The Bank Unbundling — Jason Michael Perry

The big news in the finance industry is Wells Fargo, the number 1 player in the housing market, making a decision to pull back on mortgages and focus on a more profitable slice of the market. This may sound like a sign of a weakening economy, which is true, but this continues a long trend in the disruption of banking.

Banking, the business of offering checking, savings, and money market accounts, has long tipped from a profit center into a commodity business. For most banks, the actual accounts they offer work as a loss leader to move customers into other, more profitable products. In years past, it was not uncommon for a person to have an auto loan, mortgage, credit card, savings account, brokerage, and other vehicles with just one institution.

This model has been decimated by the move to best in breed. As a best-of-breed player, start-ups focus on small slivers of the whole to quickly make inroads by offering one product that outclasses others in a category. These days Robinhood is the #1 retail brokerage company. Rocket Mortgage is quickly vaulting to #1 in the mortgage and housing market. Capital One long took the crown for credit cards aimed at middle and low-income families.

Banks have responded with complicated programs and overdraft charges as they search to find some way to monetize existing customers. In many ways, it is akin to cable companies ratcheting up fees or charging for customer service. The problem is banking is table stakes these days, and banking is more of a free offering, not a core offering. Today almost any company can offer full banking services by outsourcing with BaaS companies like GreenDot. These new companies are bucking the trends of traditional banks by making banking free, offering high-interest rates, removing overdraft fees, and in many cases offering direct deposit days earlier. These new solutions are also making it easier for start-ups to offer innovative financial products with much less regulation than the old guard.

Leading this evolution are solutions like Greenlight, a kid-friendly banking, and investment platform, or robot investment platforms like Wealthfront and Betterment which offer ultra-competitive banking features at a little additional cost.

This great unbundling has placed banking in an increasingly difficult pickle. In the past, it showed its value in physical branches, accessible ATMs, and a one place fits all offering of diverse products. The reality is those products are no longer individually as competitive as they once were, and customer loyalty is at an all-time low.

To make things worse, a new bundling is beginning through acquisition that is starting to reshape what we expect in our future institutions. For example, Rocket Mortgage is on a tear with acquisitions that have expanded its footprint as it hopes to increase revenue from its consumers by showing its hand at other services like auto loans and personal loans, all while Robinhood recently began offering IRA and retirement products.

Every major bank is sitting in the mirror, asking how it will compete 5 years from now, and the writing is very much on the wall. They must adapt, acquire, or ultimately face irrelevance.