This post was inspired by a Twitter thread around fintech infrastructure, innovation in core banking systems from the VC angle but not only. I enjoyed meeting there, Will Quist and Camera Obscura. I thank Simon Taylor whose Fintech Brain Food led me to the Twitter thread here.
2020 as an outlier year has provided us with lots of new experiences, valuable data, and solid learnings. One of those concerns consumer banking trends that showed retail valuing significantly large financial institutions. They moved cash and opened new accounts in the likes of Bofa, Chase, or Wells Fargo massively which is strong evidence that TRUST is an asset owned by incumbents of a large size. I should actually say, TRUST has been earned by these institutions over time, despite their occasional misdemeanors. In the case of Wells Fargo, the scandals are significant and they keep Wells Fargo still on the penalty list of the Fed (see here).
It shows that size is connected with `Too Big to Fail` in the mind of consumers and it works especially for licensed financial institutions. Which is evidence that A BANKING LICENSE is the other Asset.
Cornerstone Advisors 2019 US consumer survey shows that 44% of millennials (21–37yrs old) bank at the three large incumbents — Bofa, Chase, or Wells Fargo — and these are their primary bank providers.
They also reported statistics for Q1 & Q2 2020 what showed that checking account applications for the 3 US megabanks, rose. From levels c. 55% in 2019, to 63% in Q1 and 69% in Q2.
We also see that the re-bundling unstoppable Fintech megatrend is coupled with several grown-up Fintechs seeking a costly and cumbersome banking license in the US. As Ajit Tripathi declares in the last sentence of his `Bitcoin is Good for Paypal, but is Paypal good for Bitcoin?`
You live only once! Become a bank.
Just to name a few, Varo got a banking license in September, Sofi got approval in October, Revolut has applied for a US banking license. Maybe Stripe will apply for a banking license too.
Now if we had to name the third asset, that could create a sustainable moat along with TRUST & BANKING LICENSE, what would it be?
I bet that most would say, is DATA. Meaning having large sets of customer data and using technology to meet the customer at the point of sale (embedded finance), to contextually, advise, and cross-sell.
I won’t disagree, but after reflecting, I say it is REAL-TIME DATA.
Existing Core banking systems used by most mega incumbents are not even capable of sharing real-time transaction data with their clients, be it business clients or retail. Their core banking systems produce the data but it needs cleaning and pooling to be shared. This means time delays, devoting resources, no real-time computing capability or seamless API connectivity. This is a core bottleneck towards building an open banking ecosystem with connectivity to Tech & media companies or e-commerce, or unlicensed fintechs.
As long as incumbents running on traditional core banking systems, see the above bottleneck as a DATA problem and not as a CORE BANKING problem, they won’t be able to unlock the full potential of the third asset REAL-TIME DATA.
Camera Oscura`s analogy hits a nail. As long as incumbent banks that have the TRUST, and the BANKING LICENSE, refuse to change the plumbing and keep adding new showerheads with amazing capabilities like regulating water temperature and playing music or recording your thoughts in the shower, they will never be able to unlock the full potential of the data that they process.
This line of thinking makes me believe that Goldman Sachs` recent launch of a cloud-native transaction banking offer is vital to Goldman`s digital transformation game (read about it here). They are late in a market that is dominated by megabanks like Citi and JPM but they have the plumbing right and it will pay off once the open banking, open collaboration, and open innovation way of doing business takes off.
Stay tuned and watch this combo, TRUST, BANKING LICENSE, NEXT GEN Core Banking.
According to a recent survey of the American Banking Association (source Finxact), 25% of banks would consider leaving their core banking provider. What percentage may consider a cloud-native modular core banking, is yet to be seen.
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