Disruption Incoming: How are Non-financial Entrants Approaching the U.S. Financial Sector?

I’ve been with Method for five years, and in my role as Lead for Financial Services, I lead the solutions for all opportunities that come to Method from a financial services perspective, and I also participate in delivery, as well as thought leadership and offering development. I work closely with GlobalLogic's financial services too, and we partner on our approaches to the market and the offerings that we bring to the market.

Prior to coming to Method, I worked for strategy organization, where I spent three years assisting M&A work, primarily with one of the top five U.S. banks, which was in the process of acquiring a number of non-financial software companies. Essentially, these non-financial companies had developed good business software through which payments were also processed, and the bank sought to acquire these companies to remain competitive in the area of payment processing. Before that, I worked at a fintech where I ran strategy and product that enabled personal loans to be granted to consumers as a mode of payment for elective medical procedures.

In terms of Method’s experience, we help banks, insurance companies, and others in the wealth space as they try to understand how to get more of their products offered to their customer base and to have engagement with their customers so that they can help them achieve their financial objectives. We help merchants or businesses focus in on how they can improve the likelihood of sales, through engagement or loyalty types of programs, with a view to getting customers to come back and increase their transactions.

Method also helps core technology providers and also B2B players who have chosen a particular portion of the financial services value chain and have disrupted that.

You could say that we are partnering on all sides of the equation to help individual organizations achieve their objectives related towards loyalty, customer engagement, and multi-product originations for financial institutions or non-financial institutions playing in the space.

From my perspective, there are three core non-financial players: 1) Merchants and service providers seeking to optimize sales and profit; 2) Platforms that connect merchants and service providers to customers; and 3) B2B providers that sit between merchants and service providers, financial entities and/or customers. These players are playing critical roles in picking off particular pieces of the value chain and embedding themselves, and merchants and service providers are really motivated by the desire to increase sales and relationships with customers, and then optimize and create efficiency in their business model. The question then becomes one of “How do you increase sales?” and “How do you reduce costs of a transaction?”

The most contentious question of all centers around the customer relationship and data. If merchants cede more operations to a platform, service provider, or financial institution, the less they know and understand about their customers, which could impact efforts to try and increase future sales.

Platforms have similar objectives to individual merchants and service providers, with their objective to own customer relationships and data serving as a tension point between themselves, merchants and financial institutions. Oftentimes, merchants, payment providers, technology providers, and financial institutions themselves are all competing for that same knowledge about their customers.

B2B providers generally aim to enable the goals of merchants and service providers and platforms for a fee to those parties, as well as a transaction fee to financial institutions.

‘Regulations’ in the U.S. are by far the most challenging aspect for a merchant or non-financial player entering financial services sector. All players recognize the extraordinarily high cost that comes with just maintaining the status of being a regulated financial institution. Maintaining that status is nowhere near as profitable as the model to run a software company or other non-financial company. As much as any non-financial institution would prefer to eliminate the need for reliance on and fees to financial institutions, the cost of financial compliance is simply too high for disintermediation. This is the largest reason why non-financial parties have not been able to disrupt financial services fully.

Closely coupled with the regulatory barrier are the ‘operational costs’ associated with establishing divergent organizational models. Any investment of capital outside the core value delivery mechanisms of an organization is a distraction from their primary value proposition. The more that you spend time figuring out how to process payments and focusing on those aspects, the less you can focus on your core offering, and it becomes difficult to compete in both worlds that are highly competitive.

When you do try and disrupt in financial services, one of the first choices that you are often faced with is: “Do I go with a legacy core provider for which functionality and regulatory understanding exists already?” or “Do I go with a new core technology provider?” If you choose the former, you may be a new digital company, but you will then be wed to a very archaic system of technology, based on which you need to innovate, and that can be challenging.

I think that for merchants and service providers, a key objective will continue to be the optimization of first and subsequent sales. Method supports this through aiding companies with everything from product strategies to designing and developing sales and onboarding experiences, as well as customer engagement strategies. Much of our historic work with merchants and service providers really focuses on what we call the “front of the funnel”—How do we increase the likelihood that a sale happens? And, how do we continue to help with engagement and loyalty? Many of our clients come to Method to get our insights on how to optimize their customer relationships through engagement and loyalty.

Overall, we do not see merchants or service providers moving down the path of becoming regulated financial entities, unless regulations change. One exception is the case of Ford Credit, which is moving forward with an application to become a chartered institution (but not a full-fledged bank).

In the realm of platforms, while there are established super apps, there are also up-and-coming disruptors. Super apps tend to have mature product development organizations and are less likely to seek the support of third-party vendors. At Method, we have worked with Google and others, through GlobalLogic primarily, but much of that is backend data work, rather than financial services-related.

Where we are seeing a lot more demand is from companies that play a particular function within the B2B financial services space, as they are looking to modernize, grow, and expand from maybe one single niche within a value stream to multiple areas, and to increase either their value or their competitiveness in that space. These disruptors will likely face challenges in scaling their offerings either up-market or across additional value propositions. This presents a business opportunity for Method and GlobalLogic.

Lastly, from a support perspective, traditional financial institutions are feeling threatened by disruptions and seeking out Method and GlobalLogic services to help improve experiences and help foster multi-product relationships with clients.

I think that the most investment and the most disruption historically and also going forward remains in the area of money movement. That is the lesser of the regulated spaces, and so there is a great opportunity to continue to disrupt anywhere where you're helping move money via different means.

Looking at the successes of non-financial entities in past years, Starbucks is perhaps the most successful retailer of the past 15 years in terms of having really disrupted, by establishing a digital wallet platform that enriches experiences and loyalty, while allowing Starbucks to hold customers’ unspent funds. It is an interesting example of a merchant’s ability to be creative and focus on the customer experience and loyalty, and seek to understand the relationship that they have with their customers, using that to disrupt some of financial services’ strongholds on payments, etc.

Apple and Amazon are making various attempts in customer loyalty as well, and have credit programs. We're now seeing the resale of the Apple card program in the market. There are opportunities in many such areas, as they do have unique value propositions.

Tesla has the greatest potential within the automotive sector, having created an ecosystem that stretches from the dealership to within the auto and at charging stations. Elon Musk himself comes from a payments background, and you could see further forays between him and some of his other holding companies into payments as a means to try and disrupt and capture more of the value, rather than rely on outside parties.

As I already noted, money movement and payments software remain a watch area, particularly with the merging of cryptocurrencies and stablecoins into the mainstream. These forms of value transfer have the greatest potential to disrupt commercial finance. As commercial finance becomes disrupted, Method and GlobalLogic believe that there will be a significant increase in investment in the design and development of user experiences. To that end, ERPs and EMRs^*2 —systems that have captive audiences—will play a central role in corporate finance and will be key participants in disruption based on their centrality to existing user experiences.

*2

ERP refers to Enterprise Resource Planning, while EMR stands for Electronic Medical Record.

I think some of the euphoria around stablecoins, their issuance, and related transaction platforms comes from the fact that their business model is closely tied to interest rates. However, interest rates are now moving in a direction that threatens that business model. So I think there's an interesting tension to watch there.

The other side of the argument that I have heard is that the greatest value of stablecoins will be at the institutional and enterprise level, of which you could have such a volume of coins moving that even if it is a minimal margin, if you're talking billions and trillions of dollars moved, even a little bit of a percentage point goes a long way, as we’ve all learned through the history of payments.

I think that the financial industry is at an inflection point. The U.S. has a significantly higher number of financial banks/institutions than most other countries. I think what we will see is that the number will reduce dramatically. It is already a market trend. That is why I think there will be a continued collapsing within the financial service market, even within the financial institutions themselves.

For non-financial service companies to enter the market, a number of things must occur. First, the regulatory market would need to signal this possibility—regulation would need to be peeled back so that companies could contemplate market entry. Second, any entity would need to make significant upfront investments to ensure the core technology underlying financial products can scale at the speed of modern product development.

Core banking technology is a major limiting factor. There is a race of sorts to see whether legacy core providers can modernize, by using AI to rewrite legacy code into modern code and create an updated version, versus how quickly disruptors—who are built on cloud-native, microservice-driven technology—can move upmarket and into secondary financial products.

I think it's difficult to say who will win that race between the fintech disruptors that need to go up market and expand products and the existing market giants. It depends on whether those giants can rapidly modernize, convert their portfolios based on modern technology, and maintain their competitive advantage in the space.. At the current point, I think it’s a coin flip about who will win the race.

I do think there will be a ton of disruption in commercial markets. I think that is a very good area to be looking at and to be leveraging relationships with clients because I think it's going to be very interesting.

There are three offerings that we are actively developing and enhancing, which we believe will help both financial institutions optimizing their strategies or transforming themselves and non-financial organizations entering or expanding in financial services. These are part of the multi-pronged approach taken by Method and GlobalLogic.

First, our Modern Product approach looks at friction points in the product delivery motion and helps companies with pragmatic approaches to improving speed and quality of delivery, focused on efficiency and effectiveness. We have an assessment that we are able to do with companies, and ways of working so that we can pragmatically work side-by-side with them to be able to improve how they are developing experiences and make it more likely that they will be able to achieve the objectives of their strategies.

Second is that together with GlobalLogic, we have developed an Embedded Finance as a Product offering that helps organizations with everything from determining who to partner with to how best to architect and support environments that can scale and update with ease. We rolled this offering out during the past year and we are continuing to get a lot of demand within this space and feel that it will be a major opportunity for us to win large and ongoing engagements.

Finally, our new enablement offering pairs well with our traditional research and experience design approaches, helping companies understand how AI and autonomous solutions will impact people, processes, and technology, and then develop iterative release cycles that deliver real value.

These are some of the core things that we have ongoing and in development, about which we’re seeing a lot of appetite for in the marketplace, and that we feel will put us in a good position to help companies both develop the strategy and design the solution for users, which is what Method does best, or to build the sustained intelligent architecture of the future, which leads us into the capabilities that GlobalLogic excels in.