Building the Whatsapp of money: how banking is about to have its net neutrality moment
Banking networks today are reminiscent of telecommunications and the internet itself circa a very long time ago. Banks control how and with whom you transact, holding on to the scarcity of banking licenses and the limits they are entitled to impose upon their customers. This is all about to change. Unbundling in fintech is exploding, driven by the economics of open, scalable technologies, the disassembling of global regulatory barriers, and the opportunities for starkly increased value to the end-user via ubiquitous personal device ownership. Picking the winners in this new reality means looking through a lens more familiar to social networks and media than banking and investing.
Just as open principles, net neutrality, and antitrust legislation forced telecoms operators to give control back to users when it comes to how they communicate, banks and other financial institutions are being compelled to open their networks and lift restrictions on how customers pay, and otherwise access their stores of value. This paves the way for the kind of disruption in the financial world that independent, over-the-top service providers caused for telecommunications. It’s now possible to build the Whatsapp of banking.
In the early days of telecommunications there was no interconnect. If you were a customer of one of the first internet service providers, such as America Online or Compuserve, you could not email users on another network. This seems bizarre in today’s world where you can send email from Gmail to Office365 or any other standards-compliant provider.
A big reason for why we have an open internet, albeit one that is under threat in this present moment, is because of net neutrality: the principle that internet service providers must treat all internet communications equally. This happens to varying degree globally, but in general most of the world is able to choose who they communicate with, and how.
This has more to do with network science than just regulation. If you study the history of any information network, from tribal gossip to online media, you’ll find a tendency away from centralisation and toward decentralisation, accompanied by phases of unbundling and rebundling (no, that isn’t a word, but it should be).
While banking has bucked this trend, its time has come. Financial networks are decentralising because of regulation, such as PSD2 in Europe, technology multipliers like blockchain, and pressure from customers who want money to flow the same way other information does in their lives. And make no mistake about it: money is information.
Next generation banks understand this. Their products are built from the ground up to allow customers to plug in third-party software. They understand that they have more to gain from enabling open banking networks than fighting an inevitable trend.
The telecommunications networks that chose to fight open access and standards were forced to adapt or die. The failed services that some tried to create in order to stave off third parties failed too. Cellular networks, for example, tried to create their own social and news networks, streaming video, and other services that were crushed by Facebook, Netflix, WeChat, and many more network-agnostic providers. Eventually telecoms networks had to appreciate that they are plumbers, providing the network infrastructure and access layer, while the customer relationship was owned by the Instagrams and TikToks of the world.
Banks will come to the same realisation in time. Not only are they disincentivised to build network-agnostic customer services, but even if they did their customers do not want it from them.
Consider SMS text messaging, which dominated communications on early cellular networks. The moment an open internet was accessible via mobile, third-parties like Whatsapp, WeChat and Apple Messages have all but obliterated SMS in most markets.
In the world of banking we are seeing the rise of payment and other services that have a similar effect to what Whatsapp had on mobile messaging. If you could access your bank account and make payments using a better, common platform with a delightful user experience and that all your friends used, regardless of who they banked with, why would you use your bank’s app instead? What if that platform also agnostically offered a range of investment, insurance, and other third-party providers, allowing you to access them all? The banking front-end of the future is a marketplace and the future consumer has expectations that go far beyond banking.
Financial services unbundled
Spend a few minutes in the App Store, or surveying adverts on underground walls, and it's obvious that we’re in the midst of a fintech land-grab as thousands of aspirants seek their share of the trillions in value that will be unlocked by an open banking environment. A new generation of service providers is offering smart card payment, business banking, bill splitting, investing, and just about every other solution imaginable. An explosion of unbundled financial services has consumers replacing single banking instances with menageries of special-purpose apps.
We saw the same thing in social networking. You use Facebook to stay in touch with older family members, Twitter to follow your interests, and if you’re anything like me you probably have multiple chat apps installed so that you can speak to your crew on Telegram, team on Slack, business partners on Zoom, keep up with the dank memes on Reddit - the list goes on. Gone are the days where you spoke to everyone on email, if you’re old enough to remember such a time. Now your contact list - apologies, "social graph" - determines your collection of apps, whereas it used to be the other way around.
A monolithic view of winner-takes-all services is farcical. It doesn’t matter how good your product is, it can’t hit every niche. The future is unbundled, thankfully, with multiple opportunities in a global market, enabled (for the most part), by an open internet.
Most old banks don’t grasp this new paradigm. You go to the App Store to download your bank’s app, which in itself is an app store. Despite every data point suggesting otherwise, incumbent financial services providers still view the world this way, and are incentivised to maintain the status quo.
Meanwhile, unbundling is an unstoppable force that is reshaping the landscape. Just as mobile network operators had to abandon the apps and services they had created in their walled gardens, banks and other institutions are increasingly having to let go of their own customer portals and appreciate that they, like telecoms operators, are the plumbing that enable next-generation services. The consumer relationship is migrating to the next layer of protocols and services.
The myth of re-bundling
Gather pitch decks from the world’s leading fintech startups and you’ll encounter the holy grail of fintech funding: a single app or service that claims it will be the last unicorn standing in a world where financial services are re-bundled. Like unicorns themselves, I doubt we’ll see this manifest in reality. Reaching for domination is a strategy fraught with risk on littered highways. There will be those who will drip feed off tiny niches in this new ecosystem and there are those who use their proven design and development skills to situate a suite of easy-to-use applications at the entrance to the new gateways.
What looks like re-bundling is really just reframing. The great conduit through which everything flows is the smartphone. If anyone owns the re-bundled future of financial data and services, it's Apple and Google - but then they do the same thing for your family photographs, notes, and all other information too.
The meaningful work is being done by teams who appreciate that the smartphone is the platform, and the game is to bring sense to a Cambrian explosion of new services. Try and be everything to everyone and you’ll end up being nothing to no-one.
Given what we know about network science, it soon becomes obvious who is building a product for actual customers in this new world, and who is building engagement metrics for their next funding round. Value is delivered by the former.
No one knows exactly what the future looks like. We always overestimate the change that will occur in the next two years, and underestimate what will actually happen in the next ten (thanks Bill Gates). What we do know is how products are built in a world of decentralising networks. The shape might be unpredictable, but the pattern is always the same.
There are two kinds of banking networks in the future, just as there are two kinds of telecommunications networks: those that grow to appreciate their role as plumbing, and enable instead of fighting open services, and those that aren’t around anymore. We look forward to working with the survivors.
The real differentiator
Modern fintechs are B2C businesses that are subject to the same combination of magic and metrics as their counterparts in social networking and media. Picking winners in this paradigm is difficult. If we have fifty Transferwise competitors all offering the same rates and expedience for offshore remittances it is difficult to decide which will compel more consumers towards its funnel. Next generation banks are increasingly homogenous, all offering about the same thing once the chips have fallen in the design-thinking arena. The world of open banking will unlock a new smorgasbord of competitors for consumers to choose from.
It was difficult to describe why Facebook beat Myspace to become the world's leading social network. At the time it launched, Facebook offered nothing that Myspace didn't have on paper. But in reality Facebook offered a much better user experience. The average early adopter would find it difficult to articulate why Facebook was better. It just was. And once they had entered the service Metcalfe's Law and other network effects took over: you used Facebook because your friends were there.
Looking at the nature of a service, then, is a red-herring in determining its prospects. The best teams build the best services. The best user experiences win hearts and minds. The network effects makes the next phase of progression through the Diffusion of Innovations curve inevitable. You can't predict the waves, but you can bet on the best surfers to ride those swells when they come, and all that good stuff.
When looking at the next generation of fintech services, then, the correct question to ask is not if what they are doing will succeed, but rather who is doing it, and how.