For more than a century, banks have had a monopoly on our money. As a kid, I remember driving with my family to our local community bank where the world of money started and ended for my parents. Banks provided a one-size-fits-all service rooted in a classic brick and mortar experience. The only consumer choice was which color lollipop to grab at the teller window. Fast forward three decades, and this feels like a scene from a Norman Rockwell painting.
We’ve reached an inflection point in “fintech,” where early disrupters are moving from challengers to industry leaders in their own right, as they expand their services, develop their brands, and increase market share. I predict several trends unfolding over the course of the next twelve months:
Fintech startups will start to look more like banks
For the past several years, fintech players have caused a significant unbundling of the traditional financial industry. These startups initially appealed to consumers by making it easier and more enjoyable to perform individual banking transactions, such as moving or borrowing money, saving, investing, or trading stocks. They relied on a superior product experience to hook early adopters and build solid user bases. It’s how innovation usually starts, with startups digitizing the best and more vulnerable parts of a traditional business.
This year we’re going to see more and more of these early disruptors expand their services and bundle more functionality around their core products, continuing a trend that gained momentum last year. It makes sense for budgeting apps to include checking, or for loan services to go after the market for credit cards. We’ve seen that untapped upside starting to reflect in some of these companies’ multi-billion dollar valuations. Robinhood, one of our portfolio companies, soared above $5 billion last year because of its impressive financial metrics but also for its future opportunity. The company has millions of customers who love the experience and are actively engaged, representing an enormous addressable market for launching expanded services.
These companies will make significant headway this year towards becoming the new generation of banks. To be sure, existing players won’t disappear—in fact, some of the more progressive financial institutions are doing a lot of work to stay relevant. But with hundreds of billions of dollars in market capitalization among traditional banks primed for disruption, venture investors will continue to bet that even late stage companies have a lot of room for future growth.
Your finance app will reflect your personal style
As this re-bundling occurs, we’ll see some of these new brands start to appeal to different types of consumers. The future of banking will be as much about brand identity as it is about functionality. Your banking app will say as much about you as do your clothes, your choice of music and the car in your driveway.
This is a major departure from the status quo. Most people feel indifferent to their bank today, or outright dislike it. Those feelings are a result of at least few factors: a sense that big banks are all the same; a lack of trust stemming from the 2008 financial crisis; surprise fees that feel unfair and predatory; or frustration with the slow pace of the industry as it moves online. The list could go on.
As banking becomes more personal, companies will find unique and authentic voices and back that up with tailored offerings to suit their customers’ needs and wants. SoFi, best known for its student loan product, directs its vast marketing budget at so-called HENRYs, offering ‘member experiences’ like happy hours and career coaching – with ad placements at X Games events and IHeartRadio concerts. Ellevest wants to redefine investing for women, and markets a set of tools designed specifically for them. Acorns, a widely used investment app, is sponsoring a driver at Nascar. New fintech brands are coming for gig economy workers, veterans, Baby Boomers and more.
Banks will scramble to upgrade their technology
Legacy infrastructure was not built for a world where individual services are spun out of banks. It was not built for a world that is seeing a rapid unbundling and re-bundling of services. Now, the underlying tools have to catch up with the new software and services that are being created. We’ve seen these kinds of cycles play out in many new scenarios, like GPUs and chips catching up to machine learning, for example. It’s a perpetual push-and-pull in the technology world, and we’ve hit the inflection point that demands new supporting financial technology infrastructure.
While consumers will focus on the shiny new applications that populate the App Store, entrepreneurs who look to the plumbing below will find huge opportunities. As Amazon Web Services has shown us, businesses that offer scalability and flexibility can become juggernauts. This was the thesis behind the latest company we invested in, Plaid, which helps millions of consumers connect their financial accounts to services like Venmo and Coinbase. By making it cheaper and easier for developers to build, Plaid is accelerating the growth of fintech. We continue to look for founders who are innovating in other areas of the tech stack, like payments and compliance infrastructure.
What’s next?
As a new parent-to-be, it’s fun to imagine how my kids will interact with money. Banking experiences will be more digital, more personal and more seamless than anything we’ve experienced in the past. Looking back, they may see 2019 as a pivotal year in this evolution.
Mark Goldberg is a Partner at Index Ventures where he invests in fintech and enterprise software. Index Ventures is an investor in Plaid, Revolut and Robinhood.
