Are marketplaces as important as digital banks say they are? Andy Davis investigates.
If there were remaining doubts about the strength of the marketplace mindset among digital neo-banks, the past few weeks should have killed them off. Since mid-February both Starling and Monzo have announced fresh partnerships with third-party providers to flesh out the range of services available to their customers. They follow earlier adopters including Revolut, N26 and Fidor, all of whom already partner with other companies to gain faster access to a wider product set. It looks very much like marketplaces – offering everything from loans and FX services to investments, wealth management and even cryptocurrency dealing – are now the orthodoxy among digital banking start-ups.
They may have become the industry orthodoxy for all but a few, such as Atom, but is the marketplace model sustainable in the long-term, or is it just an intermediate step in the evolution of digital-only banking?
Inevitably, there are advocates for both sides. Ricky Knox (pictured), Founder of Tandem, occupies an interesting position between the two poles of the argument. Like most other neo-banks, Tandem operates a third-party marketplace but, says Knox, it is not central to bank’s revenue generating plans. “Our view is we should not be relying on the marketplace to make us our money because if you do – and we’ve run an awful lot of iterations of the model – you have to squeeze pretty hard to build a good business out of that,” he says. “For us, the marketplace is a core generator of customer benefit and not really the core place that we go to make money.”
For Tandem – with its stated aim of creating a “good bank” – the need to generate large volumes of sales via its marketplace to compensate for lower margins on those sales could conflict with its claim to want to do right by its customers. This is a familiar problem from another marketplace business, comparison websites, which have frequently been accused of favouring third-party providers that pay them the highest sales commissions, rather than those that offer the best deal to the customer.
Instead, says Knox, Tandem aims to make money from its own products and provide benefits to its customers through its marketplace by giving them convenient access to a wider range of offers, including some products that it also provides itself. But he admits that even here, the practicalities dictate that the value of the marketplace to Tandem customers may be more in the impression of choice and convenience that it conveys, than in the actual ease with which they can select third-party products.
“If I’m honest even our somewhat optimised journeys for price comparison are a bit painful and very highly regulated,” he says. A customer looking to select a third-party product faces “20 clicks and lots of data entry” en route. Some might find it less hassle to take the Tandem version of the product they’re after.
This issue of price versus convenience goes to the heart of the debate about marketplaces in digital banking. For a marketplace offering to work really effectively, the integration between the marketplace owner and the third-party product provider has to be extremely slick so that the onboarding process is as fast and seamless as possible. But that begs an obvious question: who has an interest in paying to make that happen?
Knox says that most partners that Tandem talk to fall into one of two categories: fintech start-ups with great APIs but no market traction, and established players with terrible APIs and no IT development capability. The start-ups are willing to pay the cost of integrating with Tandem’s APIs, which makes sense because above all they need to reach Tandem’s users. But he says Tandem would have to bear the cost of the tech integration with established providers that are by their nature less in need of new sources of origination. Why would it pay to help someone else sell a product that it could probably offer for itself?
“There’s a very limited number [of potential partners] that fall into the category of having both decent APIs and the products that customers might want, so you’re in danger of ending up with a thin marketplace or a marketplace of people who are there for the wrong reason.”
The question of who has an interest in investing in the tech integrations that underpin marketplace models has another dimension too. Marketplaces are inherently transactional – consumers go there to buy a well-defined product, usually on the basis of price and features/terms. But Knox argues that the real potential of digital banking is to provide service-based solutions to customers that might involve a combination of several products. He cites the example of a first-time homebuyer, who might first be offered a Tandem account into which they pay the sum they would have to find every month to service a mortgage. By doing that for an agreed period, they can prove to Tandem their ability to save and that they can afford the monthly outgoings, at which point it might be prepared to offer them a higher loan-to-value mortgage than they could get from a mainstream provider.
“That might involve a combination of automated withdrawals from your existing account plus an instant access account, plus a mortgage and probably some advice in there as well, plus some way of spotting and triggering that you were interested in that journey. There’s a whole series of financial products and digital pieces that need stitching together to create that end-to-end as a product.” The prospect of spending “half a million to build a brilliant customer journey” based on other people’s products, in return for a share of a small commission, does not stack up financially, quite apart from the practical difficulties of getting the co-operation with the product providers required to achieve the right level of integration.
From Tandem’s perspective, therefore, the marketplace has a role in its growth strategy, but not the central one. On the other hand, for a business like LendingWorks, the P2P loan platform that provides personal loans for Revolut’s digital banking marketplace as well as point of sale finance for retailers, marketplace partnerships represent a key origination channel. “Our entire strategy is focused around funding loans and generating customers via partnerships,” says Nick Harding, Co-Founder of LendingWorks. Today, three-quarters of LendingWorks’ customer acquisition comes via its API links to its partners, and 25% via its own website. This meant that LendingWorks had a clear interest in investing to create a very close integration between its platform and Revolut.
Even so, Harding freely admits that some of the businesses LendingWorks has partnered with might one day decide to offer their own loans. “With some we will keep doing this forever,” he says, “and for others their strategy is probably that we won’t.” LendingWorks’ plan is to work with a wide range of partners: it is “not putting all our eggs in the fintech basket”, he says.
This is probably wise, suggests Brendan Meehan of Genesis Analytics, a behavioural economist specialising in financial services. He sees marketplaces as a logical intermediate step for developing digital challengers and argues that even as they develop marketplaces they are also broadening their in-house product ranges and evolving to become full-service banks. “The more successful marketplaces will find themselves innovating in new directions,” he says. “That generally means an expansion of the product set or an expansion of the value chain so you rely less on outside partners.”
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