Fintech is on fire these days. Morgan Stanley just bought E-Trade for $13 billion. Intuit bought Credit Karma for $7.1 billion. Visa bought Plaid for $5.3 billion. And despite a generally subdued tech market, fintech unicorns continue to thrive: Robinhood, Lemonade, SoFi, etc.
So what is going on? Why is this all happening now? If you think my answer is “The Subscription Economy”, well…. Guilty! But let me explain.
When you think about consumer finance, you generally think of banks, insurance agencies, credit card companies, stock brokerages. Old, boring firms with lots of money. These companies have been doing the same thing for a very long time.
Think about your own experience: maybe you signed up for a checking account in college, or some rental insurance during your first job, and you’re still carrying around the same old accounts, mostly because of inertia.
My current personal checking account, for example, is 26 years old. Believe me, I don’t say that with any pride or enthusiasm. I think I got a free toaster when I signed up. It’s long gone.
But here’s the problem: this dynamic (or lack of dynamic) suits the banks and insurance companies just fine. They know that there isn’t that much difference between them, so the hassle of switching accounts usually isn’t worth it.
If you can snag someone early, you can hang onto them for life, mostly because all the other options are just as unappealing. Throw in some overage and transaction fees and you’ve got yourself a steady business.
Today this model is starting to fall apart, for a number of different reasons. In a low interest rate environment, banks are having much more difficulty simply making money off of money, forcing them to re-think their basic business model.
As companies like Docusign have taught us, you can create a very healthy business simply by focusing on eliminating pain points, and finance is full of pain points. Charles Schwab, for example, no longer has stock trade fees because of Robinhood!
In addition, new regulations around the world are forcing many of these firms to open up their businesses, allowing potential new entrants to “peek under the hood.” Also, finance isn’t the impregnable castle that it used to be. These days, you can practically start a bank out of your garage.
But I think what it really comes down to is that an old and calcified way of doing business is colliding with the expectations of the modern consumer.
Look at what’s happening to industry after industry:
- In media, people got tired of paying hundreds of dollars for hundreds of channels that they don’t watch, hence the rise of cord-cutting.
- In software, businesses got tired of paying for new features in big clunky annual installations that they don’t need or use, hence the rise of SaaS.
- In music, people got tired of spending twenty dollars on a CD that might only have a couple of decent songs, hence the rise of streaming services.
- In fitness, people got tired of paying for gym memberships they never used, hence the rise of Peloton, ClassPass, and other more flexible options.
People are tired of the old way of doing things. They’re tired of being asked to follow someone else’s rules, simply because that’s the way things have been done for decades.
So it’s not surprising that every single function associated with personal finance currently has half a dozen mature fintech companies associated with it: payments, insurance, stocks, mortgages, loans, rent, credit, even good old fashioned banking.
After all, these financial firms are where we store much of the value that we generate as creative-minded professionals. Why shouldn’t we be able to engage with that value in interesting, creative ways? Why can’t we have new financial services that are social and engaging and even (gasp!) fun?
Fintech services are finding inspiration from other popular digital services. There are social aspects with Venmo, usage-based billing with Metromile, paid subscriptions that offer more features with Robinhood, and Amazon-like instant rental quotes from Lemonade.
All this disruption isn’t just limited to the younger folks and their zippy apps. My company is working with several investment firms that are empowering their advisors with tools and AI to strengthen their customer relationships.
There are new AI-powered platforms for financial advisors like eMoney, private wealth management platforms like Goldman Sachs’ United Capital, and portfolio risk assessment services like Riskalyze.
These big finance firms aren’t dumb. They know that big changes are coming, and there will be winners and losers. They would much rather wind up like a streaming service than a cable company. That’s also why you’re seeing all these acquisitions — if you can’t beat them, buy them.
In my opinion, these moves are just the start of a much broader transformation. The key is this isn’t just about sweeping up some millennial accounts. Financial services firms have to fundamentally change the way they operate, or they may wind up on the other side of an acquisition — LendingClub, a fintech company, recently bought a bank!
I’ll say it again: in this new Subscription Economy, there will be winners and losers. The status quo doesn’t cut it anymore. It took a little while, but big changes are finally coming to finance. Let the games begin. The big winner is the customer.
For more insights from Zuora CEO Tien Tzuo, sign up to receive the Subscribed Weekly here. The opinions expressed in the Subscribed Weekly are his own, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.
And check out his book SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future – and What to Do About It.