Part one: What is the best model for marketplace banking?

It’s 2021 and the future of banking, a mega-conference packed with every head of innovation from companies across the globe, is about to start.

Lights dim, futuristic music plays and a grey-haired man wearing a suit with sneakers steps onto stage.

Oliver Mitchell, CEO at Moneycado

“In five years, retail banking will be unrecognisable” he proclaims.

“Customers will pick and mix products from ecosystems curated by banks. We will transition to a truly customer-centric model of finance. The bank of the future will be a marketplace!”

The audience sighs softly.

Another keynote with the same tired theme! If only someone would actually venture how this model might work, to go beyond the catch-phrases and into the messy work of defining, prototyping and developing…

Here, Oliver Mitchell, CEO at Moneycado, shares his personal views on marketplace banking in a two part series.

I am fascinated by what banking may look like in the future. I’ve read the consultancy white papers that outline grand and abstract visions. I’ve worked with industry practitioners, who grumble about implementation difficulties and I’ve spoken with fellow founders, who sit uneasily between these two worlds. As yet, I haven’t come across a comprehensive and compelling analysis of marketplace banking, so I’m writing one.

I will answer these questions:

1. What is the best model for marketplace banking? How might it actually look in practice?
2. Who is in the best position to effect this evolution: legacy banks, challenger banks or third-party aggregators?
3. How can fintech products win in the marketplace? Along what lines will the terms of competition be drawn?
4. Can the marketplace bank make money?

These are my views, formed over the past two years, and I’d welcome criticism and debate.

What is the best model for marketplace banking?

The best model for marketplace banking is a small number of contextual, deep integrations into third parties. It is not an extensive menu of options, the kind that platform businesses like Amazon and Google operate in other industries.

The contextual, deep integration approach to marketplace banking works well for three main reasons:

• First, financial product decisions hinge on high trust. It is far more personal to open an investment account than it is to buy a pair of noise-cancelling headphones. An extensive menu of options (like what you would find in Amazon or Google Shopping) works incredibly well for consumer products, where the consequences of an incorrect purchasing decision are less severe and generally reversible. But this same approach is paralysing when making financial decisions. Even price comparison sites like Money Supermarket –an earlier manifestation of marketplace banking – establish trust by asking clarifying questions before presenting options to users.
• Second, most financial products are low frequency purchases. A user might purchase an insurance product once a year, so would have relatively low familiarity with the available options and the differentiating factors between them. An implicit recommendation by their bank – made by including a product in a small list of preferred providers – has the potential to play an important role in decision-making.
• Third, consumers simply don’t want to scroll through a large menu of services. It’s time consuming and cognitively difficult. Consumers constantly rely on rules of thumb for their financial decisions, so introducing too much choice will hinder rather than help the process. Banks occupy a position of authority for their customers, and recommending third-party products is one area where they can exercise that authority.I find choice overwhelming when trying to buy towels on Amazon, let alone a life insurance policy!

Monzo’s savings marketplace is a great example of marketplace banking for financial services. Once a user has selected ‘Earn interest on your money’ from the main menu of the app, it takes only ten clicks (yes, I counted!) to open up an OakNorth savings product. During the process, the user never leaves the Monzo app and is not required to re-enter any identifying information that Monzo already has.

There are only five options on offer at the time of writing, all of whom have competitive (though not market-leading) rates. The selection is not overwhelming, there is an impression that Monzo has done the sorting for you already.

The rates on offer via Monzo are lower than if consumers open accounts directly with the third-party providers. There’s a clear trade-off between seeking the extra yield by opening an account directly and the convenience of having your savings and everyday money in one place. The difference in rates is where Monzo earns its income on the product.

Starling’s Marketplace is designed more like a menu of options. In order to find a third-party product, the user needs to navigate to the Marketplace from the main menu, rather than being directed in the course of trying to solve a contextual problem (e.g. ‘I need to earn interest on my money’).

Further, products across multiple categories, from credit to insurance to investments, are displayed one after another in a scrolling table. In order to access a third-party product, the user is redirected to their browser where they need to re-input identifying information. There’s a relatively shallow level of integration between Starling and the third-party product and Starling.

The difference between Monzo and Starling in this instance is a question of degree. Neither are seeking to imitate an Amazon-style search (“97 results for ‘investing’!), but Monzo has taken integration a step further by making third-party products a natural part of their user experience. They could improve this even further by serving contextual recommendations for saving or investing to users who consistently have surplus money each month.

Who is best positioned to provide marketplace banking?

A two part series examining marketplace banking by Oliver Mitchell, CEO, Moneycado.

Incumbent banks, challenger banks, and account aggregator products are all eying the transition to marketplace banking. I believe that challenger banks are the best positioned to win this race and, in effect, become the focal point of consumers’ financial lives.

Challenger banks typically facilitate their customers’ day-to-day spend. Though previously the industry scrutinised which bank consumers pay their salary into, I believe this focus is misplaced. In order to understand a customer’s behaviour, a bank needs information about their everyday transactional spending (not just the size of their pay packet). It is easily the highest frequency interaction that customers have with banks, and yields a wealth of data about habits that can be used to improve service.

To take a simple example, I pay my salary into an HSBC account but conduct all my routine spending using a Monzo card. HSBC knows my salary, but Monzo knows that I went to Slovenia two months ago. Spending behaviour provides a much fuller view of the financial products and services that I could be interested in.

Incumbent banks lack the technical agility to use spending data effectively. Customer data is often trapped in silos, generally segmented by product. It is a non-trivial challenge to match a customer’s mortgage history with their credit card spending within the same bank, let alone extracting value from this information so to make specific recommendations back to customers. This problem is not uniformly distributed – some incumbent banks like DBS in Singapore and Commonwealth Bank in Australia are rapidly evolving – but it is common.

Account aggregators like Yolt and Money Dashboard struggle to extract great insights from the data provided via Open Banking. There are significant constraints to how banks provide payment information:

• There is no unique identifier attached to transactions so it’s difficult to consistently identify payments;
• Merchant details are only sometimes available, and often obscured in transaction description fields; and
• There is no standard categorisation of transactions.

Part of the reason so many middleware providers (such as Yapily, TrueLayer, OpenWrks and Plaid) have sprung up is to contend with these technical challenges.

There is also a limit to the number of times each day that third-party applications such as account aggregators can request refreshed transaction data. They’re effectively always a few hours behind what has actually happened in their customers’ transactional account, rather than enjoying a real-time view. So long as this constraint exists there is real power in being the provider of payment infrastructure to customers.

Keep your eyes peeled next week where Mitchell explores how fintech products can compete in the marketplace, and how the revenue models may work for marketplace providers.