No-Limit Thinking
- Amazon began as an online bookseller and now sells everything including cloud software.
- CVS—“Your Neighborhood Drugstore”—sells groceries and make-up.
- Modern day financial companies like Square Capital have expanded from payment processing into lending, food delivery and more.
What’s clear from these companies is that in order to scale, you need scope and in order to have scope, you need scale. It’s the classic chicken and egg strategic scenario. So the question for both incumbent and new entrant financial institutions is: How will you gain scope and scale?
Epic Failure
The classic example of catastrophic failure is Sandy Weill’s merger of Citibank and Travelers, which resulted in what some called a zombie bank.
“Mr. Weill’s watershed deal is regarded by some as one of the worst mergers of all time.”
And while Weill might have been a visionary in his grand vision of a globe-spanning financial supermarket, he failed to take into account both scale and scope, essentially combining two businesses into the Titanic of financial institutions. The result has been a shedding of business lines, shrinking geographies and the elimination of tens of thousands of jobs. Citi went from a dominant #1 to merely a top 5 bank in the US.
1 https://www.sec.gov/Archives/edgar/data/831001/000083100117000038/c-12312016x10k.htm
2 https://www.sec.gov/Archives/edgar/data/831001/000083100117000038/c-12312016x10k.htm
Stunning Success
On the flip side, Schwab, Fidelity, and Vanguard are scaling with aplomb, crushing a nascent monoline Robo Advisory sector by introducing Robo Solutions for their customers, advisors and technology partners. Not only does this severely cut costs, it potentially offers higher net returns for investors and eliminates the complexity of a direct relationship with a human financial advisor.
They added 2x what Betterment has ($9Bn) in total in just one quarter.
Fidelity’s new RIA platform already reaches more than SigFig ($70 million AUM).
It took 15 months for Charles Schwab & Co. Inc.’s robo-advisor to reach $8.2 billion. Now, in just nine months, the robo’s assets have nearly doubled that amount and it’s on pace to hit $30Bn of AUM by 2018.
Who’s next?
Several entrants have claimed to be the financial supermarkets of the future. SoFi was one but with the departure of their CEO—who left in disgrace and may have been their best hope at being a Bezos of Finance—that seems unlikely.
Betterment and Wealthfront have the war chests to pivot and expand their business scope but scaling may prove trickier and more timely than investors have the appetite to accommodate.
N26 represents a variant of the supermarket by allowing other financial products to compete for their mobile app customers via an API marketplace. Scaled properly, they have the potential to replace the end-to-end ego of traditional banking with an adaptable tech platform for changing times.
Lessons
Scale matters. It allows for price leverage, operational efficiencies, and brand development.
Scope matters. Choose your scope carefully. Unlike Citi, Fidelity, Vanguard and Schwab didn’t expand into new business lines, they drove innovation in their product lines, took ownership of their value chain and evolved the parts of their business requiring disruption.
Amazonization. Becoming the global financial supermarket may sound like a Sandy Weill dream, but the realization is that mingling assets and liabilities, conflicting regulatory bodies and cross-selling take time and innovation. We’ve seen how scale and scope can help, but on their own, they’re a three-legged stool. Technical innovation is the missing leg to complement them for true success.
