Banking and Unbundling

You might be somebody’s landlord, you might even own banks, but you’re gonna have to serve somebody – Bob Dylan

If it is the case that the Internet unbundles things, that the “power of connected networks such as the Internet is that they unbundle all that came before them,” then looking at areas that might be in the process of unbundled might be interesting. I’ve previously thought this was mainly and initially happening in media and education.

But maybe it’s actually occurring most quickly and aggressively in financial services. The Economist, in a survey of non-bank finance, recently wrote: this is a time of huge opportunity in finance — as long as you are something other than a bank.” Banks and financial instituions often centralize things – capital, capabilities, credit, underwriting, risk assessment – things like that – and clearly the last 20 years have seen the rise of integrated financial institutions, so-called financial supermarkets, that in theory gain from being able to provide every financial service available under one organization. But what if those capabilities were better performed separately, and unbundled from the core institution; would the services be provided better (faster and cheaper)? As the Internet reduces information and even transaction costs (even to zero), not only does the notion of a finance supermarket not make sense, but the economics to those “buying” the services don’t either.

So are we seeing this then? I would submit yes. Take just a few examples off the top of my head: Market Invoice, Zopa, Prosper, Funding Circle, Lending Club, Transferwise, Dwolla, Stripe, Pollenware, Venmo, RateSetter, Wonga, Simple, MoneySupermarketAnthemis Group (some of these are companies USV has invested in). These cover retail banking, consumer lending, business lending, money transfers, receivables financing, payments infrastructure, and more. Each one of those does what a “bank” would do, but in a specific area, utilizing the Internet as broadly as possible for most components of its business, and often at a level of service that is much better than previously offered (and most definitely less expensively). Some of these are peer to peer businesses; and some of these are doing over $1B in volume. 

Each one and many more represent the unbundling of the bank. Yet banks are big and entrenched. If and how they respond will be one of the more interesting things to watch in the upcoming years.