A tectonic shift called “rebundling” is taking place.
- It happened with Spotify and Music.
- It happened with Netflix and TV.
- It’s happening right now with Curve and Banking.
To understand the tectonic shift that’s taking place in Banking, we should first understand how such markets operate, and have a dive into Bundling and Unbundling theorem. A good way to explain how these markets operate, and how Bundling and Unbundling works, is to take the examples of what happened in the music and TV industries.
The Music Industry
Back in the 90s, Sony Music and Warner Music Group were the category kings in the publishing and distribution of popular music. Both Sony Music and Warner Music Group operated as bundles. They controlled the entire value chain from Supply to Demand. They scouted, sourced, produced content and developed technologies to deliver the content (vinyl, cassettes, CDs), printed the content on that technology, owned and partnered with distribution channels like music stores, and were responsible for shipping and managing the price of the content which was sold in these stores. Their foothold as a bundle was so strong, that they de-facto owned the talent itself1.
We claim that what defines the Bundle DNA, anything from culture, to processes, people and skills, is dependent on the technology that was available at the time to distribute the content. For example, in Music, it simply didn’t make sense to print just one song on a CD because of the costs associated with distributing the CD. So the record labels employed talented scouts who searched for artists with potential to write more than just one hit wonders, but 10 or 15 songs per album. Even more sought after were artists who could get beyond that difficult sophomore album and deliver multiple platinum albums in a row. This meant that the threshold for quality content increased, and in fact these record labels were the gatekeepers to our music taste2.
The restrictions put by the technology which was available at the time to distribute music – vinyl and CDs – therefore were key to resulting structure of the bundle – everything from its DNA, Purpose, Mission, Skillset, Culture, Business Model and Value chain.
With the introduction of the internet, supply has been commoditised and the distribution of digital goods has become much cheaper – in fact almost free. That allowed the introduction of a new model in the distribution of music – instead of ‘printing’ several songs on one physical CD it is now possible to distribute only one song over-the-top, via the internet, any place, any time, and with it a new category has emerged.
Steve Jobs and Apple was amongst the first who realised the power of the internet to distribute music one song at a time, and had the brand and distribution to make it happen. It convinced all major labels to sell their copyrighted content for $0.99 a song, something that many other companies had failed to do previously. Amazon was fast to follow with its MP3 service, and with it Pandora, Deezer, Myspace, Soundcloud, YouTube, Vimeo, and many other services began to emerge and provide a unique listening experience to consumers – one song at a time. Despite not owning the supply of content, these companies slowly began to own distribution, breaking up the bundles and soft monopolies, cutting out the middleman and blurring the value chain.
Now, instead of having to choose which package of tracks they wanted to buy, or to listen to one album at a time, consumers could choose from hundreds of thousands of tracks online building their own playlists – legally. With that technology innovation, consumer behaviour, expectations and tastes changed with the market. But although customers had gained choice, they lost oversight. It was confusing, time consuming, and required a significant know-how to identify the what, where and how to listen to music. Curation and direction was missing.
From the market perspective, the fragmented music market which evolved, meant that margins eroded, and are now distributed via multiple players. Data was not leveraged as it sat across multiple touchpoints, which left a significant value untouched, de facto creating inefficiencies and market arbitrage. One of the first lessons we learn in economy school is that market arbitrages are doomed to close over time, as the market becomes more efficient by increased competition and eventually consolidation. This arbitrage that emerged with the unbundling of Music was doomed to close down eventually.
With the unbundling of Music, customers had gained choice but lost oversight. Navigation of the unbundled markets was confusing, required know-how (what – where – how), and most importantly – time consuming. In a day and age where consumers expect everything to happen at lightning speed, and available at a touch, the listening experience was far from ideal.
This situation gave rise to the opportunity to introduce a better experience to the market. To give access to the great variety the market has to offer, yet conveniently, simply and in real time. Only one question remained – who would be the first to rebundle the market?
We argue that the old bundles are unlikely to become the new rebundlers. Two key reasons make it extremely challenging for an incumbent to rebundle the market.
- The first is embedded in the company’s DNA and culture. As discussed briefly above, companies are born with a certain mission in mind, and the technologies available to them determines the company’s strategy, value chain, skillset etc. With the introduction of new distribution technology in the Music industry, the focus of power shifted from owning the supply to owning distribution, as the user experience became the most important thing. As such, companies had to develop a new mission, processes, structure and hire new people. This is not easy to change (to say the least), in a company that is already operating successfully in a market.
- The second is accounting practices3. Old bundles are likely to be public companies, which have more pressure from their shareholders to provide immediate returns on their investment. Metrics such as RONA (Return on Net Assets) which measure returns on assets incentivise managers to make short term decisions at the cost of long term impact or market position. Add to that the ‘agent problem’, where managers are concerned and incentivised by short-term metrics vs. long-term company market position, and the fact that some disruption means that the company may hurt existing business models, and you will get to how unlikely it is for an incumbent to change its skin (and game) to hone an opportunity they’ve identified in the market.
And indeed, the incumbent bundles such as Warner Music Group and Sony Music did not become the new rebundlers. Instead, they tried to block competition. In fact, they went through similar stages of grief; denial in the late 90s that the internet and the new MP3 compression would have any impact on them; anger that their market was being eaten by new entrants, and suing these new entrants from accessing their copyrighted content; bargaining when losing their case in the courts; depression and eventually acceptance by focusing on what they do best – managing the supply side from talents, to production to commercialisation through merchandise and concerts.
And then came Spotify. Launched in Sweden in 2008, and in the US in 2011. Spotify offered its customers access to almost any type of music, at any time, anywhere in the world. For $9.99 a month, or free if you’re willing to listen to ads, millions have signed up.
Spotify faced stiff competition from other streaming services like Pandora and Amazon Music. But what Spotify has done so well to keep its customer base happy is to unleash the power of data. Spotify sees what you are listening to, gets a good idea about your music tastes, and promotes rising artists tailored to you using its Discover playlists. It gave customers what they want – an everyday music that is varied, reflects their tastes, and is available at a tap. In fact, just over 10 years later, Spotify has become a full blown bundle, owning not only the distribution side of the market, but also identifying rising talent with their data, producing one song at a time, and pushing it through the Discover channel to the relevant audience at the right time4. Spotify has become Warner Group Music, owning both the supply and distribution of music, however with one key difference – it is playing a different ball game. While Warner Group Music played baseball, Spotify plays basketball – using data and user experience as two of its key capabilities to win the market.
The same pendulum movement from bundling, unbundling and rebundling has happened in many other markets as well such as Netflix in TV, and Amazon in Commerce. All of which started by rebundling distribution in a fragmented market, eventually owning both the supply and demand side of the market5.
And the same thing is currently happening in Banking.
The Banking industry
In the past, money was much simpler. Our parents sourced their banking needs from one bank, one branch, and often from the same account manager. They were highly likely to have chosen their bank because it was the one used by their parents. These banks combine various banking services under one roof – wholesale, retail, and investment banking. These banks, such as Santander, Barclays, HSBC, Chase and many others have dominated the Banking sector for decades.
In banking, we’re seeing a similar pattern emerging – from a bundled market position where global banks owning a significant share of the market, to an unbundled market where many players and new entrants offer better, faster, cheaper banking services, and what we believe is the inevitable eventuality – a rebundling of the market.
Firms like BlueVine and Kabbage introduced new models and experiences in business lending; Transferwise introduced fee free money transfer and foreign exchange; Robinhood is offering fee free trading; Affirm better lending; Habito faster and cheaper mortgages. And that’s just a fraction of the offerings available today in Banking. In fact, there are over 30,000 fintechs today, providing faster, cheaper, better financial services that compete directly with the incumbent banks.
But this unbundling has made money complicated, inaccessible, and often expensive. Although offered more choice, consumers already use a variety of financial products and services, are not left with much more headspace to onboard an additional product – even if it could save them a few dollars here and there. More consumer choice has greatly increased anxiety, which has paralysed adoption of new products and services6. This ‘paralysis’ will further support the market rebundling, and the movement of Banking to the cloud.
The only question remains – who will become the new rebundler? Would it be the powerful banks, or a new entrant? For reasons discussed above, we believe it is unlikely that the incumbent banks would be the new entrants who will rebundle money. Walmart did not become Amazon, and Sony Music did not become Spotify. The only question we have here at Curve is what will be the type of product which will win the rebundling race, and will it be a new bank?
If you come to think about it, your bank is doing a great job – keeping your money safe. Keeping your money safe (i.e taking deposits) is the only real job of banks. Everything else that a bank does today, one can do without a banking license, but one job – taking deposits.
The reason for this is simple – from a regulatory standpoint, banks have a unique role in our economy which is to act as money multipliers. The banks’ initial job was to take deposits, and multiply money back into the economy. This unique and powerful role which has been delegated to them by the regulator/central bank, is why banks are amongst the most heavily regulated entities globally.
People’s expectations in banking are no different than their expectations in other aspects of their lives – listening to music, watching TV, and shopping. They want it simple, convenient, always available and always on.
Several startups have realised this and started to develop new banking experience, from the ground up. Companies like Monzo, Revolut, N26, and Chime have all built a fully regulated bank, with an accompanying app that provides a better banking experience. But will they be the answer to the market rebundling? We are not so sure about that. Few reasons lead us to believe that the winning strategy to rebundle money and move banking to the cloud requires a different strategy than the one the ‘challenger banks’ have chosen:
- Once you realise that the only job of the bank is to keep your money safe, you conclude two key learnings; first – that your bank is doing a great job at it, and therefore the switching costs are high. Second, that you can do anything a bank can do today, but taking deposits, without a banking license. Not being a bank provides huge advantageous, predominantly around return on equity, capital requirements and cashflow, regulatory overhead, etc.
- Your money is not just with one bank. It’s everywhere. Multiple accounts for personal, business, joint account, back home accounts, student accounts, debit cards, credit cards, Venmo, Paypal, and the list goes on. The older you grow the more financial products and services you consume, and building a new bank – the best bank – will still not solve all use cases. And to think that one bank will replace all these services, feels a bit megalomaniac – even to us.
- History teaches us that all rebundlers started by rebundling distribution. Not ‘publishing’/’manufacturing’. More specifically, all of them started as an over-the-top (OTT) layer that provided a better experience over existing rails. e.g WhatsApp did not create a new mobile network. Netflix did not create a new cable/satellite TV. Amazon did not sell their own products, or built their own store. The winning rebundler was always an OTT layer providing better, faster, cheaper experience on top of existing rails; focusing first on distribution and eventually venturing into creation of content.
In fact, we believe that challenger banks were a bit lazy. They started their companies as prepaid cards, eventually moving into a full fledged bank because that was the paradigm available to them at the time. By choosing to become a bank they believe that banks are doing a poor job, which means either they don’t understand the role of the bank (money multiplier), or they honestly think they can do a better experience keeping my money safe. In addition, they also believe that they will be able to compete with the likes of Chase and Bank of America; take enough market share from them by offering a better bank account experience.
We can’t disregard the fact that even if one of the challengers is building the very best bank in the world – I’m talking a kick ass bank coming directly from the 25th century; by being a bank it means that it merely answers one use case I have with my money – my personal, my business or my mortgage account. Whatever that service my be, it will only be around my deposits, and will disregard other places my money is parked (e.g Paypal, Venmo, etc.). If we use the analogy of Spotify, it’s as if Spotify had told its target audience – ‘Spotify gives you access to the best music – you never heard about’, rather than connecting you with the music you know and love.
A true rebundler must be agnostic of where the customer money sits, and connect it all together into one interface. The Over-The-Top Banking paradigm, a paradigm which Curve introduced into fintech, is the way in which we believe the rebundlers will emerge.
The rebundlers in each category – Netflix, Amazon, Spotify – are all data companies that are focussed on the customer. And similarly in Banking, the future rebundler will be a company that is focused on distribution, have the highest access to data and builds the best, fastest, cheapest, most delightful User Experience on top of it. Curve moves your bank accounts, credit cards and other financial products and services to the cloud. By doing this, we will use data to demystify your finances by connecting your money, right at your fingertips. We will be able to spot where you could do better financially and we will help you discover products that are a better fit for you, and we will execute these for you. No challenger bank can claim that they are the one platform for all bank accounts. But with Curve’s unique DNA, vision and positioning, we believe we will be. We look forward to delivering this new ball game to you – creating incremental value to our customers and partners. We are rewriting the rules to build the new Over-The-Top Banking category that allows you to Spend, Send, See and Save – better, faster, and cheaper.
1. A good example of how draconic their foothold was can be found in the war Prince waged against the label companies.
3. Clay Christensen speaks a lot about why accounting practices prevent companies from disrupting themselves, eventually losing the market to new entrants.
4. Financial Times – Spotify Article
5. Amazon now selling its own products with Amazon Basic, and Netflix is creating its own content.
6. The Paradox of Choice by Barry Schwartz