The Fintech Unbundling Playbook By Simon Troup

The unbundling of financial services is happening everywhere, we may not notice it but there are clues all around us. Here we’ll reveal an almost perfect play-by-play fintech unbundling by the team at Fundapps and Onfido. Some context on the startups.

• Fundapps is a leading regtech (regulatory tech) company born in London and surviving independently as one of the most widely used reporting platform for portfolio compliance.
• Onfido is an identity platform university spin-out whose timing was perfect for emerging tech and clients.

We’ve all heard stories about “Challenger Banks” and fintech disruption, but the road is littered with failed fintechs that couldn’t unravel themselves from regulatory complexities. Being a full-service financial services firm isn’t just a tech challenge, it needs a long funding runway to navigate legal and regulatory needs. Many disruptor banks, think Monzo, Starling, Revolut and others, have struggled on a path to profitability. Being profitable in a complex regulated industry is really hard. The banking industry, certainly in the scale business of retail and business banking (rather than investment banking), is relatively low margin and needs upfront cash to provide a path to profit. Whilst being a challenger bank is a worthy goal, a founder needs experience navigating regulators concerns of AML (anti-money-laundering) and KYC (know-your-customer). Founders of these neo-banks tend to be experienced in consulting or banking (or both!), its simply not enough to be amazing at the tech in fin-tech.

However, the opportunity in financial services remains, it’s a huge addressable market where small improvements in operating efficiency yield millions in bottom line earnings improvements. Furthermore, in banking many opportunities are buried in the risk management or and business-as-usual parts of the customer journey. And given all businesses are about allocating capital to generate advantage, building the best risk systems has an opportunity cost in your more differentiating activities.

In this post I’m going to show you how the most successful investment managers and banks leverage fintech platforms to increase operating margins and mitigate risk.

FundApps: Compliance Made Simple

“We are thrilled to have a dedicated team of more than 130 FundAppers who are passionately serving over 120 clients and skilfully managing an impressive US$17tn in AuM.”

Readers who’ve joined on of my guest lectures will have heard me say the most boring startups are often the most successful. Those that solve real customer pain points that unlock resources for core (higher value) business problems are an easy sell. A great example is https://www.fundapps.co/ who “enable compliance teams to respond more efficiently to regulatory change, increase certainty and reduce complexity associated with compliance processes.”. Regulatory compliance is toil work, it must be done but it rarely delivers a significant advantage. In fact, the principal advantage of regulatory reporting is the reputational risk of getting it wrong, not getting it MORE right!!

To that end why not buy in tech and expertise that know regulatory compliance better than anyone and defend your reputation and brand? Why not lever fundapps?

Website > https://www.fundapps.co/

YouTube > https://www.youtube.com/channel/UC5tUQ5GqPHaTGHKmscNhpkA

How it works > https://www.youtube.com/channel/UC5tUQ5GqPHaTGHKmscNhpkA

Fund apps is a classic fintech unbundling play; identify toil work within the investment management process and pull on the thread. Find a process that is shared across thousands of investment managers globally. Fundapps provide a simple way to post your holdings into a platform where the platform ensures all investments are categorised correctly within each reporting framework (SEC in the US, FCA in the UK) and generates perfect paperwork. That alone is enough to save 1-2 FTE (full time employees) within an investment manager (and a lot of horrible VBA code in Word!!).  The FTE equivalence makes pricing super easy since the savings are in plain sight.

But there’s more! Since the financial crisis regulations have become increasingly volatile, for example short selling bans in financial stocks during periods of financial stress. The best folks to manage a rules-based reporting frameworks are fundapps’ analysts in partnership with experts in regulatory and financial law. So fundapps not only remove the toil of reporting to regulators, but they help you remain current with legislation. They save you time/money AND de-risk you from operating errors with regulators, and ultimately ensure your clients receive the best possible fiduciary services.

Lesson One – Boring is good – Fundapps is not AI, it’s not big data, its tools that both save money and mitigate risk as a repeatable and robust workflow. Who’s not a buyer of that value proposition?

Lesson Two – Small pieces of a BIG pie – You can be disruptive in financial services by taking a few basis points (100^th of a percent) of fees, you don’t need to be after the entire investment experience ‘soup to nuts’.

Lesson Three – Pricing on value – If you can measure your product by the FTE equivalent, that gives a sense of the bottom line impact on your buyer, and its often more than you’d imagine! This works particularly well in sectors struggling to digitise and automate.

Check out https://www.fundapps.co/ here, and some useful vlogs to frame their product and culture.

Onfido: Digital Identity made simple

Monzo (challenger bank) > “We know you’re busy and have come to expect that the signup flow for any digital service you use will be super easy and totally ‘frictionless’.”

Onfido > “Create trust at onboarding and beyond with a complete, AI-powered digital identity solution built to help you know your customers online.”

Sometimes startups are all about timing. Onfido are a great example of where a collision at university of some hungry founders, the development of cloud and AI tech and the rise of challenger banks was a perfect melting pot to build a disruptive product. I was blessed to briefly meet the founders of onfido at an event run by the amazing https://crane.vc/

in London perhaps around 2016 when they had traction but were still building. Their product caught my attention and I’ve followed their amazing journey ever since.

What is onfido? If readers have ever signed up to a new financial service, you have probably used onfido tech. Have you shared your passport details via an app, perhaps even with NFC touch tech? Have you taken a selfie to cross check vs the UK home office’s records? Have you digitally shared a proof of address? These steps roll up to a scientific approach to KYC (know-your-client) using an identity knowledge graph including government digital services. No longer does it take weeks to sign up to a current account, it can be minutes, even with digital cards being issued for use online or via apple/google pay for immediate use.

The first thing that strikes you about the founders is how young they were, only one of them had graduate experience in financial services. Their youth and energy were a superpower enabling them to think laterally about the business problem of identity verification. Perhaps in ways that more experienced founders could not be due to preconceptions and bias. As three co-founders (the hustler, hacker and hipster?) they had the resources at hand to bootstrap an early proposition and raise funding via Oxford University seed fund. As digital natives graduating just when industrialised AI and cloud compute was coming online they were perfectly placed to take these technologies and build a product; noting that they didn’t have to invent it, just compose and build. Without facial recognition services such as https://en.wikipedia.org/wiki/Amazon_Rekognition  a cost effective build would have been extremely challenging, so timing from a tooling and tech perspective was critical.

The second slice of luck was the emergence of challenger banks looking to win market share from a digital generation who lived through their mobile devices and considered that the norm (rather than their parents who considered apps an annoyance).

Between 2015 and 2016 the big app driven banks were born, Monzo, Starling and Revulot, alongside other business banking propositions such as Tide. They were competing on user experience and delight, and onboarding was a critical part of customer acquisition strategy. If customers dropped out of the onboarding workflow due to friction that was a customer lost in an industry where lifetime value could be tens of thousands of pounds. A huge opportunity cost given the target demographic was in teens and early twenties. Banking is sticky and folks often stick around for a lifetime!

However, KYC (know-your-customer) tech is a fringe capability in banking needing expensive machine-learning expertise. A startup offering APIs (Application Programming Interfaces) to hook into an identity workflow would have a strong customer pipeline. It’s a classic unbundling play, taking a small slice of a financial services workflow, making it epic and selling it via a SaaS (software-as-a-service) API driven model. The cost of integration is low, you have the best available tech supporting a robust workflow defending you from fraud whilst getting out of the way of your customers. Who wouldn’t appreciate having access to banking services in minutes or hours rather than weeks or even months?

• Website > https://onfido.com/
• YouTube > https://www.youtube.com/@Onfido-ID
• How it works > https://www.youtube.com/watch?v=9_-FuPgoPOU

Lesson One – Unbiased Thinking – Some problems are great for student founders; in particular those that need open minds and imagination to solve elegantly. Even though banks could deliver passable on-line experiences onboarding was terrible. Perhaps only those under 25 could have the imagination to solve that problem.

Lesson Two – Industrialised ML: Onfido was catalysed by the industrialisation of not just machine learning skills and tools, but the packaging of ML application services such as facial recognition. They composed cloud API rather than invented deep tech in building valuable business products.

Lesson Three – Onboarding Delight Matters – Onboarding of clients is a critical milestone. If your onboarding experience sucks, then you will lose prospects. In businesses with high cost-of-customer-acquisition such as banking, that’s opportunity you cannot afford to leave behind.

Lesson Four: Timing is everything – Onfido slid into financial services just when our challenger banks were selling ‘frictionless’ onboarding and were ready to outsource that tech (since it was costly, complex and non-core to running a bank).

Why Unbundling Tech Works?

Unbundling works because the founders are reductive in the problem they are solving for. They are not trying to ‘boil the ocean’ by setting up a soup-to-nuts banking experience. They focus on a particular pain point, often one that’s non-core but MUST be a non-discretionary activity.

In other words, it’s an activity you must do, but isn’t part of your secret sauce or unique-selling-point. And even if something like identity verification is part of your brand (delightful onboarding certainly is for Monzo, starling, Revolut etc) it’s something that you probably cannot do as well as strong technical startup. Besides the beauty of onfido is that it’s the startup most of us have experienced, but never notices! It sits behind the façade of the banking experience, often white labelled with the branding of host service provider. The user need not know it’s powered by onfido, they just need to experience a differentiating delight vs traditional full service banks.

How to run an unbundling play?

Step 1 – A big pie – The key to applying an unbundling strategy is to firstly to find a large ecosystem; here we have two examples, investment management and retail banking. But this could apply to healthcare, telecommunications or energy sectors, you just need a big enough pie to take a slice from.

Step 2 – Empathise – Identify the problems that your clients are paying away profits to support, often on the risk management or operating side of the business. You can do this in your everyday lives, ask yourself why is this or that so difficult? It shouldn’t be this hard!

Step 4 – Think reductively – What is the smallest part of the pain point you could viably solve for. Ambition is great, but taking on too much introduces complexity. Complexity in your ability to integrate your service into your clients, ideally via API. And complexity in your client’s ability to carve out a small, manageable proof-of-concept at an acceptable risk.

Step 3 – Design Partners – A “build it and they will come” approach rarely works, having a design client is a huge lever in building a valuable product. It will also keep you focused on small ‘hero scenarios’ that have a huge impact.

What Next

These steps are how fundapps and onfido carved out material slices of the financial services industry and made them their own. The best part about using their approach is that it’s not based on theory –it’s proven to work in the real world and is only just the beginning. Perhaps the next spin-out to acquisition story like Onfido will be from Future Worlds Southampton?  Just start observing your financial experiences and ask yourself, why is this so hard? What can I do to make it better?