JPMorgan Chase recently announced the impending shutdown of Finn — the bank’s millennial-targeted, natively digital offering. More surprising than the announcement itself was the speed in which the institution declared defeat (barely a year after the service’s national rollout). Why didn’t it work and what are the implications? Below are some thoughts and notes on the subject from our team and some close industry friends.

Why Finn At All?

It’s fair to say that JPMorgan Chase is dominant in financial services. With over $2.6 trillion of assets, the bank is almost 10% larger than Bank of America and much larger than Citi and Wells Fargo (numbers 3 and 4, respectively). Deposits comprise $1.5 trillion of those assets, and the firm is generally considered the leading issuer of credit cards to U.S. consumers.

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Recent data reported by CB Insights showing JPMC’s recent steady progress in digital.

So, is the banking juggernaut really concerned about disruption? Maybe. In 2018, FinTech startups raised almost $40 billion from private investors and, in Q1 alone, two digital banking challengers or “neobanks” (N26 and Chime) raised $550 million between them as they claim over 5 million consumer deposit accounts between the two of them. Their long-term goal? To take on the big boys in the U.S. in consumer deposit and credit card accounts.

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What makes neobanks so notable are their digital-first experiences, innovation-centric cultures and transparent, consumer-friendly pricing models. These challengers (e.g. Chime, Varo, MoneyLion) have scaled quickly in the U.S. by partnering with “sponsor banks”, who allow these new, startup brands to use their banking licenses. Challengers benefit from best-in-class banking technology (most bank infrastructure hasn’t been upgraded in decades), a maniacal focus on user experience and top-notch startup talent (which has studied the banking industry, but is ready to challenge convention at every turn).

In fact, the biggest advantages incumbents have over challengers may be the bank charters themselves…as well as access to distribution. So, should incumbents really fear the rise of new banking brands? The recent lengthy momentum of neobanks and their bank charter partners might suggest the answer is yes. Moreover, there are at least a few historical examples of challenger brands in the U.S., like ING Direct, growing from zero to huge scale. Todd Sandler, a friend of CV and early marketing executive at ING Direct, shared some of his perspectives with us on the topic. Even though ING Direct USA launched as a full-fledged bank (even in its early, challenger days), the ING Direct brand was new to American consumers and had complete independence from it’s parent…unlike Finn and Chase. Effectively, ING Direct was more like Chime than Finn and, to this day, ING Direct stands out as one of the most successful U.S. challenger banks of all time.

In summary, it’s fair to perceive today’s challenger banking model as drawing the necessary banking partnerships and access to capital to make these neobanks a credible threat. Will they get distribution scale before the recent waves of private funding begin to ebb? We’ll have to wait and see.

Opportunities in a Flanker Approach

If we agree that big institutions perceive neobanks as credible threats, they may pursue flanker brands as a viable counter-strategy. From their perspective, flanker models provide the opportunity to test (and scale) new technologies, expand to new market segments, and develop new product offerings. Chase recognized this opportunity as it conceived Finn. Generally, we see three viable strategies for creating a successful flanker brand.

A JPMC insider recently shared with us that Finn was originally intended as a “starter product.” The strategy was to acquire younger and less profitable individuals, with the goal of cross-selling/ migrating these customers to higher profit products over time (e.g. wealth management). This strategy could work, but only if the bank accepts that the flanker will be a loss leader for the core business (and thus must be measured accordingly). The flanker brand, in a sense, is a marketing channel to drive new acquisitions and increase adoption of existing products.

Of course, a flanker brand can also exist as a stand-alone business. This requires different products, different pricing, different go-to-market, different servicing, and likely different infrastructure than the bank’s core product portfolio. It also requires a clear focus on a new customer segment that does not meaningfully overlap with the bank’s existing base; otherwise, there is a risk of cannibalizing one’s own customers. We saw this happen with Finn, where a sizeable portion of Finn customers were Chase Bank clients and used both products.

In addition to the ‘starter product’ and ‘stand-alone’ strategies, banks can also use flanker brands as a laboratory. Success with this strategy requires accepting that the institution is not likely to make money or gain new customers from the new brand. It also means effectively testing — and learning from — new approaches to product development, new user experiences, new distribution channels, and new technologies. Banks have the flexibility to apply a ‘lab model’ without significant investment or public expectations around brand growth. These learnings can be applied to the core business — building talent, migrating the best technologies, and enhancing the customer experience.

Challenges of the Flanker Model

We reviewed this topic with long-time banking technology innovator, Pete Kight (Founder and former CEO of CheckFree), and his view is that there are “two significant challenges with flanker brands — both [of which] are well known, easy to understand, but nonetheless seem [hard to avoid].” Pete highlights first that “bank culture doesn’t lend itself to creating a nonbank, fast moving, risk taking [and] innovative business platform.” Said simply, if you start with the bank’s native human capital, you won’t achieve the truly new and innovative thinking required to make truly innovative products and experiences. Locked in that same human capital is the legacy of the bank’s weighty corporate culture, which is antithetical to the nimble, risk-taking approach required to make the flanker a success. Todd Sandler echoes this sentiment, sharing that “it’s incredibly difficult for large incumbent brands to spin off new stand-alone entities without complete independence of employees, systems, culture, office locations and management. Consumers are smarter than ever and building trust from a flanker brand is incredibly difficult.”

In addition, Pete highlights that “no matter how hard they try, flanker brands are still owned by banks, and the cost of supporting the strategy is ultimately subject to the traditional bank’s strategic planning and budgeting.” The implications of this are broad and not to be underestimated. Even if the flanker has been built on new, more modern and cost efficient infrastructure (which is often not the case), the accounting of the flanker business unit is often subject to allocations of corporate overhead, scale biases set in core, legacy business areas and external capital markets expectations which prioritize scale and profitability over investment in innovation. To this point, Pete reminds us of Goldman Sachs CEO David Solomon’s recent complaint that “the digital Marcus business is getting absolutely no credit from anyone else in the investing community.” This is after building $48 billion in deposits and $5 billion in loans.

What are the Implications for the Industry?

The lesson in Finn’s failure is that, in practice, it is very hard for banks to successfully scale flanker brand strategies. It’s one thing to launch a new brand…it’s entirely different to scale and sustain that brand with economics that satisfy internal and external expectations. This is particularly true in an environment where consumers see an increasing number of digital-first alternatives developed by heavily funded start-ups.

If you believe that conclusion, then banks will likely be forced to pursue one of three paths. The first is centered on using M&A to capture the next generation of product innovation, talent, and the associated customer base. The second is to adopt the ‘Laboratory Strategy’ and use the flanker brand as an asset to build internal talent, recruit new digital resources, and scale select capabilities beyond the Lab. The third is to pursue partnerships with consumer FinTech brands to leverage their capabilities and non-competitive positioning (e.g. JPMC’s partnership with OnDeck).

Of course, all of this conjecture and analysis began with a simple question about a credible threat. One might reasonably argue that the largest FIs shouldn’t be so worried about neobanks as threats at all. Historically, the biggest banks only had to keep up “good enough” product experiences to preserve their leadership positions, given their advantages in unit economics and distribution. Nonetheless, the demise of Finn certainly reminds us that big banks struggle to innovate at scale. This is not a flanker brand problem nor is it the neobank challenge. It is a cultural, financial and capital markets reality that consumer banks will have to confront and overcome in order to survive in the long term.

Specific Takeaways for FinTech Challengers and Enablers

We read these unfolding events as net-positive for most FinTech players. As mentioned above, the fact that large FIs struggle to create new brands and offerings in-house may mean they inevitably are forced to pay up to acquire venture-backed challengers. These acquisitions may have economics that will be initially challenging to justify to Wall Street, but the largest players are likely to be able to absorb the dilution as part of a carefully crafted growth and innovation story. So — if you’re investing in rapid growth or at-scale FinTech challengers, the outlook seemingly remains positive.

For folks like us who also love investing in enablers and infrastructure, Finn’s struggle is doubly impactful. Many of our portfolio companies supply technology and data services to FinTech challengers, so the prior paragraph suggests good news for them and consequently for our companies. In addition, most of our portfolio companies supply technology to the incumbents as well, and we expect that setbacks like Finn don’t change large FIs’ need to update the important capabilities supporting their core products. If anything, we expect that need to increase in importance in the absence of a viable alternative, flanker platform.

-Post written by Daniel Rosen & Ysbrant Marcelis, with contributions from Pete Kight, Todd Sandler and a few other friends of Commerce Ventures. Thanks to Andrea Fitzhenry for the editing help.

Early-stage venture capital firm investing in technology innovators in the retail and financial services eco-systems.

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