Thread: Why I’m obsessed with disrupting banking.

Starting from the top...

1/ Banking is a government sanctioned oligopoly. Just 4 banks represent *half* of the US banking market, holding about $8 trillion in assets. A huge regulatory moat limits competition.

2/ As a result banking is obscenely profitable. Most banks - and especially the big 4 - have bloated cost structures yet consistently deliver 20-25% net margins.

3/ High margins & regulatory moats breed complacency. Your grandfather’s banking experience in 1960 wasn’t fundamentally different from yours today, except you’ve got an app. The underlying products and fee structures are mostly the same.

4/ Not only have banking products not changed, they’ve also remained siloed. Banks treat each financial product (checking accounts, loans, etc.) as a separate business with its own profit goals and almost no sharing of data or bundling discounts.

5/ In short the whole system is optimized for bank profitability, not customer experience or value. The processes, the fee structures, the tech stack, everything.

6/ Now we’re in the midst of a fintech/neobank explosion. But behind every fintech is a bank “sponsor”. These sponsorships allow fintechs to innovate at the top of the stack with UI and data but it’s mostly lipstick on the pig. The underlying banking products haven’t changed.

7/ Don’t get me wrong - many fintechs will be wildly successful and are forcing much needed innovation in banking. But to date fintech success is more of a statement on how bad traditional banks are than how great neobank alternatives are.

8/ Let’s pause for a personal story. I opened my Wells Fargo checking account in 1994. In the 26 years since, WF has seen every paycheck I’ve ever received. Every loan payment I’ve made. 10’s of thousands of transactions and millions of dollars have flowed through that account...

9/ ...but I receive exactly the same service as a college kid with a new account and a $100 balance. I’m not making an elitist argument that I deserve better service because I have more money. But as a practical matter I have more sophisticated needs - I’m a power user! But...

10/ ...if I were to apply for a loan today with WF - let’s say a mortgage - I would literally start with a blank loan application and receive the same treatment as a random person off the street. Same process, same underwriting, same pricing. Insane!

11/ Again, my point is not that wealthy people deserve better service or pricing - it’s that *we all* deserve better service and pricing. Because technology.

12/ Last point (and this is where it gets exciting): Cost efficiency and better UX are one opportunity but an equally important disruption will come through the *specialization* of banking.

13/ Today’s banking market - especially on the consumer side - is a sea of sameness, with generic brands and products. It’s like medicine if every doctor was a general practitioner. But just as our health needs vary wildly, the needs and desires of banking customers vary wildly.

14/ I recently hired a strategy firm to conduct customer research, identify 25 niche bank concepts, and ideate highly differentiated signature features for each. (Bear in mind that a tiny niche in banking, 0.1% of the market, is a billion dollar business.)

15/ Here’s one example of a niche concept: A bank brand built from the ground up to serve the 1 million doctors in America. This bank might:

16/
- Underwrite based on unique characteristics (and unique knowledge) of the medical profession
- Partner with equipment manufacturers to make leasing/purchase easier
- Provide free SaaS to automate the back office (a virtual CFO)
- Provide benchmarking and business advice

17/ Imagine if features like these were bundled with basic banking services and wrapped in a beautiful brand crafted just for doctors. You can imagine that many might choose this bank, especially if they’d save $1000’s vs. a traditional generic/siloed banks.

18/ This level of specialization might create a moat that is more powerful than regulation, one based on *customer value*. Highly specialized consumer banks might become the ‘no brainer’ choice and could slowly (or quickly) eat away at big bank market share.

19/ To be clear, this example is not one I’m considering but it illustrates my thesis. This type of bank is probably borne of a bank and fintech operate as one team (the opposite of today’s plain vanilla, arms-length, somewhat adversarial bank sponsorships).

20/ Stay tuned.