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 powerful and considered by many futurists as the most prophetic bellwether for where mobile and platform technology is heading.
It was developed by the Chinese multinational conglomerate Tencent and launched in early 2011, as of 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 but rather the vast array of different services and products you can seamlessly access from within the app itself. All 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, Trip Advisor, Venmo, Deliveroo and Tinder all in the same app and you are still only just beginning to get the picture.
Instead of trying to imagine how a super-app works just take a look at this video put together by The New York Times, it will do it much more justice than any short description I can give it – https://www.youtube.com/watch?v=VAesMQ6VtK8
Why did WeChat become so popular so quickly?
It became so popular so quickly 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 being China’s largest taxi-hailing app DiDi Chuxing. They integrated with WeChat in early January 2014 and within a month had doubled it’s registered user base form 20 million users to 40 million users.
So while the WeChat phenomenon may not have been easy to predict before its emergence, with hindsight it seems almost inevitable.
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, as 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, and all curated and calibrated for your own needs?
Convergence layers such as Amazon and Alibaba are essentially the next generation of platforms like Uber and Airbnb. The later offering convergence of a myriad of suppliers of a single product category, while the former goes one step further and offers a convergence of a myriad of suppliers across a myriad of product categories.
How does this relate to the world of financial services and FinTech?
Up until a few short years ago, it was uncommon for an individual in a market such as 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 you might find Monzo, Revolut, Nutmeg, Transferwise and eToro on their home screen. Where once they had one or two relationships with organisations that offered a broad range of financial services, they now have relationships with multiple niche financial services companies and all delivered 100% digitally.
This 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 that they have become accustomed to from the likes of Amazon and Alibaba.
So just as the 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 industry or the hotel industry or the 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. Maybe the evolutionary advantage lies with banks following a marketplace strategy?
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 own app. For instance, within the Starling app, the main current account and payment service is 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 that 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 to 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 that is dominated by an oligopoly of different banks, who have successfully adopted marketplace banking and who brought that curated and seamless experience to their customers.
Big Tech Encroachment
The most obvious candidate to fill the role of the WeChat of financial services is probably an existing tech giant. Volumes have already been written about the beachheads which have been established by the various US and Chinese tech giants in the world of financial services. Most of them already have banking licences, payment services and some already offer loans at various junctures of their businesses.
That said for the most part they are still only offering financial services where they support their existing business models. For instance, Amazon offers loans that help their customers buy more products on their platform and Facebook Messenger has payments services to keep their users on platform for longer. However, when we look towards China, the financial services ambitions of Ant Financial go way beyond the simple modus operandi of their US counterparts. Far from simply making it easier for their customers to access loans in order to buy more products on the Alibaba platform, it has also spawned AliPay (where approx ⅔ of Chinese online payments go through), Yu’e Bao (their money market fund which is already the world’s largest), Sesame Credit (their credit scoring and loyalty program), MyBank (their digital bank) as well as their many joint ventures such as Paytm in India and KakaoPay in South Korea.
However, it is one of their 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 of the companies 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, which gives supply side sellers an amazing and previously unavailable capability to target content and services with unerring accuracy.
The salient point here being that digital market ecosystems such as those being brought to reality by Ant Financial are simply more efficient in almost every aspect than traditional market ecosystems and distribution networks. All things being equal they will always become dominant over their less efficient legacy counterparts.
What will the end game look like?
Predicting the future is a fools 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. All the while 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, and they are eventually in danger of becoming “component suppliers” in a new platform enabled reality. Radicalising their technology infrastructure and then embracing both the opportunities and dynamics of platform distribution seems like the only way they can indemnify themselves against decline.
The eventuality of any extinction level event for banks is far too distant for any reasonable level of predictability. However, 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 it does, has there ever been a greater economic prize?