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What's this all about?​

LEVERIS’ Head of Innovation, Conor McAleavey, explores the factors behind the rapid rise of Chinese mobile app WeChat and assesses the likelihood of a similar convergence application emerging in financial services. While predicting the future is a fool’s game, Conor draws his own conclusions.

Read on if you:

  • Have an interest in fintechs, innovation and the future of banking
  • Are launching a bank
  • Envisage yourself creating the WeChat of financial services

For those of you unfamiliar with WeChat, it could most easily be described as the WhatsApp of China. Since its inception, however, it has morphed into something altogether much more fascinating and is considered by many futurists as the most prophetic bellwether for where mobile and platform technology is heading.

WeChat launched in early 2011, developed by the Chinese multinational conglomerate Tencent. At the time of writing, it is the most ubiquitous mobile app in China with over one billion monthly active users.

The most interesting thing about WeChat, however, is not the sheer scale of its user base. Rather, it is the vast array of different services and products you can seamlessly access from within the app, each one delivered to the user via ‘mini-programs’ that are incorporated into the platform. These mini-programs are essentially apps-within-the-app (all 580,000 of them as of January 2018), making WeChat not really an app at all but in fact a ‘super-app’.

Just imagine being able to seamlessly access the services of WhatsApp, Facebook, Uber, TripAdvisor, Venmo, Deliveroo and Tinder all within the same app and you are only beginning to get the picture.

Instead of trying to imagine how a super-app works, take a look at the video below produced by The New York Times in 2016. It will do more justice than any short description I can give.

Why did WeChat become so popular so quickly?

WeChat’s rapid rise was due to classic platform economics solving supply and demand-side problems simultaneously. 

On the demand side, the consumer gets a single point of entry to a vast array of curated products and services. Why have multiple logins and a disparate user experience when you can have one login and a seamless user experience?

On the supply side, the producer gets access to a vast user base numbering in the hundreds of millions. The perfect example here is China’s largest taxi-hailing app DiDi Chuxing. It integrated with WeChat in early January 2014 and within a month had doubled its registered user base from 20 million to 40 million.

So while the WeChat phenomenon may not have been easy to predict, with hindsight it was almost inevitable.

A convergence layer for smaller apps

At its most fundamental level, WeChat is simply a convergence layer for a galaxy of smaller niche apps; a single point of access for almost every product and service that can be delivered via your mobile.

The emergence of this new category (convergence layers) seems, in hindsight, a logical progression for the mobile world where consumers are swamped by choice when it comes to apps and services. 

Why have so many disparate apps with individual logins when you can have them unified on a single platform, with a singular entry point, all curated and calibrated to suit your needs?

Convergence layers like Amazon and Alibaba are essentially the next generation of platforms like Uber and Airbnb. The latter offers a convergence of a myriad of suppliers for a single product category. The former goes one step further, offering a convergence of a myriad of suppliers across a multitude of product categories.

How does this relate to the world of financial services and fintech?

Until a few short years ago, it was uncommon for an individual in a market like the UK to have more than one financial services app on their phone. However, stop the average millennial on the streets of London today and chances are, you’ll find Monzo, Revolut, Nutmeg, Transferwise or eToro on their home screen. 

Where once they had one or two relationships with organisations offering a broad range of financial services, millennials now have relationships with multiple niche financial services companies, all delivered 100 per cent digitally.

The explosion of new financial services companies delivering mobile services is amazing for choice and competitiveness, but less than optimal for a coherent mobile experience.

While consumers may want choice and flexibility, they also crave the single points of entry they have become accustomed to thanks to the likes of Amazon and Alibaba.

So just as consumer desires for choice and flexibility drove the great unbundling of financial services, surely the consumer desire for seamlessness, contextuality and efficiency will drive the eventual re-bundling and aggregation of those same financial services. After all, this is the evolutionary path we have seen in so many other industries.

All that said, of course, financial services is not the retail, hotel or taxi industry. A much greater regulatory burden is rightly imposed on banking. Anti-Money Laundering requirements, disparate payment schemes and issues with interoperability make financial services a much tougher nut to crack for any potential WeChat-type scenario. 

So maybe no global convergence layer will ever emerge. Maybe regulation is just too restrictive. Perhaps the evolutionary advantage lies in banks following a marketplace strategy.

Marketplace banking

This idea of marketplace banking is already alive and well in many of the challenger banks, with the likes of Monzo, Starling and N26 already offering partner services via their apps. 

For instance, within the Starling app, the main current account and payment service has native Starling functionality but you can also use numerous curated third-parties to invest (via Wealthify), start a pension (via PensionBee), search for a mortgage (via Habito) or purchase travel insurance (via Kasko). It is, in essence, a WeChat-type service at its most embryonic stage.

This starts to move these challenger banks away from the traditional banking revenue model of interest income and towards a platform revenue model which you would associate with the likes of WeChat. It’s also a pretty decent experience for the user as they get to choose from a large selection of financial products and services from within a single banking app.

Perhaps the old banking approach to financial products of design, manufacture and distribute will soon make way for an altogether less cradle-to-grave approach. 

Perhaps the future that lies at the end of the great re-bundling of financial services is one dominated by an oligopoly of different banks, who have successfully adopted marketplace banking and brought that curated, seamless experience to their customers.

Big tech encroachment

The most obvious candidate to fill the role of the WeChat of financial services is an existing tech giant.

Volumes have already been written about the beachheads established by various US and Chinese tech giants in the world of financial services. Most of them already have banking licences and payment services. Some already offer loans at various junctures of their businesses.

That said, for the most part, these large tech companies are still only offering financial services where they support their existing business models. For instance, Amazon offers loans that help its customers buy more products on its site while Facebook Messenger provides payments services to keep its users on the platform for longer. 

However, when we look towards China, the financial services ambitions of Ant Financial go way beyond the straightforward modus operandi of its US counterparts.

Far from simply making it easier for its customers to access loans to buy more products on the Alibaba platform, Ant Financial has also spawned AliPay (through which approximately two-thirds of Chinese online payments go), Yu’e Bao (its money market fund which is already the world’s largest), Sesame Credit (its credit scoring and loyalty programme), MyBank (its digital bank) as well as its many joint ventures such as Paytm in India and KakaoPay in South Korea.

Nonetheless, it is one of Ant Financial’s latest creations that is perhaps one of the most relevant here. Caifu Hao is an open marketplace for financial institutions which allows them to advertise and sell their products and services through the app. Many are sister companies of Ant Fortune but many more are third-party providers. 

Platforms like Caifu Hao are becoming increasingly successful not only because of the same deterministic platform forces that drove the growth of Airbnb and Amazon, but also because these platforms offer so many other useful tools for sellers such as advanced analytics and CRM. 

Ant Financial has data and AI capabilities built into its infrastructure at every conceivable level. This gives supply-side sellers an incredible and previously unavailable capability to target content and services with unerring accuracy.

The salient point here is that digital market ecosystems, like those Ant Financial is bringing to reality, are simply more efficient in almost every aspect than traditional market ecosystems and distribution networks. All things being equal, they will always dominate their less efficient legacy counterparts.

WeChat of financial services

Will the end game produce a WeChat of financial services?

Predicting the future is a fool’s game. All we can do is take a general view based on recurring patterns and observable evolutionary arcs. 

Therefore, it seems legitimate to predict that marketplace banking and large platform plays will continue to disrupt and evolve the traditional financial services landscape. Products and services will become more commoditised, new platform distribution channels will continue to emerge, and more new players will enter the field enabled by technology and easier access to customers. Meanwhile, the large platform players will vie to become the dominant convergence layer.

What all this probably means is that banking’s traditional end-to-end approach to financial services (i.e. design-manufacture-distribute is slowly coming to an end. Traditional players are in danger of becoming ‘component suppliers’ in a new, platform-enabled reality. 

Radicalising their technology infrastructure, then embracing both the opportunities and dynamics of platform distribution, seems like the only way they can indemnify themselves against decline.

The war for the convergence layer in financial services

The eventuality of any extinction-level event for banks is far too distant for any reasonable level of predictability. But for those banks that do not take action, a much more gradual decline in relevance, profitability and viability are completely predictable.

It’s almost impossible to envision who will win the war for the convergence layer or even if one victor will emerge. But if one does, has there ever been a greater economic prize?

 

This post was originally published by LEVERIS in October 2018.

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