Fintech on Benzinga: Consolidation Seems Inevitable

Last week, I wrote about two types of fintech strategies.  Diversified fintech is the trend for any application serving a specific cause, specific purpose or specific community to sit on top of the bank of record and serve the client in a more personalized way.  Dashboard fintech is the need for consumers to have all their data in a single, broad dashboard allowing for better insights and decisions.

Either way it plays out, there will be a consolidation potential. 

Diversified fintech: Making decisions

Diversified fintech is looking for new ways to serve underserved or new consumers. The common elements across consumer-facing fintech is the need for underwriting decisions and back-end deposit account hosting. 

Diversified fintech apps have been partnering with small, innovative banks or a network of banks and credit unions to be the bank of record for holding cash. A sporadic network of community financial institutions is vulnerable to a large(r) bank that provides a back-end system for access deposit accounts.  There are banks, like Cross River Bank (CRB), that have become leaders in providing tools and solutions to emerging fintechs and large brands who want to host payment solutions. Some white-label platforms, like Cambr, provide access to the network of community banks and credit unions.  CRB is aggregating APIs. Cambr is aggregating deposit accounts.  

Any bank that does need or want name recognition can become the account holder for all the diversified fintech apps across the web.

The other service all these diversified fintech applications need is underwriting.  

Many are serving consumers who do not fit into the typical FICO credit criteria.  As a result, whether based on alternative credit modeling or alternative data, each app or card needs real-time decisioning. Right now, many (hundreds?) of fintechs are creating underwriting engines and there is a consolidation potential here.  

Fannie Mae and Freddie Mac offer it to mortgage companies and call it an automated underwriting system (see, AUS). Call it AUS or underwriting-as-a-service; no reason why all these creative startups need to re-create the wheel when a dynamic service could support all the different approaches.

If banking-as-a-service (BaaS) debuted and rose in popularity several years ago, underwriting-as-a-service could become a consolidation option.  

As the trend of diversified fintech using the front-end to serve myriad themes, solutions and communities, the potential to consolidate services (engines) powering these fintechs will grow.

Dashboard fintech: One app to rule them all

The “dashboard” in dashboard fintech refers to the visibility now available to consumers through data import & data aggregation.  Increasingly, those data sources make it possible to see all your financial info in one place. 

One problem that I wrote about last week in Fintech on Benzinga is the problem of access.  Consumer data lives in a variety of different places. Unfortunately the best consumer finance decisions are made when the entire financial picture available.  Today, most consumers have this “picture” housed in discrete apps for each service– direct deposit account, high-yield savings account, investment account, crypto wallet, student loan, car loan or payment, mortgage.  

Yet, one thing consumers want is proactive insights, recommendations and special offers or advantages.  Those are limited in value without the full picture.  The full picture is not available unless there’s a place for the data.

The two important aspects of consolidating data are objectivity and proactivity. 

Objectivity is critical. 

No one wants to be offered a comprehensive fintech picture from a company that is also the provider of products and credit.  More bluntly, you don’t want to upload all your accounts to a bank or mortgage company and feel like you’ve lost the ability to shop before you even started.  

The platform empowering consumers must actually empower consumers separate and apart from offering the product. Lenders and financial institutions are not well positioned to offer objective recommendations. Good for fintech. Bad for traditional financial services.

Proactivity is important.

Traditional financial services is also historically reactive. The whole model is application-based. Applications are inherently reactive. So the entire system was established as a response to a customer request.  

Apply for a loan and we’ll see.  

Apply for a mortgage and we’ll let you know. 

Apply. 

Ask. 

 Beg. 

This is not just hubris.  For a long time it was a lack of information.  

Lenders and banks did not (and could not) have access to consumer data such that a proactive recommendation was even possible.  Data aggregators and fintechs have made it so consumer data is available given the right permissions and disclosures.  Now, financial institutions – such as those with direct deposit income visibility – can make proactive offers for real credit products to consumers. 

Consumers value personalization & customization.  

Increasingly, we also all know how valuable our data is. 

As those two trends intersect, consumers will come to expect that any service with access to their data is providing actionable insights and offers that are only possible as a return on the investment of downloading the service to begin with.  Companies like MX are attempting to consolidate insightful tools. In that model, the fintech pays for the tools and offers them free to consumers.

That’s not to say that consumers would not pay for valuable insights and offers, we would.  The only requirement is that the return be actually valuable to us.  To date, most of these fintech promises are unfulfilled.  

Future of fintech

There are some attempts – you may be thinking – that I’m not mentioning. Mint. Betterment. Wealthfront.  Budgeting, robo-advising and investing are all important fintech solutions and important tools but are not the diversified fintech approach and are not comprehensive in objective recommendations.  The consolidation underway at the existing solutions is not back-end cash support or customized financial management.  Yet.

That said, I’m sure I’m missing the app you use that does everything – great! Place it in the comments and let’s discuss.