Jim Barksdale, the CEO of Netscape famously said, “There are two ways to make money in business: bundling and unbundling.”
In business, solving the biggest problem tends to make the most money. For instance, in the pre-internet world, one of the businesses' biggest problems was how to reach their customers. Newspapers had to be delivered and songs were stored in CDs that were physically delivered to consumers. As distribution was so costly, it made sense for distributors of newspapers and CDs to cram as many products into one bundle and deliver to customers, in a bid to gain maximum value from each bundle.
With the internet, you can target millions of customers all over the world, at the same time. Within a few decades, the distribution problem was all but solved. Business models built on distribution networks, like newspapers and record labels, suffered. The battleground shifted to customer preference and quality of content, so companies with the best user experience or the best content thrive.
Distribution is now so cheap the traditional bundle has been broken. You can buy and download a single song on iTunes or read a single article on a website.
Unbundling Financial Services
Consumers have three main financial needs: to move money from today to tomorrow (to save/invest), to move money from tomorrow to today (to borrow) and to pay/receive payments for goods and services (to transact).
Banks have had distribution power. There are branches across Nigeria, so they bundled these three services into their business models. But, with the rise of the internet and mobile, a more efficient distribution channel emerged, so the biggest value-add now comes from customer preferences. Just like newspapers and CDs, the bank is beginning to be unbundled.
Today's consumer is "divinely discontent” and always looking for a better experience. Fintech companies thrive by unbundling financial services and providing individual services that improve on what banks offer. For instance, Piggybank offers automatic deductions and high-interest rates – making saving easier than in a bank. Paylater disburses loans within minutes, and Paga allows you to transact with the millions of Nigerians that do not have bank accounts – something you cannot do with a traditional bank. By focusing on specific needs, these companies can provide a superior customer experience than banks.
Will PiggyBank Become PayLater before PayLater Becomes PiggyBank?
Unbundling is always followed by bundling. As user experience improves and new platforms emerge, bundles start to re-emerge for the same reason they always do, to gain maximum value from each customer. Spotify has created a bundle bigger than the CD, while subscription publications like Medium, New York Times or Wall Street Journal are also bundles.
Predictably, after unbundling the bank, fintechs are starting to bundle it all together again. Paylater has launched a savings product, Paga has launched a savings product, while Odun Eweniyi, the Co-founder of piggybank appeared in this podcast episode named "We are building a bank”.
It is appealing to the companies to try to bundle all these products together, after all, there are two major ways to grow a business: get more customers or get a larger "wallet share" from each customer. PiggyBank, for example, was born in a unique situation. High interest rates in Nigeria meant that returns on safe investments like treasury bills went as high as 18% and they were able to give users interest rates as high as 8% by simply investing in treasury bills. As interest rates fall, and treasury bill returns decline, PiggyBank's margins begin to get squeezed. Diversifying their services is a way to protect these margins.
The argument from the consumer's side is less clear. We want to save, we need loans, we need to transact. We choose these companies because they provide a superior customer experience for each activity, and bundling may put this at risk.
I go to PiggyBank when I want to save. The advantage is that I know that any money put in PiggyBank is not meant to be touched and PiggyBank makes it difficult to get to that money by penalising me when I withdraw money outside of four pre-set withdrawal days. This directly contrasts with the primary objective of the job to be done in transactions, which is to make it as easy as possible to move your money. Paga would have the same concern, but in the other direction, as they are moving from transactions to savings.
For Paylater, the switch offers massive advantages on the companies end. Collecting savings gives them a new source of cash to make loans with. Their ability to provide loans, and therefore grow the company, is limited by the amount of capital they have. Offering a savings product gives them a lot more capital to fund their lending. However, lending without collateral is pretty risky, and it would be tough to convince users that their savings are safe while it is being used to give out loans to people without collateral.
So while many Fintechs dream of building alternatives to traditional banking, consumers do not necessarily want their products bundled together. As they all create digital bundles of financial services, they will start to compete directly with other Fintech companies, who would do well to remember what has brought their initial success: improving the customer experience by focusing on a few services.
What About The Banks?
So far, I have not talked about the possibility of banks creating the digital financial services bundle. Wema bank seems to be doing just that, by releasing their ALAT mobile application. This sort of innovation coming from banks may seem like the obvious choice, but the obvious choice isn’t always the right one. Cable companies didn't create Netflix and Spotify wasn’t created by record labels. There are also other players, like telcos and technology companies like Google, Amazon, and Apple.
The banks have a major advantage: they own the licenses and the core infrastructure. You still can’t use PiggyBank or Paylater without a bank account and this means their distribution still piggybacks (pun intended) on existing banking infrastructure. This is why it was not surprising to hear that PiggyBank is looking to acquire a micro-finance license, to rid itself of this dependence. Of course, with Paga, you do not need a bank account.
The future of the digital financial services bundle is essentially a race between Fintechs, traditional software companies, and traditional banks. It all boils down to which is easier; for Fintechs to crack distribution or for banks to crack the digital user experience.
Place your bets now.