In the fast-paced world of FinTech, one concept stands out as the holy grail – client stickiness. It’s the dream of every FinTech firm to not just acquire customers but to retain them, keeping them loyal to their platform. In recent years, we’ve witnessed a fascinating transformation in the FinTech innovation landscape, and it revolves around the idea of “rebundle.” FinTech companies are evolving into comprehensive financial ecosystems, offering an array of services under one roof. This shift isn’t just reshaping the FinTech industry; it’s also embracing cryptocurrencies and the burgeoning field of embedded finance. In this blog post, we’ll delve into this fascinating trend and understand how it’s changing the face of finance.

Over the past decade, we’ve witnessed a series of significant developments in the financial services landscape. This journey has included the unbundling of services into standalone companies, followed by a rebundling of these services, particularly with the rise of neobanks. Simultaneously, there has been a notable increase in digitization among incumbent financial institutions.

Today, one of the most promising opportunities in the financial sector involves a fundamental shift in the delivery of financial services. This shift is characterized by the integration of financial services into broader customer experiences, meeting individuals where they are and catering to their preferred methods of conducting transactions.

The Fintech Market Opportunity and Three Major Advancements

Advancement #1: The Rapid Growth of Digital Banking

The days of physically visiting a brick-and-mortar bank branch are swiftly becoming a thing of the past. This transformation is being driven by technological advancements in the financial sector, as well as a surge in demand for digital services, particularly spurred by social distancing measures during the pandemic. In the present day, nearly two-thirds of the U.S. population utilizes digital banking services, with an impressive 80% of millennials embracing this technology.

The widespread availability of smartphone banking applications, catalyzed by the introduction of the iPhone in 2007 and the subsequent release of the first banking app in 2011, has fundamentally altered consumer expectations regarding their banking experiences. Mobile apps that facilitate actions such as direct deposits, bill payments, and money transfers have become standard features for the average smartphone user.

Advancement #2: The Decoupling of Financial Services

During the mid-2010s, as consumers became accustomed to the user-friendly design and personalization of social media applications like Facebook, they began to demand a similar level of seamlessness and intuitiveness in other aspects of their digital lives, including financial services. Fintech applications, armed with focused offerings and agile teams, were well-positioned to provide streamlined and user-centric financial experiences, surpassing the capabilities of incumbent banking apps.

Consumers began integrating these fintech apps into their daily routines, using them for various financial activities such as spending, saving, investing, borrowing, and overall money management. For instance, instead of relying solely on their traditional bank for all financial needs, individuals might choose to utilize Mint for personal finance management, Venmo for peer-to-peer payments, and SoFi for managing their student loans.

Advancement #3: The Reintegration of Financial Services

As consumers embraced an increasing number of fintech applications, they also grappled with the challenge of managing multiple apps to perform various financial tasks. Consequently, consumer behavior shifted away from the use of standalone fintech apps and gravitated towards comprehensive financial super apps that covered three principal categories:

1. Digital wallet applications (e.g., PayPal, Venmo, Cash App, ShopPay)
2. Investing and banking (e.g., SoFi, Chime, Robinhood, Coinbase)
3. Buy now, pay later services (e.g., Affirm, Klarna)

Having a select few banking super apps that offered a wide spectrum of financial services became more appealing than managing a multitude of single-purpose fintech apps.

The technological infrastructure underpinning this reintegration is powered by orchestration companies, which enable application providers to seamlessly incorporate robust financial functionalities into their products across various categories, including:

• Banking-as-a-Service: Offering high-yield, FDIC-insured checking and savings accounts (e.g., Unit, Treasury Prime, Green Dot)
• Payments: Facilitating seamless payment processing for users (e.g., Adyen, Stripe, Checkout.com)
• Cards: Providing fully customizable, high-interchange debit card solutions (e.g., Marqeta, Galileo, Lithic)
• Brokerage: Empowering users to engage in stock trading (e.g., Apex, Drive Wealth)
• Crypto: Enabling cryptocurrency trading (e.g., ZeroHash, Paxos)

Source: M13

Embedded Fintech vs Fintech Rebundling

Embedded FinTech and FinTech rebundling are related concepts in the broader landscape of financial technology, but they represent different approaches to reshaping the financial services industry:

1. Embedded FinTech: This concept involves integrating financial services seamlessly into non-financial platforms and applications. It’s about making financial services accessible and convenient for users within their existing digital ecosystems. For example, you might access lending or investing services through a mobile app or e-commerce platform without needing to visit a separate banking or FinTech app. Embedded FinTech leverages APIs and partnerships to deliver financial services where customers already spend their time.
2. FinTech Rebundling: Rebundling, on the other hand, refers to the trend where FinTech companies, especially neobanks and digital financial platforms, are consolidating various financial services under a single brand or platform. After the initial wave of unbundling, where specialized FinTechs offered standalone services, rebundling aims to provide customers with a comprehensive suite of financial products and services. This approach simplifies financial management for users, offering multiple services under one roof.

The relationship between the two can be understood as follows:

• Integration of Embedded FinTech: In the rebundling process, FinTech companies often integrate embedded financial services into their platforms. These embedded services enhance the value proposition of the rebundled platform. For example, a neobank may integrate savings, investment, and insurance services within its app, effectively embedding those financial functions.
• Enhanced Customer Experience: Both embedded FinTech and rebundling aim to improve the customer experience by offering more comprehensive and accessible financial services. Embedded FinTech contributes to the rebundling strategy by providing users with a broader range of services while staying within their preferred digital environments.
• Diversification of Offerings: Embedded FinTech allows rebundling platforms to diversify their product offerings without building everything from scratch. They can partner with specialized FinTech providers through APIs, giving users access to a wider array of services.

A noteworthy research effort led by Matt Harris and the Bain & Company team delves into the potential of embedded fintech. You can find a link to this research here.

A couple of key takeaways from this research are particularly striking:

1. Significant Market Size: Embedded fintech is already a substantial force, accounting for $2.6 trillion in transactions, which represents 5% of the total. Projections indicate that by 2026, it will expand to a staggering $7 trillion, constituting 10% of all transactions in the United States.
2. Value in Seamless Experiences: The value proposition of embedded fintech is rooted in providing customers with contextual and seamless financial experiences. Platforms, it seems, are exceptionally well-positioned to harness the potential of this transformation.
3. Untapped Industries: The research also highlights the vast potential for transformation in numerous industries that remain largely untapped. A graph below illustrates the sectors where embedded fintech is likely to bring about significant change.

The financial landscape has undergone remarkable shifts in recent years, and the rise of embedded fintech represents a pivotal evolution. As it continues to grow and integrate into various sectors, it promises to provide customers with more convenient and personalized financial experiences.

Embedded FinTech and rebundling are complementary strategies within the FinTech ecosystem. Embedded FinTech enables rebundling platforms to provide a more holistic set of services, creating a win-win situation for both FinTech providers and their users.

But before rebundling comes the unbundling…

Unbundling: The Fintech Disruption

To understand rebundling, we must first look at its precursor: unbundling. Traditionally, industries bundled products and services, offering packages that often included both desirable and less attractive offerings. This bundling approach extended to the financial sector, where services like bank accounts, mortgages, loans, and investments were neatly confined within vertical silos. However, the rise of FinTech brought about a disruption known as unbundling. Niche FinTech startups emerged, offering specialized solutions that tackled specific financial needs. For instance, robo-advisors like Wealthfront and peer-to-peer lenders like LendingClub offered alternatives to traditional banking that were more flexible, faster, and user-friendly.

Reference:

• Wealthfront
• LendingClub

The Role of Crypto in Unbundling

As the unbundling phase continued, cryptocurrencies entered the scene as a disruptive force. Bitcoin, introduced in 2009 by the mysterious Satoshi Nakamoto, presented a novel form of decentralized digital currency. It aimed to eliminate intermediaries like banks from financial transactions, emphasizing security and transparency.

Reference:

• Bitcoin Whitepaper by Satoshi Nakamoto

Cryptocurrencies effectively unbundled the concept of money from traditional banking systems, enabling global peer-to-peer transactions without intermediaries. This innovation captured the imagination of tech enthusiasts and investors alike.

The Challenge of App Proliferation

While the FinTech revolution brought choice and convenience to consumers, it also introduced a challenge – app proliferation. As FinTech startups offered specialized services, users found themselves managing multiple apps for their financial needs, resulting in complexity and fragmentation.

The Rise of Crypto Payments

Within the evolving FinTech landscape, cryptocurrencies began playing a role in payments. Companies like BitPay and Coinbase Commerce facilitated cryptocurrency payments for merchants, opening up new avenues for transactions. These cryptocurrency payments promised efficiency and global accessibility, bypassing traditional banking intermediaries and streamlining cross-border transactions.

Reference:

• BitPay
• Coinbase Commerce

The Era of Rebundle: SuperApps and Crypto Integration

Rebundle represents a reversal of the unbundling trend. FinTech companies are moving away from offering specialized, standalone services and, instead, bundling these services together under a unified brand. This rebundling phenomenon is driven by several key factors.

One significant driver is the growth of e-commerce. Regulatory changes, such as PSD2 (Payment Services Directive 2), have allowed non-financial businesses to enter the financial services arena. Companies are seizing this opportunity to rebundle previously unbundled financial services, creating more comprehensive and seamless customer experiences.

Another factor is the diversification of payment companies. Payment providers are expanding their product portfolios to include adjacent services like lending and compliance. Examples include SumUp’s acquisition of Tiller, Thunes’ acquisition of Limonetik, and Rapyd’s acquisition of Valitor. Stripe has also partnered with businesses like Klarna, Visa, and Alipay to broaden its service offerings.

This rebundling shift marks a departure from the specialized, standalone services that FinTech startups initially offered. David Jarvis, CEO of Griffin, highlights this transformation, noting that FinTech startups initially focused on specialization and delivering highly contextualized customer experiences. However, as these companies have grown, they’ve recognized the potential of bundling adjacent services to enhance their revenue margins.

Søren Mogensen, Chief Growth Officer at Banking Circle Group, observes this rise of rebundling, especially among FinTechs that started by unbundling the offerings of traditional banks. These FinTech platforms have evolved into vast ecosystems, offering a wide array of financial services to their users.

The Various Paths to Rebundling

Companies may approach rebundling differently based on their strategies and business models. Finextra’s impact study, titled ‘Rebundling: The Next Stage of the FinTech Evolution,’ outlines two primary routes to rebundling:

1. Incumbents Embrace FinTech Startups: Traditional banks are opening up to FinTech startups, optimizing internal processes and customer journeys. They are launching joint products and creating financial service ecosystems following the implementation of PSD2.
2. Challenger Banks Expand Their Services: Challenger banks acknowledge the need to offer a broader range of services to meet their customers’ evolving demands.

Companies pursuing rebundling may adopt various models:

• Owned Rebundling: Some companies, like Zopa, choose to create and own all their financial products. This approach allows them to maintain control over the entire product lifecycle, ensuring simplicity, better value, and fairness for their customers.
• Brokered Rebundling: Others create marketplaces and white-label external products, offering a high degree of choice and flexibility without the need to build products from scratch.
• Audience-Focused Rebundling: Companies like mobile money transfer service Monese concentrate on specific audience segments, providing a coherent offering tailored to their unique needs.

Why Companies Pursue Rebundling

The desire for customer loyalty and the allure of offering a diverse range of services under one roof are the driving forces behind the rebundling trend. Companies are responding to consumer needs by providing a more holistic set of financial propositions. This approach simplifies financial management for consumers and consolidates their data in one place, facilitated by open banking.

Rebundling not only streamlines consumers’ financial lives but also enables FinTech providers to generate better insights for more proactive financial actions. By consolidating services with trusted providers, consumers can select products more straightforwardly and efficiently.

Lessons Learned and Warnings of Overbundling

Despite the advantages of rebundling, it comes with its own set of challenges. One notable risk is overbundling, where companies offer products that aren’t needed by their customers. A clear strategy is essential to avoid this pitfall.

Søren Mogensen warns against developing overly diversified conglomerates that offer rebundled solutions that are not complementary to the core of the company. Striking a balance between growth and serving existing customers is crucial. Read more at “Rebundling: The Next Stage of the Fintech Evolution“.

Some Noteworthy Use Cases

Let’s explore three recent noteworthy fintech developments:

1. Roam’s Innovative Proptech Platform

One intriguing fintech case to highlight is Roam, a proptech platform with a specific focus on assisting homebuyers in their quest for houses with assumable mortgages—those unique low-rate mortgages that can be transferred along with the home’s ownership. These specialized ‘proptech platypuses’ like Roam are captivating, as they are tailored to exploit highly specific niches within the real estate market. There are, however, legitimate concerns about their adaptability as market dynamics evolve. Only time will tell how resilient they prove to be in an ever-changing real estate landscape.

2. Transformations in Small Business Banking

The world of small business banking is undergoing significant transformations. Intuit, for instance, is developing its own bill payment solution designed specifically for Quickbooks users, which could potentially pose challenges for existing players like Bill and Melio. Intuit is also taking a bold step by offering a free version of its small business banking and payments product, a move that reflects the ongoing trend of rebundling in the fintech sphere. Additionally, JPMorgan Chase is entering the scene by partnering with Gusto to provide payroll services to its extensive base of 5 million small business customers. This trend towards rebundling is rapidly reshaping the small business fintech landscape.

3. Alza’s Niche Neobank for Latin American Immigrants

Lastly, Alza, a neobank with a distinct focus on serving Latin American immigrants, has emerged from stealth mode. Impressively, the company has integrated thoughtful features into its product, with robust and cost-effective cross-border payment capabilities being a standout example. It’s important to note that niche neobanking, such as Alza’s approach, presents unique challenges. Nevertheless, it has the potential to yield substantial rewards. The key will be for Alza’s investors to grant it the time needed to establish a solid foothold in this niche market segment.

In conclusion…

Rebundling is part of the ongoing evolution of financial services, offering consumers greater simplicity and choice. As the FinTech sector continues to evolve, rebundling, along with embedded finance and cryptocurrencies, is driving the next phase of innovation, promising a more integrated and customer-centric financial ecosystem. Banks and FinTechs alike are reshaping their strategies to adapt to this new era, where customer loyalty and comprehensive financial services are at the forefront. The future of finance lies in the rebundle.

Also read, The Small Business Crypto Guide: Embrace the Future of Finance (Part 1)

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