The disaggregation of financial services is temporary, says economist

By Ryan Weeks on 27th December 2017

Challenger Banks

This behavioural economist thinks digital banks’ third-party marketplaces are a temporary phenomenon.

The disaggregation of financial services is temporary, says economist

This behavioural economist thinks digital banks’ third-party marketplaces are a temporary phenomenon.

Marketplaces are all the rage in digital banking – for now. These in-app collections of financial services products, mostly delivered by fintech partners, are increasingly being seen as the primary route to revenue for the likes of Monzo, Starling and Revolut.

Monzo recently confirmed that its own formative marketplace will become fundamental to its business model. Revolut already boasts a marketplace that spans credit, insurance, wealth management and, most recently, cryptocurrency trading. Cryptocurrencies aside, all of these products are delivered through partnerships – with P2P lender Lending Works, insurtech Simplesurance and robo-advisor ETFmatic.

But for one behavioural economist, Brendan Meehan, reliance on third-parties is merely “a temporary state”. The disaggregation of financial services – a state of play in which many specialist firms can flourish in partner roles – won’t last forever.

“It’s quite hard to be only a platform,” he explained. “Eventually, firms become large enough to not require third-party product providers on their platform, realising that they could be building products internally for a cheaper amount.”

Most marketplace-partnerships operate on a commission basis, with the company that “owns” the customer (typically a digital bank) taking a portion of the underlying service provider’s fee. Meehan’s theory is that neo-banks will ultimately go after a bigger slice of the pie, or indeed the whole thing.

“They can make more money by building these products internally,” he said.

For Meehan, this shift towards what he describes as “aggregation” is a well-trodden evolutionary path. “There are industries that have displayed exactly the same traits,” he said, referencing Clayton Christensen’s theory of disruption, which has been applied to companies like Amazon and Netflix.

The potential pitfall in a shift towards “aggregation” is that the customer centricity that has until now been so inherent to digital banking is lost in favour of making money. How is a neo-bank incentivised to push the “right” products for its customers, rather than the most profitable products for itself? Hard to say, but one instinctively is more trusting of an entity that recommends from within a broad array of options, offered by a broad range of providers. As Meehan explained, larger financial institutions have limited motivation to cross-sell for the “right” reasons. If a neo-bank began selling its own overdrafts to customers, would it be likely to continue to flag third-party refinancing options?

“If people behaved well financially, banks and financial services would make less revenue,” said Meehan. Neo-banks often claim to help their customers to behave better with money. Could that claim hold in the absence of a diverse range of support partners?

Stepping away from the topic of marketplaces for a moment, Meehan closed the interview with a prediction.

“The inflexion point is where the fintech players become less of a secondary provider and more of a primary provider,” he said – a reference to the fact that many neo-bank users continue to operate a traditional bank account with, say, Lloyds, as well.

Beyond this inflexion point, into the unknown, will digital banks maintain their customer centricity? Or will they simply morph into the very scattershot-cross-selling behemoths that they set out to disrupt?  

Meehan has spent the last 5 years at Genesis Analytics, and has experience working with digital banks in consulting roles.

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