Rebundling the bank as a platform

The future of financial innovations will rely on banks and startups working together

Much has been made of the notion that the explosion of financial technology stands to disrupt banks, or in other words, that the billions of venture capital pouring into the sector (some $14 billion in 2015) have designs on unbundling the bank. CB Insights’ signature chart, which illustrates how hundreds of startups have taken over individual tasks traditionally under a bank's purview, provided a compelling and rallying visual. But for all the rhetoric about disruption, that’s not exactly what’s happening—and that’s certainly not the story heading into 2017.

Instead, a different dynamic has started to emerge: Rather than drawing customers away from banks, many fintech businesses are in fact helping financial institutions become more entrenched. That’s because these so-called disruptors rely on existing bank accounts as the hub of their users’ financial lives. Financial technology businesses are the spokes that enrich them. (And Plaid serves to connect the two.)

The idea of the bank as a hub for the financial account isn’t new—but it’s becoming more prominent as it becomes easier to forge connections with bank accounts thanks to technology enablers like Plaid. According to a Plaid study of 581 consumers, the average consumer has 15.6 connections per bank account, which include third-party applications connected to the account as well as a litany of recurring billing payments, from utilities to insurance and investments.

Financial institutions are beginning to adapt to this platform role, embracing services like Plaid to act as the technology fabric weaving together old and new. Moreover, many banks are coming around to the idea that it’s good business to enable customers to take greater control of their financial lives by consuming fintech services a la carte.

A second Plaid-commissioned study of 848 U.S. consumers who use financial applications found that consumers are looking to banks to help them manage their digital financial lives. It’s a tricky balance to strike, to be sure: As banks strive to empower their customers, the survey found that hindering such data access—which can happen for a variety of reasons, from security controls to data monetization ambitions—could undermine a bank’s relationship with its customers. And by the same token, supporting third-party data access and enhancing the visibility consumers have into their connections can further cement loyalty (and increase switching costs).

Sophisticated financial institutions are taking advantage of this phenomenon.

This is borne out in the brands banks have built. A sample of Plaid data demonstrated that customers of tech-forward banks are more likely to have connections to two or more financial applications. Customers of other institutions, on the other hand, aren’t as likely—a dynamic we’ll unpack in a future post.

Studies have shown that when customers use financial applications they feel more empowered, are more likely to stay on top of their finances, and are less likely to make poor financial decisions. As banks work to find novel ways to help their customers get ahead—nevermind merely retaining them—it’s increasingly clear that it’s a good idea to partner with financial technology companies across the spectrum who are leading the way of future banking. Similarly, fintech companies must embrace working with banks.

This can take a variety of forms, from investments to an interest in startups that ultimately fuels banks’ own innovations. Just this week, for instance, J.P. Morgan announced that it has taken a stake in Level Up to support development of ChasePay—an acknowledgment that to build the best products and tools for customers, players across the financial technology ecosystem need not compete.

As Ana Capella, head of strategic investments at J.P. Morgan, told The Wall Street Journal, “We could have developed [LevelUp’s preordering and rewards features] internally, but they had already done it.”

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