Fintech Partnerships and Losing Customer Ownership (#52)
Banks, lenders, and other REs must find ways to maintain customer ownership in a fintech-first future
Welcome to the 52nd issue of Unit Economics. For today’s write up, I share thoughts on how growing dependence of certain regulated entities on fintech partnerships is challenging their traditional core of customer ownership. Dive in!
A partner fintech comes in with the tremendous potential to support a regulated entity (RE). It starts with a strong focus on improving the experience in a sub-domain, moves fast to integrate, and spends out of pocket for customer acquisition. All while the RE rests on its regulatory laurels and adds a KYC-ed customer on its books.
For lenders, fintech partnerships provide a way to grow their loan banks and share credit risk at the same time. Additionally, the alternative data captured by a fintech application helps support the underwriting and other decisioning of the lender.
For smaller REs, these partnerships further help with brand building. Take Federal Bank, for example, which opens 13-14K bank accounts on the back of Jupiter and Fi each day – more than 3X than it does organically through 1400+ branches.
No wonder then that there exists a high appetite amongst banks, NBFCs, and other REs for such partnerships. SBM Bank, IDFC First, Federal Bank, and DMI Finance, for instance, have all strengthened their brands on the back of tens of digital partnerships over the last few years.
However, behind the closed doors, this is hardly the only sentiment. With the fintech partnerships accounting for a growing part of an RE’s acquired customer base, there are concerns about how these partnerships leave the REs vulnerable.
To understand the risks better, note that banks and other REs have traditionally relied on strong customer ownership to build their retail books. This meant a higher control of a customer’s financial universe through up-sell and cross-sell of financial products. And it makes sense. Cross-selling is cheaper than new customer acquisition. Some quote the costs as 5X less than for a new acquisition. Further, the chances of success improve drastically when selling to an existing customer (60-70%) than to a new customer (5-20%). The cost benefits are obvious.
While there is limited public record, a study put the global average for the cross-sell ratio at 4 about a decade ago. This implied that, on average, a customer used ~4 products with their bank. To highlight further the strength of customer ownership, note that Axis Bank sources more than 80% of its retail assets from existing customers. And it is hardly an outlier.
But this is slowly changing with fintech partnerships weakening customer ownership for REs. To start with, not many people are even aware of the lender or bank behind their shiny new financial services app. This has been a common cause of concern for lenders that have to explain to many why the customer has a loan on *their* name, instead of the fintech’s in the bureau report.
Further, by nature, a fintech does not owe its loyalty to a RE. And REs understand that. A fintech takes swift decisions when deciding on a partner RE and focuses more on the metrics of the speed of execution and commercials, than on forming long-term relationships. Also, to be perfectly clear - there is nothing wrong with doing so.
So, as it happens, the fintech ends up issuing savings accounts via one bank, lending via one or multiple NBFCs and other banks, and offering investments or insurance through a completely different set. All across, there is little consideration of driving customer ownership for the RE, but rather the focus is on self.
With the reality dawning, there is a realization of the risks that this brings to the REs:
Some REs face significant concentration risk, as a high percentage of their new customer acquisitions are driven by a small subset of fintech players. With the fragility of the partnerships, this is always a business risk that the RE would focus on reducing. Consequently, the RE invariably shifts focus to diversify via new fintech partnerships or organic customer acquisition. Ask Marqeta, for instance.
Secondly, Indian banks have long struggled with maintaining a high cross-sell ratio, and the fintech dependence on short-term unsecured loans, co-brand prepaid cards, and even credit cards today make cross-selling a tougher challenge – especially when the partner fintech dictates a large part of the customer communication. It might be reasonable to assume then that the cross-sell ratio of REs for customers acquired through fintech partnerships is likely less than 2 on average, indicating weak customer ownership – although the fintech does save RE the acquisition costs.
A second-order effect of the weaker customer ownership is the lack of customer relationship yet high accountability that the RE faces, which pushes the business and product functions of the REs on standby while maintaining the pressure on the operations and customer support functions. This, in effect, changes the operating model of the RE from one that is direct-to-customer, to one that supports the fintech by acting as a B2B instead.
The degree of importance that the lack of customer ownership gets depends directly on the magnitude of business that is driven or expected from these partnerships. But it is prudent to pre-empt the shift unless the RE can come up with a Yuno or 811 of their own. Even then, the fintech companies might make up for the lack of functionalities by the time a RE can deliver on the expected customer experience on their apps.
In all honesty, it appears that the gradual fintech breach into traditional financial services is inevitable. How can REs then mitigate the risk of losing customer ownership? There is no magic formula to this, but in a consultant-ish way – we can broadly look at how REs may be tackling this:
Up-selling to acquired customers by offering add-ons on existing products, which could be in the form of bonus interest boosts on savings account deposits, or an increase in sanctioned credit limit on noticing good repayment behavior, among other ways. For the RE, this requires the foresight to maintain the control on up-selling via fintech at the beginning of partnership negotiations itself.
Next, REs seem to be vying to make themselves the preferred partner for more than one financial service by building bigger tech & partnerships muscle, chasing a lower speed-to-market – which would make it likelier for them to attract more fintech partners, or cross-sell more services to those existing and expanding. Presently, the cross-sell push is being fastened with the help of a few Technical Service Providers (TSPs) such as M2P, Happay, etc. that are increasingly involved in the middle for REs and fintech companies. This is a risk worth discussing some other day.
Lastly, while this might be a little wishful, the REs can potentially negotiate more real estate on the highly critical parts of the fintech applications to improve CTRs for their up- and cross-sell initiatives. Further, taking ownership of part of the customer communication for certain critical actions (account created, payment successful, loan sanctioned, etc.) will help increase the visibility of REs to their acquired users, and increase the chances of success when directly cross-selling. But this is much easier said than done.
Along these, there seems merit in expanding partnerships with an eye on managing business concentration risk, as we have seen with Affirm and Marqeta recently. Especially for a world where the democratization of financial services through APIs is the norm, where customers multi-home and have low loyalty – as do fintech companies – the threat to customer ownership is real for REs and requires long thought.
For some REs, the dependence on partnerships is already significant enough to command action, and it would be interesting to see how they get themselves out of the shadows over the next couple of years. Until then, when we next go to a partnership or integration discussion – it is worth keeping the customer ownership challenge at the back of our minds.
If you have any views or feedback to share on the topic, feel free to add a response below or to share your thoughts with me over Linkedin. In case you feel your friends or family would be interested in reading about payments, feel free to share the blog with them as well. See you in a couple of weeks!