The old adage that everything old is new again has consistently held true in consumer fintech. In part, that’s because the early stages of innovation in the space centered on stripping down the incumbent: unbundling the bank. Instead of reinventing each product, they were reimagined in a fresh, modern way. This approach happened for good reason — the technical, regulatory and go-to-market complexity of fintech makes a narrow focus especially helpful. But now, we’re starting to see the fruits of phase two: The great rebundling. It’s something that’s getting more attention lately; in fact, our friends at Fintech Today coincidentally tackled the very same topic in a recent newsletter.
Unbundling was innovative, but for most companies, it was unprofitable. CACs were high, while LTVs from single products tended to be relatively low. This made it difficult to build enduring independent businesses. Of course, there are exceptions: Challenges aside, Robinhood, Chime, and Nubank are examples of meaningful businesses that also reset the innovation bar. But is the fact that we can count the examples on one hand an indictment of the unbundling movement, or a sign that it’s actually the next era of fintech that will crack the great product / great business code? How should we interpret the fact that, increasingly, vertical SaaS companies are themselves fintech businesses? Can the core issues that emerged in unbundling be solved with bundling and the dawn of the super apps?
To unpack — or unbundle — these questions, let’s dig in to how we got here, how we’re seeing rebundling take shape, and how this phase can avoid its predecessor’s innovative but unprofitable fate.
Why unbundling happened in the first place
First, some backstory. The biggest banks in the United States have strength in scale. For example, lower cost of capital thanks to checking accounts; physical footprints that can present both an advantage and an albatross; known brands; and deep regulatory experience. Historically, they’ve also enjoyed unique competitive advantages stemming from this scale. The regulatory landscape can act as a barrier for new market entrants; the depository account typically serves as a “hub” for one’s financial life, giving banks easier cross-sell opportunities and stickiness; and banks have troves of valuable data they’ve been building on customers for years. Acquiring customers in banking is notoriously costly, but once established banking relationships have tended to stick. That’s because it’s typically been burdensome for consumers to close and open new accounts, or switch direct deposits from employers or change automatic payments like credit cards and mortgages. So the cross-sell opportunities that banking products offer have historically represented something of a goldmine. It’s no wonder the list of the largest 10 banks in the United States has remained largely unchanged for the past decade, save a few key mergers.
That started to change with a one-two punch that hit banking (and the world) in the late 2000s. The market reset following the Great Recession led to increased consumer skepticism of banks in general. It also raised the regulatory bar for traditional FIs, bringing more pressure — and costs. In an environment where CEO bonuses were being critiqued and movements were calling for leaders to go to jail, the risk appetite was pretty low.
This left FIs flat footed when it came to innovating in response to shifting consumer behavior. But the sudden ubiquity of the iPhone and overall changing consumer expectations driven by increased digitization made this inertia costly, too. Increased access to technology accelerated consumers’ desire for speed, access, and user friendliness in digital UX — hardly already in banks’ back pockets. Further hampered by their physical footprint's cost structure, incumbents also struggled to innovate on elements that touched their business model (for example, the sudden vogue of no overdraft fees). In this way, their strengths opened a flank for newcomers to exploit.
And so they did. With the dawn of fintech, commonly referred to as fintech 1.0, startups often focused on narrow problems — and revenue lines — that might have seemed niche but that they could solve beautifully on customers’ behalf. In some ways, they had to be narrow: These were lean teams, often running on tight budgets (compared to the grand balance sheets of the FDIC-insured) and moving with a strong sense of urgency to find product-market fit. While there was plenty of competition within these niches, overall, many fintech startups didn’t compete directly with each other. Instead, it was the banks that were buffeted on all sides. And 2015, CB Insights published its now-infamous unbundling graphic on the topic, overlaying Wells Fargo’s site login with a constellation of logos that had emerged to tackle discrete areas of the business: Savings, budgeting, payments, lending, investing, and more.
You know the one:
Rebundling has always been on the radar
As I’ve written previously, this initial wedge that is so common in fintech can seem narrow. But appearances can be deceiving, as is their impact.
Take the example of Robinhood, whose fee-free offering (and compelling UX) caused commissions to go to zero across the industry and invited scores of new investors into the retail markets. Or Wealthfront, which disintermediated the wealth manager and offered people a novel solution for taking control of their financial lives by not taking total control through a passive investing strategy. Venmo started with a simple question of why paying friends couldn’t be as easy as handing them cash.
With just their initial wedge, these companies and their initial products had a transformative impact on consumer expectations in fintech specifically.
That part’s obvious. But as I’ve written before, the initial wedge is in fact just the tip of the iceberg. The best companies expand their product offerings over time.
For some companies, the wedge itself is quite large. Still, plenty of startups have made no secret of their banking ambitions: SoFi first applied for a banking charter in 2017, a process that took years. Many were stymied in their earlier years in seeking bank charters (the true value of which is another story for another post). But even in the earliest innings of fintech, we started to see flashes that there would be a great rebundling.
Early on, a lot of hypotheses seemed to be that the real value was in reorienting the hub: Becoming a bank, or at least the new depository account. Since the checking account was invented, it’s been a brilliant execution of the “freemium” offering so common in SaaS. A free, compelling product that then unlocks numerous opportunities for the bank to cross-sell or upgrade. Why? Because direct deposit in particular drives stickiness and engagement. Both to deposit funds, but also because that means that is where regular expenses are paid out of. (It’s also why — even as it’s gotten easier to open new accounts and move money, we’re seeing banking relationships become redundant. Folks don’t always feel compelled or able to ditch their primary account completely, so instead they hold multiple accounts.)
Indeed, the barriers to adopting other financial products are low when connected to one’s depository account. Or, perhaps more precisely, to the store of value. In these cases, companies often use a different wedge to build customer relationships, and then offer a checking account. The customer opens one — but that doesn’t mean that becomes the sole primary account. Look at how Paypal has steered Venmo to merchant payments as a result of the balances held in the P2P app. Or consider Cash App’s remarkable fast foray into lending.
To be sure, the unbundling movement was successful on some dimensions. It reset consumer expectations to higher quality, more digital-native experiences, and better bang for one’s buck. It also reset the chess board on which to compete. But the work is not done. Nor are the majority of initial wedge businesses independent success stories, by which I mean enduring, strong, free cash flow-generating businesses.
The question is: Will that come with the rebundling movement?
BaaS has accelerated rebundling — which may help focus on key remaining challenges
This rebundling trend has only been accelerated with the advent of banking as a service (BaaS), which provides the key infrastructure to layer in a suite of typical banking services via API. Now, these products are no longer the sole domain of fintech — a big contributor to the blurring of lines in how fintech should be defined.
While BaaS is commonly credited with enabling bank-like servicing across niche audiences — whether based on certain demographics, jobs or something else entirely. But more transformative is that BaaS, and the rebundling trend in general, has lowered the barrier to enable other types of businesses and services to add traditional financial products to their suite, with the hub being their OS.
This isn’t like the department store offering a line of credit, as they’ve done for half a century. This is something far more powerful — and in many ways, difficult. As we’ve seen, ease of innovation breeds competition. Startups have new incumbents to contend with: Like Apple, which has become a juggernaut in payments. Acquisition costs are rising with additional offerings — as the space becomes more competitive, so does the bar of what revenue per user needs to look like. But costs are also falling in scenarios where companies tap into an entirely separate need in order to hopscotch their way into fintech. In these creative cases, that non-banking wedge that companies use to find product-market fit and cement customer loyalty can make for more attractive unit economics when adding banking products. Just look at the transformation underway in vertical SaaS, as these businesses’ role as the OS for their customers lends itself to a wide array of fintech products.
These market changes have coincided with a dramatic shift in the burden of opening an account and transferring money. It’s now easier than ever for consumers to open and track multiple accounts. But getting to be the primary account remains very challenging — another reason why cross sell feels even more important to make unit economics work.
But it’s not yet proven that cross-sell is a given. Remember: Cross-sell is really enabled by having the primary account, but is not guaranteed or magical in a world where consumers are more discerning and willing to shop around. It’s easier to manage multiple accounts — even if not ideal — and the reality is that folks’ money is likely spread across several accounts given the barrier to do so is lower. Take my own experience: I have a folder on my phone that has 2 bank accounts, 3 brokerages (2 equities and 1 crypto), and 3 credit card apps. That’s not counting my payments folder, where I have Venmo and Cash App. Not to mention my social investing platform. Or the other accounts that I don’t look at as frequently, like my mortgage and 401k.
To date, much of the rebundling happening is taking shape first among products that have very high trust and engagement, making that cross-sell natural. It’s also being attempted by companies that have relatively low revenue per user and are seeking to monetize via new revenue streams.
As we rebundle, we’ll likely see innovation well beyond the bank’s typical categories of products and services, because these building blocks will be integrated in brand new ways. That’s an area I’m especially interested in seeing.
I’m excited because I believe there will be as many if not more success stories in this wave — but it’s critical to be laser focused on answering key questions to drive the right outcomes. Many of these are the same questions fintech 1.0 companies have faced, with some new elements thrown in.
1. How big is the market?
2. What is the revenue per user and margin profile?
3. What does acquisition / distribution look like and do the margins support the costs?
4. What are the additional products you will offer, why, and how realistic is the cross sell?
5. How does that alter the profitability profile of the consumer (CAC:LTV)?
Are you building in this space, or finding that your experience tailoring to niche audiences is increasingly bumping up against fintech? How will you measure progress of this next era in fintech? I’d love to hear from you.