointment considering all the rhetoric of its arrival heralding a sea change in the way financial services works in this country.
The truth is that very few have built anything particularly compelling yet. Customers care little about APIs and what a TPP is and whether they are an AISP or a PISP. Indeed, customers care very little about Open Banking itself and why should they? It’s abstract and holds little meaning without anything tangible to latch on to. What customers do care about, and forgive us for stating the obvious here, are compelling products that solve painful problems or, arguably more interestingly, that create a need or desire that they didn’t know that they had.
Were we overly optimistic to expect groundbreaking products and services from the off? Clearly yes. There were always going to be teething problems with implementation and that’s even before the industry was able to take stock and think about how to deliver something truly meaningful for customers, make some bets and maneuver themselves towards product-market fit. The biggest winners so far have by far and away been the infrastructure companies such as TrueLayer, OpenWrks et al.
Whilst we are not going to claim that 2020 is the year that Open Banking goes mainstream, we have had conversations with enough companies in the space to know that many see the ongoing inertia as a chance to fill the gap and create something that finally moves the needle.
So, what do we believe is going to move that needle?
The truth is that very few have built anything particularly compelling yet. Customers care little about APIs and what a TPP is and whether they are an AISP or a PISP. Indeed, customers care very little about Open Banking itself and why should they? It’s abstract and holds little meaning without anything tangible to latch on to. What customers do care about, and forgive us for stating the obvious here, are compelling products that solve painful problems or, arguably more interestingly, that create a need or desire that they didn’t know that they had.
Were we overly optimistic to expect groundbreaking products and services from the off? Clearly yes. There were always going to be teething problems with implementation and that’s even before the industry was able to take stock and think about how to deliver something truly meaningful for customers, make some bets and manoeuvre themselves towards product-market fit. The biggest winners so far have by far and away been the infrastructure companies such as TrueLayer, OpenWrks et al.
Whilst we are not going to claim that 2020 is the year that Open Banking goes mainstream, we have had conversations with enough companies in the space to know that many see the ongoing inertia as a chance to fill the gap and create something that finally moves the needle.
So, what do we believe is going to move that needle?
We believe that if you follow Open Banking to its logical endgame, the marketplace model will emerge triumphant and is most likely to stand the test of time.
But first, what is a marketplace? A marketplace connects demand (someone who wants a product or service) with supply (someone who can provide a product or service) and facilitates a transaction (for which a fee is taken - this is also known as the ‘take’ or the ‘take rate’ when expressed as a percentage of a transaction).
Marketplaces are everywhere. They are a breed of businesses that have encroached into every aspect of our lives - Uber finds you someone who is willing to take you from A to B, Deliveroo delivers restaurant meals to your doorstep that you could previously only get via walk-in and Airbnb connects you with a stranger who is willing to let you make their home your own for a few days. Everyone’s a winner.
Marketplaces are not exactly new to financial services though. The likes of Starling and Monzo have already dabbled with marketplaces that integrate with other financial product providers such as insurers and digital mortgage brokers. That begs the question: do these newer challengers know something that the others don’t?
These fintechs likely understand the powerful and highly desirable characteristics of marketplaces which make them worth pursuing:
1. Two-sided network effects
Each additional unit of demand or supply creates value for the other side of the marketplace. Or to put it another way, more supply creates demand which in turn creates more supply and so on, resulting in a virtuous cycle.
So if we take Uber as a more concrete example: more drivers brings down the ETA for a ride which attracts more users onto the platform, which in turn attracts more drivers.
2. Highly defensible
Once a marketplace has built up a vast demand and supply-side and succeeded in getting the flywheel going, it becomes very difficult for a competitor to enter and replicate the marketplace - a strong barrier to entry has been created.
Just imagine trying to create a competitor to Airbnb. Users would have no reason to join your marketplace because you will have no listings and whilst some hosts may be willing to join (they have nothing to lose whilst they wait for you to build your demand-side), the likelihood is that they will eventually churn as Airbnb is already able to serve their needs so well.
3. Scalability
A marketplace owns no (or very little) inventory and is therefore able to grow and achieve huge scale as they aren’t having to deal with manufacturing/acquiring/storing inventory and all the complex operations and costs that this entails. You only need to look at how quickly some of these companies have managed to expand to overseas markets and achieve unicorn status.
The financial services industry is fragmented and this is to the detriment of the customer who is required to navigate this chaos.
The problems are numerous for customers.
1. Discovery:
2. Highly defensible:
3. Ongoing management:
Whilst the list above is not exhaustive, it covers some of the most common problems faced by consumers and anyone who can solve the above has the potential to completely monopolise customers’ attention when it comes to managing their financial life. And the more that we interrogate the above, the clearer it becomes that the mix of Open Banking and the marketplace model is the elixir for solving these problems effectively.
Consolidation is needed in this fragmented world. Customers value the convenience of having a one stop shop for specific needs - e.g. an Amazon for all their online shopping or a Netflix for their entertainment. In China, WeChat has gone as far as trying to be the one app to rule them all from messaging to booking cinema tickets to transferring money and it is succeeding.
The argument is similar for financial services - there is a need to aggregate customer demand and efficiently connect customers with the most suitable financial products whether that is your own or that provided by another bank or fintech.
Bringing together Open Banking with a marketplace model means that you can:
1. Discovery
Establish partnerships for the very best financial products/services across mortgages, insurance, money transfer etc and anticipate customer needs to surface the right product/service to the right customer at the right time - e.g. travel insurance for a customer who has just booked flights or mortgages for someone likely to be accepted based on their recent transaction history and potential deposit size.
The more customers you can attract, the more supply you will attract (and the greater your leverage with this supply-side).
2. Applying for or switching products
With great leverage over your supply-side comes the opportunity for building bespoke, in-app product application journeys that are more likely to convert as well as providing a stellar post-application experience.
It is also worth mentioning that such a marketplace doesn’t need to solely focus on financial products. Any platform that can aggregate significant demand in this way can be opened up to brands as a means to drive discovery and trial of both new and existing digital and physical products. American Express currently does this with the offers section in its app, allowing customers to ‘add’ offers such as discounts and moneyback to their cards which are automatically applied when they spend in-store or online.
3. Ongoing management
Close integration with third parties means a world where you can provide a consolidated view of all live products and their individual details.
The presence of a vast supply-side means there is always an opportunity to cross-sell/up-sell or recommend a product switch where it makes sense for the customer based on their transaction data or the arrival of new offerings onto the market which a marketplace is well placed to aggregate and curate.
This is by no means easy to do though and this will be a long and arduous journey requiring players who are in it for the long haul. Marketplaces are notoriously difficult businesses to build because you are solving two problems instead of one - 1) “What are customers’ pain points with financial services?” and 2) “How do I bring the right quantity and quality of customers to my partners?”. Getting this flywheel going takes time and effort.
Also, doing this at scale in the long run will require the use of machine learning techniques. Models need to be trained to infer what a certain pattern of spending means and therefore what the customer might need next - e.g. buildings insurance because they are purchasing a new home or maybe a better savings solution/practice if a customer is showing signs of reining in their spending as they eye a big ticket purchase. Both supervised and unsupervised learning algorithms could be used here where in the former we explicitly train a model to learn that x means y or in the latter case, we allow an algorithm to pick up more novel, nuanced patterns and needs that would not be obvious to a human.
Snoop is a recent example of a startup that we have been working with to build out a product which uses machine learning techniques and open banking data to make some headway in solving some of the problems - namely serving a user with the right advice at the right time. This is something that has often been seen as intractable but together, we have proven that it can be cracked.
Assuming that this is the endgame, this then means traditional banks and the likes of Monzo and Starling are already in a race.
As mentioned before, these newer challengers are already trying to build out marketplaces but what they realise (and what Monzo realised very quickly) was that a marketplace alone is not profitable without the lending activities to go along with it, which is where the traditional banks have the upper hand. Traditional banks have a low cost of funds and are able to lend these funds out at higher interest rates on their loans and mortgages than they offer on deposits. This is where the likes of Monzo and Starling are striving to get to as they convince people to move away from paying their salaries into their older, longstanding bank accounts so that they can use these deposits to build out their lending arms.
In short, having both the marketplace and the high margin lending activities is the holy grail and both startups and banks are closer to one than the other so it really becomes a question of who will be able to get their hands on both first?
It is worth addressing the elephant in the room though. Why would a bank want to build a marketplace if it involves recommending competitors’ products to customers?
We think there are a number of reasons:
1. Jack of all trades, master of none
It is impossible for any one player to be the market leader across all the possible offerings as different customers have different requirements whether it is the cheapest offering, specific product features or outstanding support.
It is best to acknowledge this from the outset and use this to one’s advantage. If customers are going to be using other offerings anyway, then why not provide value by making the discovery and application process for other offerings seamless and monetise this?
2. Preserving a direct relationship with the customer
A marketplace play means having a direct line to the customer with other players relegated to the periphery and needing to pay someone else to get access to this vast demand-side. The other argument is that this gives the marketplace the ability to surface their own products more often (obviously only when it makes sense to do because otherwise you risk losing the trust of the consumer) and to sell its benefits.
Simply put, it is better to be on the inside and in control than on the outside looking in. The nature of network effects means that once someone is on the inside, the relationship with the customer will be almost impossible for a competitor to break.
3. A unique vantage point
This model offers the opportunity to collect a vast amount of data on customers’ financial profiles via Open Banking, what demand for different products looks like over time and what product/services customers eventually end up opting for.
The beauty of this is that the owner of a marketplace effectively has a monopoly on this data and can use this to optimise their own portfolio of products or even to think about which new verticals to enter. If you know how many customers come through your marketplace and how many take out a particular type of product on a given day (on average) then you can forecast how many customers you could capture by producing a ‘better’ product. In other words, the ROI becomes clearer.
Another way to think about this is that you may start off with a ratio of 1:9 where 10% of traffic in the marketplace ends up taking your own product whether that is a mortgage or a personal loan. However, with the data, a marketplace can start to think about how to start shifting that ratio in their favour over time to 2:8, 3:7 and so on, whether that is through dynamically adjusting prices in response to demand or adjusting risk appetite at an individual customer level by leveraging Open Banking data and analysing their transaction history.
4. Profitability at scale
Banks can use their lending activities to subsidise the scaling of a marketplace whilst startups will likely need to rely on investors who understand the long game and are willing to provide the runway needed to realise this play.
We believe that once huge scale has been reached, the combination of revenues from own products as well as the take rate from marketplace transactions will be hugely profitable and even more so if the marketplace is successful in adjusting this ratio in their favour.
What we have laid out is our view on how we think things will play out in financial services in this world of Open Banking.
It’s an ambitious vision and one that will require commitment and resolve to realise. The most interesting aspect of all this is that there are many different ways to slice this problem with a variety of tactics that could help in making headway. There is certainly a lot to be learned from the playbook of other marketplace businesses.
One thing is clear though: the race is on.
