History repeating itself? The great bundling debate

By Pat Patel – Global Content Director Money20/20

When I hear the word bundle I tend to get catapulted back to my childhood, back to the school playground, when the word ‘BUNDLE’ was shouted and you ran. You either ran to jump on the poor soul who was about to be bundled or ran away from the scrabbling mob bundling you. Now onto financial services. This story is about whether we are heading to or from (or in fact back to) a good old-fashioned bundle.

The Financial Services playground has experienced a movement towards, then away and then towards bundling in recent years all driven by insurgents. While the majority are scaleups such as Zopa, TransferWise, Robinhood or even Square, some are consumer internet companies such as Amazon and Alibaba (via Ant Financial). Moving from specialism to diversification in the quest for scale. But how do these insurgents make the unit economics stack up?

Bundling since the dawn of banking

In the beginning, banks built out their product offerings akin to ‘a supermarket’ for all financial needs (within reason). Cross-selling and cross-subsidising were key and banks capitalised on their strength of brand and the consumer and political need for trust. Scale and unit economics could be achieved and large players dominated their domestic markets and grew internationally.

As this trust deteriorated during the financial crisis, alongside a demand for better products and choice, the door opened for startups to offer niche products that were either cheaper or easier to use, leveraging their agility and new technology. By leveraging mobile app stores, open APIs, cloud infrastructures and banking regulation,startups focussed on single experiences and markets.

Now we are in the early phases of rebundling as customer acquisition costs have risen, due to increased competition and a desire from customers for contextual and seamless experiences. The advent of more APIs, disruptive technologies like artificial intelligence and the ability to leverage structured and unstructured data is meeting these needs, enabling greater insight into customers.

To combat this increasing competition and customer acquisition costs, growing scale or providing more services to existing customer base become essential for insurgent survival.

New models are evolving

The key question is what’s next? Is this insurgent model sustainable? In recent years, marketplaces have been enabling a new form of rebundling for those insurgents that have built scale as a niche unbundler. A great example of this is N26 as it connects with niche players to offer a broader range of services to its customers. The best of both worlds if the commercial model can stack up!

To bundle or not to bundle?

There seems to be two business models emerging, firstly those that build their own product capabilities themselves, largely traditional banks and some scale ups and then those that build a platform to connect to third parties and take a commission of every product sold to its customers. There are certainly parallels with how app stores operate and in the domain of financial services, Ant Financial, via its Alipay product has managed to achieve this providing a range of products starting with payments and then moving into savings, lending and much more.

At present the driver seems to be scale. The next consideration needs to be whether the unit economics stack up as the cost to acquire customers are increasing and the competitive playground is changing.