Part two: Who is best positioned to provide marketplace banking?
Following last week’s analysis on marketplace banking, Oliver Mitchell, CEO at Moneycado, explores how fintech products can compete in the marketplace, and how the revenue models may work for marketplace providers.
If marketplace banking is the future, then any fintech product that isn’t a core payment account will be “plugged in” through the marketplace. How do other financial products differentiate themselves in this scenario?
Michael Porter’s generic strategies for competition are a useful framework to answer this question. The three strategies that he identifies for standing out in a market are cost leadership, differentiation, and focus.
Cost leadership is providing the lowest cost option for a product. In financial services this works well for commodity products – those that can be easily compared between providers and have simple on-boarding processes like savings accounts. Marcus by Goldman Sachs’ Online Savings Account is a fantastic example of this strategy. They led with a market-leading rate and attracted impressive initial interest.
Differentiation is creating a product with attributes that are uniquely valuable to customers. This works best for product categories with a strong customer service component. An easy example is travel insurance, where even if the price is higher, a consumer may choose one product over another because the claims management process is friendlier. Pluto Travel, for instance, has attracted phenomenal Trustpilot reviews and built their proposition around a great customer experience rather than leading on price.
Alex Rainey, CEO and co-founder of Pluto, says: We quickly realised in travel insurance that in order to win on price, you need to cut some pretty scary corners and massively reduce the quality of cover you’re providing, this isn’t something we were ever willing to even explore…so we decided that one of the things Pluto would be known for was rockstar customer support. Monzo especially and others have proven so well that 24/7 human support through your smartphone was a must and people loved them for it.
Focus is offering a specialised service to a defined subset of consumers. For highly popular customer objectives like “I want to earn interest on my money”, this will not be relevant. It is more important for niche objectives. For example, Hammock, a new current account, addresses the property sector exclusively. It offers property income and expense tracking, automatic notifications to landlords and tenants as well as tax statements split by property. Landlords and letting agents can (and have previously) done all of these things separately, but having these functionalities combined on one platform makes for an attractive proposition.
Manoj Varsani, CEO and founder of Hammock, says: “We want to focus on providing the best value to our users. Addressing a specific user group, rather than trying to support all consumers at once, allows us to identify clear priorities and to develop a product tailored-made for the property sector (landlords, letting agents and tenants).”
Can the marketplace bank make money?
A marketplace bank earns income by referring its customers to third-party products, either as a one-off transaction fee (e.g. travel insurance) or as a share of the recurring income that the third-party earns (e.g. savings and investments). It is effectively an affiliate business model. Whether this income is sufficient to justify the model is so far unclear.
Banks and aggregators may be better off building their own products in the long term. Ricky Knox, CEO of Tandem Bank, has stated previously that marketplace banking is not an important revenue stream in the bank’s strategy. He says “the marketplace is a core generator of customer benefit and not really the core place that we go to make money.” It’s telling that Revolut, which earns the most revenue per customer of any challenger bank, has so far eschewed the marketplace model.
There is also the existential risk that big tech, specifically Apple and Google, will take a more active role in recommendations to customers, effectively cutting out the aspiring marketplace providers. John Heaton-Armstrong argues that their ownership of the mobile devices and operating systems enable them to have a closer, more effective relationship with end customers. Further, these firms have “revenue streams beyond simply providing accounts, and as such could run these at an operating loss leveraged against profit margins generated elsewhere.” They might leverage their position to squeeze the profit from marketplace banking entirely.
Despite this, the lower cost base of aggregators and challenger banks might still allow them to operate sustainably on a marketplace model. A business model based on marketplace revenue may not be as rich as one based on net interest margin, but lower costs might offset this difference. It also avoids the risk of being disrupted by peer-to-peer lending. If loan aggregators like Habito and Trussle gain significant market share, the traditional business model of banking may be even riskier to pursue.
How might we proceed from theory to practice, to ensure that come 2021 there will be new developments to dissect on the conference circuit?
Aspiring marketplace providers should start small. They should choose one product category which is already on their roadmap and look to partner rather than build internally. Just as Monzo did for savings, they should choose relatively few partners and focus on simple, consistently branded product on-boarding journeys.
Marketplace participants (i.e. everyone else) should in turn be thinking about how they can differentiate. Do they intend to become a cost leader like Marcus, a customer service supremo like Pluto, or seek out an underserved niche like Hammock?
These early iterations of marketplace banking are the start of a broad and irreversible shift in the UK market, and one which moves the focus of banks away from internal compliance and squarely onto the needs of their customers. Now – into action!
By Oliver Mitchell, CEO, Moneycado