A sea of sameness: As startups turn into bank-like platforms, differentiation remains an issue

Outwardly, fintech companies insist they don't want to be banks. While they may not hold charters or operate branches, they're all adding products. Whether they started out offering checking accounts, loans or investments -- most of them want to do a lot more, calling themselves financial one-stop shops or marketplaces. The past year has seen startups move ever closer to bank-type service models. U.K.-based Starling launched its marketplace last fall; investment and lending platforms like Stash, MoneyLion and SoFi said they will roll out bank accounts this year; and digital banking startups like Varo, Chime and Monzo envision a future where their customers will look to their apps for services that go beyond checking accounts. It's all part of a movement toward the "platformification of banking," which Cornerstone Advisors' Ron Shevlin defines as a plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other, and create and exchange value. He argues that to become successful with this system, the company must attract the right kind of participants, act as a product matchmaker of sorts, and offer a toolkit -- the API "plumbing" that lets producers and consumers seamlessly interact. While platforms offer opportunities to deepen relationships with customers and grow multiple revenue streams, the risk is that they will appear too similar. Founders are preparing for a scenario in a few years that will likely see a range of different platforms available for consumers, one in which maintaining a distinctive product offering will become crucial for survival. The need for differentiation will raise the bar on product innovations and holistic advisory services that go beyond pure banking services, a recent paper from Deloitte points out. Companies are working to address financial needs of target demographics and evolve product roadmaps alongside customers' needs. They're developing ways to evolve products more quickly and investing in technology to know their customers better. "The key is to differentiate around the client's needs," said Aite research director Alois Pirker. "Traditional banks are built around siloed product structures, not in an integrated way. ... Companies like Acorns, Stash or SoFi are looking at specific demographics; they've built their [value] propositions and segued [to other products]." Investment app Stash aims for an underserved market of customers who don't have a lot of money to invest. It will soon offer bank accounts, and it already offers retirement accounts. For Stash, which has 2 million customers, carving out a distinct brand identity means learning about the customer and addressing needs relevant to their situation. This means using customer data to offer personalized, holistic financial advice through in-app assistant Stash Coach. "We center everything around pain points," said co-founder Brandon Krieg. "We get [customer] feedback from and through data science. We're able to offer really specific [advice] -- we don't need a hammer to address a problem we don't have." Krieg added that another differentiator is the financial education material offered to customers, and to enable that, the company continues to invest in hiring content marketers alongside data scientists. Neobank Chime has invested in back-end technology to keep costs down and pivot when necessary. Chime, which recently hit the 1 million customer mark, emphasizes customer loyalty. Its back-end technology keeps fees down, which helps build trust and enhances customers' openness to being offered new products. Its "top of wallet" strategy offers customers incentives to engage with the app, making it easy for them to switch their default bill-payment option to Chime. The advantage of a self-built back-end technology stack is the ability to evolve products and grow offerings as its customers' financial needs change over time, said CEO Chris Britt. "When you own the tech stack you're able to quickly iterate on the product and provide automation tools which are critical to success -- if you simply hire a third-party enterprise for your checking account you can't innovate quickly," he said. Others don't see a cluttered market of platforms as a threat, as incumbents still offer a huge opportunity for new customer acquisition. Chicago-based investment platform M1 Finance has a product path to offer more services, but its core differentiator is an investment tool that offers customers significant latitude to design their portfolios, a level of personalization few others offer. "For us, it's about integrating [services] so they feel like they're all part of one product -- we all want them to be laid out in a very elegant fashion, and the M1 account in time should replace your checking account, direct deposit or bill payment," CEO Brian Barnes said. Since M1's customers are typically more seasoned investors who are used to taking a more active role in designing their portfolios, Barnes said he sees his competition as incumbent brokerages, and that's where the bulk of his new clients come from. "We’ve taken the perspective of people who are using legacy systems now, and also use the best in tech for other aspects of their lives," he said. Startups see the market as big enough for multiple players to thrive. Many of them have differentiated significantly enough to hold their own in a world of multiple platforms; while there will be some consolidation, those that don't generate significant-enough market will likely close down, said Pirker. Others say the market will evolve to become more favorable to incumbents who are looking for acquisition opportunities. While the flow of acquisitions has slowed in recent years, a bear market could push startup valuations down and create a climate favorable to larger players looking to acquire startups to more quickly evolve their own products, said Capco partner Kapin Vora.