UNBUNDLING THE FINTECH GROWTH STORY

 By Dr.Deepa Venugopal

Last week, I was reading through innovations & rapid growth happening in Fintech and accidentally hit upon the Article in HBR written way back in 1999 by John Hager and Marc Singer – it was titled “Unbundling the Corporation”. This article throws light on the fact why many traditional (powerful) companies could not sustain their growth trajectory by doing all the jobs in the value chain themselves, and how small companies in highly specialized business thrived and unlocked the business potential and became game-changers.

So, what is it that slows the pace of behemoth growth as the years pass by? Hager and Singer explain that Interaction cost is the villain. Interaction cost refers to the money and time expended whenever people exchange goods, services, and Ideas (Hager& Singer1999). Keeping the interaction cost small will make organizations nimble. This helps in better organizing the business and maintaining a strong relationship with customers. The article also takes a relook at the architecture of the organization, at the heart of it there are three core businesses which includes Product Innovation, Customer relationship and Infrastructure Management. Each of these elements has an economic, competitive, and cultural imperative

Now my Curious mind wants to apply this theory of ‘Unbundling’ in the Business Model Canvas suggested by Alexander Osterwalder in the fintech space. The figure given down shows the basic Business Model Canvas (BMC)Template. The BMC has 9 components which consist of Customer Segment, Value Propositions, Channels, Customer Relationship, Revenue Streams, Key Resources, Key Activities, Key Partners and Cost Structure.

Business Model Canvas

Key Partners (8)	Key Activities (7)	Value  Propositions  (2)		Customer Relationship (4)	Customer Segment (1)
	Key Resources (6)			Channels (3)
Cost Structure (9)			Revenue Streams (5)

Left Canvas (Efficiency)                                                                    Right Canvas(Value)

(source: Business Model generation- Alexander Osterwalder, Yves Pigneur, Tim Clark)

 Fintech – As HOT as HADES

A recent study by Financial Times in the UK predicts that 70% of young people will manage their financial lives exclusively Via digital channels by 2023.

Putting technology at the forefront of innovation is not something new. Hence use of technology in finance is also not new. But Fintech has impacted the life of a plethora of people around the world. It has changed the way we transact with banks, the way we invest, the way we make payments, and surprisingly it has taught us to be still cool & do the shopping without any cash in our wallet.

Major fintech Classification/Models of Fintech business.

  

·        Lending	·       Digital Banking.
·       Small Ticket Firms	·       Digital Insurance
·       Payment gateways.	·       Payment
·       Digital Wallet	·       Alternative Credit Sourcing.
·       Asset Management	·       Alternative insurance underwriting.
·       International Money Transfers	·       Transaction Delivery
·       Peer-to-Peer Lending

 The Business Canvas Model- Then – All in one (Bundled) Private Banking business model.

Key Partners (8)   IT solution providers   Partnering with other banks	Key Activities (7)   Advisory role New Financial product development Operations & Marketing	Value Proposition (2)   Custom made wealth management solutions   Financial Products   Ease of doing transaction		Customer Relationship (4) Advising High net worth Individuals (maintaining Long term intimate relationships	Customer Segment (1)   High Net-worth Individuals.   Private banks   Independent Financial Advisors.
	Key Resources (6) Strong transactions platform Trust			Channels (3) Salesforce Banking network Transactions Platform.
Cost Structure (9) Platform /Transaction management Cost of innovation			Revenue Streams (5) Consultation & Advisory fees Transaction fees.

Left Canvas (Efficiency)                                                                  Right Canvas (Value)

The Business Model Canvas depicted above represents the whole bunch of activities and business taken up by Private Banks. To this let us draw up the Unbundling of the private Banking sector with Fintech disruption.

The Unbundled banking business with the emergence of Fintech Business:

Product Innovation	Customer Relationship              Management	Infrastructure              Management
·        801 bank proof cash              machine - IBM       ·     Credit Card       ·     Mag Stripe        ·      ATM       ·   Contactless payment       ·      Bitcoin       ·       Digi Wallet ·    Google wallet – B2C        ·        Alibaba’s Smile & Pay	·       Chat Bots &Virtual              Assistants       ·       (Alexa Skill)       ·     Using AI for Predictive               Analytics.      ·       Robo Advisors	·       Digital only Banking      ·       Blockchain for DeFi (open              Financing)      ·   Daaps – Smart Contract –           Zero human intervention

The unbundling of corporation/ industry consists of 3 core business types. (1) Product Innovation (2) Customer relationship Management (3) Infrastructure Management.

Classifications of the Fintech innovation models given earlier would fit into any of the three unbundled space. Today, Numerous fintech companies compete in this unbundled arena.

  PRODUCT INNOVATION.

The product innovation in fintech started way back in 1934 with the introduction of IBM‘s 801 banks proof cash machine. This helped banks to separate and endorse cheques and significantly reduced the time required for clearing cheques. Then came the charge cards, credit cards, and the one with Magnetic Stripe(Mag stripe). Barclays introduced ATM in 1967. Further disruptions in this space include online banking through “HomeLink” where people could check their bank statements through their television sets if it is hooked to a terminal and a telephone line. Then came the mobile payment in 1997, where people could “Dial – A-Coke” from their mobile and the vending machine would dispense it and charge the amount to the phone bill. A new era started in P2P and online lending with “PayPal” creating the first Digi Wallet in 2002 followed by the first contactless payment by Barclays Card in the UK in the year 2007.

The launch of Bitcoin in 2009 by Sathoshi Nakomoto saw a big vault in this space. It pushed the technologies & regulations that were there in the market till that day to new levels of efficiencies. Bitcoin is a digital currency, available in open source, its design is public with no central regulatory authority/banks and all transactions occur in a network. Nobody owns that network but anyone can participate in the network and transact.

Bitcoin brought faster peer- to peer transactions, lowered the processing fees, and encouraged worldwide payments.  Thus, a new kind of money was born. Later Google launched Google wallet (Now Google pay), followed by Apple pay. This broke the entry barriers to the B2C Financial world. But in 2017 Alibaba leapfrogged into a different fintech world with the launch of “Smile to Pay”. It utilized Facial recognition technology that allows a customer to pay by literally flashing a smile. This application could be used by registered participants who had the Alipay App.

To conclude the product Innovation business is driven by speed and easy market entry. It requires constant innovation to remain afloat in the business.

CUSTOMER RELATIONSHIP MANAGEMENT

The Fintech companies in the space of Customer relationship management are engaged in finding and acquiring customers and building relationships with them. Like many other sectors, companies in the financial sector are going out of the way to provide better digital processes and customer(user) experience.

Chatbots and virtual assistants: High connectivity and improvement in AI have made financial technology companies to leverage the power of ‘Voice’ -which has bought in a new revolution in customer experience. From Chatbots and virtual assistants to Alexa to Siri to Google Home, all of them use voice technology and voice strategy. Research says that more than one billion devices have access to voice assistant technology. More than 50% of all searches are voice searches and more than 30 % of searches are done without a screen. Smart speakers have become a household fad and a study shows that most households would be happy having a smart speaker. Fintech companies are trying to bring in the power of intuitive conversation in ‘vernacular’ to present an extraordinary voice experience for customers especially for those who are not financially or technology savvy. Capital One and Liberty Mutual use Alexa skill to help customers pay bills.

Artificial Intelligence and Predictive Analytics: Artificial intelligence uses the power of data to create financial solutions in real-time providing a high level of personalization which was unimaginable in the past. AI-driven predictive analytics help organizations to design financial packages for individual’s which will help to improve the speed of loan approvals, inducing better customer retention and reduction of frauds  .

Robo Advisors: If you are not happy with your financial advisors, then go Robo Advisory Way!

Technology backed fintech companies have gone beyond providing mutual fund services, today they offer digitized, long – term financial planning with the help of Robo advisors. They are similar to human advisors in terms of understanding the goals, aspirations, and risk appetite of the customers. In addition to this, robo advisors help customers build portfolios using an algorithm. There are mainly three types of robo advisors. (1) Fund based advisory robo (eg. Scrip box, Fisdom, Kuvera) (2) Equity-based robo advisory e.g.(Small case – Market Mojo) (3) Comprehensive wealth advisory eg. Arthyantra, cube wealth 

INFRASTRUCTURE MANAGEMENT:

Infrastructure management business in the unbundling model looks at how corporations build and manage platforms for generating high volume, repetitive businesses.

Today more than physical infrastructure, consumer confidence in a financial institution is centered around its virtual infrastructure and service quality of the products/services offered. New generation's banks are luring customers by going all digital to reach mobile-first. These digital-only banks are perhaps the most obvious examples of Fintech today. These banks have very low infrastructure and human costs, but provide cheaper services without compromising on the quality.

With the shift towards Decentralised Finance – DeFi - blockchain technology has been making headway in the Fintech business. Many financial institutions like JP Morgan, Bank of America, Wells Fargo have successfully tried using blockchain technology to provide financial services at a lower cost.

DeFi effectively eliminates middlemen and helps in migration from traditional, centralized finance to a P2P finance felicitated by decentralized technologies built on blockchain. DeFi makes the Fintech infrastructure highly cost effective, more transparent, less prone to human errors and fraud, easily accessible, and secure.

Another interesting aspect of DeFi is the surge of Decentralised apps – DAPPS. This also adopts blockchain for functioning. Once a smart contract is deployed using a blockchain DeFi, DAPPS can run themselves with little or no human interference. DappRadar report 2020 says that the total value unlocked from decentralized finance has surged to 380% in the second quarter of 2020.

These unbundling strategies have been very effective in the Fintech space and the best is yet to come. Survival in the business depends on how companies unbundle and finally choose any of the three core types of the business and keep the wheel of business rotating.

“At the end of the day, customer-centric fin-tech solutions are going to win.” – Giles Sutherland

References:

(1)    “Unbundling the Corporation.” Harvard Business Review. Hagel, John, Singer, Marc.March–April 1999.

(2)    Osterwalder, Alexander, and Yves Pigneur. Business Model Generation: A Handbook For Visionaries, Game Changers, And Challengers. Wiley, 2010.