Banking as a Strategy: How non-fintechs have approached the challenge

Amazon & Walmart - highlighting early movers in fintech innovation by non-fintechs (Part II)

Many fintechs at some point set their sights on becoming the primary depository account. As we’ve unpacked previously, this is because the store of value is seen to create stickiness, if not loyalty, the real ideal. Stickiness drives LTV and therefore viability — the ultimate prize. But it’s potentially even more compelling to examine how non-fintechs have successfully built banking products (we covered payments in part 1 previously). 

It’s no surprise that developing a depository account has been a foundational strategy among the “traditional” fintechs, often seen as the key to dominance and sustainability from a unit economics perspective. Look at how Venmo — under the leadership of a company that helped pioneer this approach (Paypal)  — expanded its offering from pure P2P to making it easier to deposit checks and contractor payments, and from there become accepted by retailers. Before that, SoFi debuted Money, a checking-savings account hybrid, and sought for years to win a bank charter. The list goes on. (And today, even Elon wants in on it.)

In many ways the climb for non-fintechs is steeper, but the reward is significant if executed thoughtfully. Sure, the rise of infrastructure like banking-as-a-service has made adding fintech functionality logistically easier. But it’s another thing altogether to win in the space, which takes really understanding users’ needs, securing their trust, having a built-in distribution network, or other competitive advantages. The first step to drive margins and CAC is adoption of banking features — but adding banking doesn’t mean users will adopt them because of the competitiveness of the market.

It’s worth noting that successful examples in banking are harder to come by than, for example, payments. This is expected: After all, payments are lower on the adoption curve, both for the ubiquity of embedded solutions and the fact that payments tends to be a first natural extension of the customer relationship. And payments are often the product from which bank accounts *can* flow — even if only as a way to receive and (temporarily) store said funds. But it’s striking how few breakout examples there are of non-fintech banking innovators in general.

Although fewer non-fintechs find themselves this far along in the checking journey, FIs have made clear that these are the plays that they’re keeping close watch on. Banks originally held the strongest, stickiest customer relationship — but now they have become commodified middlemen. No wonder they’re monitoring the next wave of players with strong customer relationships. Moreover, I would argue that the definition of a bank account has also broadened in many ways to encompass stores of value. And as the industry has approached feature parity, the things that used to lure users away, like offers of no minimum balances, overdraft fees, or fees, just aren’t that special anymore. (As an aside, it remains to be seen whether this is a dynamic that favors the entrenched to only become more so.)

So let’s take a look at what some well established companies — Walmart and Apple — as well as more emerging non-fintech businesses have done to turn the bank depository account on its head, and engage with some broader takeaways. 

APPLE

Apple’s foray into financial services is part of a larger goal to enhance the value of the Apple ecosystem — a classic case of the way financial features can eventually drive the bottom line if done successfully. But unlike in emerging businesses, the unit economics don’t have to make sense right away or any time soon at all. Apple is a trillion-dollar-market cap business that is profitable enough that it can be patient. And it’s good at patience: For years, Apple Wallet adoption lagged expectations. When the service was introduced, just 3 percent of retailers accepted it; now 90 percent do. To ensure success, Apple can likewise afford to partner with best of breed, proven players in the ecosystem (rails like Visa and banks like Goldman) to get the job done. So it was natural when, in October, Apple announced a new high-yield savings account in partnership with Goldman Sachs. It’ll automatically receive deposits, sans fees (of course), with plans for users to eventually be able to spend, send, and save. Apple already controls much of the browsing and commercial experience for consumers, and has built a brand that has won trust among consumers for decades. And if Apple pulls this ambitious plan off, it’s not just creating a new bank. Just like with Apple Pay, it’s enriching the entire Apple ecosystem, making the hardware more valuable, too. 

The takeaway: Apple’s success in payments seeded its broader neobank ambitions, but the key to remember is that its dominance hinges on the ubiquity of distribution via the iPhone and the trusted brand it has built with consumers — as well as its ability to be patient, because building and harvesting a network effect takes time. Moreover, it’s worth noting that Apple actually is running an established strategic playbook, even if it looks novel for the banking sector. It’s not just delivering technology; it’s serving as the platform that integrates existing services and applications — a refrain familiar to anyone who’s used the App Store. 

WALMART

The story of Walmart’s move into financial services is ultimately about acknowledging the power of scale. The retailer has nearly 5K locations, 1.6 million employees and more than 100 million weekly shoppers in the U.S. alone. So while the typical CAC for a bank account runs in the hundreds of dollars, for Walmart, it’s likely to be far less: They don’t need to acquire customers. They already have them, and just need to make this cross-sell as easy as possible. 

Of course, a higher proportion of Walmart’s customers are the ones that traditional FIs have underserved — leaving them literally underbanked. This set the stage for the opportunity that Walmart seized. The fact that Walmart has built a product tailor made for them makes it easier to drive mass adoption. And while these customers tend to be less profitable for banks, these are Walmart’s core customers, driving a unique flywheel.

Walmart has a history of uniquely addressing its customer needs. It’s actually been adding various banking features for some time, in large part because it has seen how it enhances the customer relationship and thus its overall business. Walmart has a longstanding partnership with Green Dot to offer prepaid debit cards, and it also has let customers cash checks and send money abroad at the retailer’s MoneyCenters for many years. In January, it announced the acquisitions of Even and One (which uses Coastal Community Bank as its partner bank), which many have speculated may bring the elusive concept of a super app (a concept we’ve been skeptical about) to life.

The takeaway: Like many retailers, Walmart’s banking strategy is still taking root despite being decades in the making. But if it works, it will be a testament to the cliched — but still underappreciated – idea that knowing and uniquely serving one’s customer is the path ahead for financial services.   

Both Apple and Walmart examples show that success is all about maniacally serving one’s customer and gaining their trust in doing so. That trust, and meeting their needs, is how non-banks can ultimately drive adoption of financial services products by leveraging their unique distribution models. Banking, after all, isn’t easy: Even giants like Google have failed or pivoted from their initial ambitions. At the end of the day, distribution and trust is everything in fintech.