Your Margin Is My Opportunity

Visit any downtown area in any city. Which companies have the nicest buildings? The banks. Who do you think pays for those buildings? We do.”

Feel The Power of the Dark Side

  1. Few banks are admired as companies. Books about banking are typically tales of scandal and greed, not out-of-the-box thinking or brand building. “PayPal mafia” is a term of respect but “Wells Fargo mafia” rings true in a more literal sense. But banks have business superpowers: access to cheap (essentially free) capital, the ability to hold and redeploy government-secured deposits, and the right to lend money with broad discretion on fees and terms.
  2. People generally dislike and distrust (and sometimes despise) their bank. And for good reason: Banks have demonstrated that they value profits over the needs of customers and often can’t be trusted to do the right thing. Backlash against banks — especially big banks — is at an all-time high.
  3. Banks are protected by a regulatory moat but the very moat that protects the banking oligarchy is also a cage, limiting evolution and diversity (in the Darwinian sense). Silicon Valley has taken notice and has aimed its formidable guns directly at banks. If fintech has its way, banks will be relegated to the role of a back-end utility.
  4. That said, the practical reality is that fintech companies are hamstrung by the very banks they seek to displace. To do anything interesting, fintechs must partner with a “bank sponsor”, which largely limits product innovation to the data and UX layers. Not to mention that banks are typically bad partners; slow, bureaucratic, and hyper risk-averse. Put simply, the current fintech model is quite limiting.
  5. If banking is going to be reinvented then at least some of the innovation needs to happen within the system. This must happen by definition because there are layers of the stack that can only be changed by banks (more on this later).

A Billion Dollars Isn’t Cool. You know what’s cool? A trillion dollars.

How To Disrupt Banking (or WWAD — What Would Amazon Do?)

  • Amazon spends $7 billion a year to produce content for Prime Video — and then gives it away for no extra cost to Prime subscribers. If a bank CEO were running Amazon, she would surely organize Prime Video as a stand-alone business unit with its own P&L goals. For Amazon, Prime Video is yet another compelling reason to become/remain an Amazon customer.
  • Amazon allows other retailers to advertise alongside Amazon’s offerings (gasp). This is outright heresy for traditional retailers with a “bar the doors” mentality but Amazon embraces the reality that competitors are always one click away. Why not profit from those clicks (to the tune of $10 billion annually), earning trust and credibility along the way?
  • Almost every financial move requires underwriting and approval, which means paperwork and hassle.
  • It’s painful and costly to move money between different financial products. For example, if I want to tap home equity to pay off a high interest credit card, it’s a 4–8 week process with lots of paperwork and fees. This friction traps money in the wrong places and eats away at customers’ hard-earned money.
  • Because banks force us to organize our money into silos, customers can only optimize individual products and don’t get the benefit of bundling (remember Amazon Prime?). For example, the Apple Card is a great credit card product — a triumph of design — but it’s still just a credit card. It works just like any other card and doesn’t play particularly well with other financial products.
  1. Optimize around customers, not product silos. What if financial products were built and marketed based on customer needs, not the needs of the bank? What if customers were approved just once for everything they might need lead to live their financial life? What if the pricing was fair and transparent, with no nickel-and-diming?
  2. Eliminate friction so that money flows freely and doesn’t get trapped. What if you could move money between all of your financial products with one click (or automatically) and at no cost?
  3. Bundle to reduce cost and build lasting relationships. What if your bank provided more services and value to you over time without charging more for it? What if they became a true partner in your financial life?

Re-imaging the Banking Stack

  1. When you opened your bank account (or when you bought your home), you e-signed a bundle of documents all at once, putting in place a number of financial instruments, including a HELOC, that you may not need immediately.
  2. Your idle HELOC is automatically adjusted/re-underwritten based on changes in your home value (as determined by an AVM) and principal remaining. The HELOC is priced at your mortgage rate.
  3. When you have a need for cash to pay off credit card debt (or a multitude of other reasons) the HELOC is already in place and can be tapped immediately with no transaction cost. You don’t even need to know that it’s a HELOC or how HELOCs work — to you, the customer, it’s just “pulling money from your home”. The UX makes it all feel simple.
  1. Putting financial instruments in place preemptively so that they are available for future needs.
  2. Removing friction by eliminating fees and changing bad policies. We explored one simple use case but there are many. Perhaps a forward-thinking bank would charge one flat subscription fee for this type of banking service.
  3. Mixing & matching existing financial instruments in clever ways but hiding the complexity with great UI/UX.
  4. Underwriting the whole customer and utilizing cross-collateralization among financial products to reduce risk and drive prices down.
  5. Money is money is money — Customers don’t understand most financial instruments, and for the most part they shouldn’t need to. A dollar is a dollar whether it resides in home equity, savings, or another vehicle.

Here’s why the “Amazon of banking” will probably be created within (or along-side) a bank.

  1. As noted previously, a meta banking platform can only optimize at the product level (e.g. a lower rate on a mortgage or a better credit card). Attempts to optimize across products (at the customer level) would be met by the friction, cost, and hassle I mentioned earlier.
  2. Fintech companies must partner with a bank (often referred to as a “bank sponsor”) to provide actual banking services. By law the bank must have ultimate control and approval over the entire program. Any fintech CEO will tell you that this structure is workable but suboptimal. Banks are notoriously difficult to work with and often serve multiple fintech companies so the services they offer are standardized to the lowest common denominator. Even the best bank partner is a hungry mouth to feed, which limits end user price flexibility.

The most compelling argument of all.

“The problem is desire. We need to *want* these things. The problem is inertia. We need to want these things more than we want to prevent these things. The problem is regulatory capture. We need to want new companies to build these things, even if incumbents don’t like it, even if only to force the incumbents to build these things. And the problem is will. We need to build these things.”

Raising kids, climbing rocks, & reinventing banking. Boulder / Honolulu.

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Kevin Dahlstrom

Kevin Dahlstrom

Raising kids, climbing rocks, & reinventing banking. Boulder / Honolulu.

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