The world of payments and commerce continues to be a very busy place as the world reopens for business and consumers emerge with new preferences. How to meet those preferences profitably has become the focus for both commerce and financial services. Yann Ranchere, partner at Anthemis Venture Investing Group, joined Karen Webster for the latest episode of This Week In Payments to talk about all of the latest developments.
Ranchere said that while many people attribute the economy’s nascent changes to the COVID-19 pandemic, “if you take a hard look back at the beginning of the year, some of these trends were already happening. All the pandemic really did was pull them into focus and accelerate some timelines.”
The Challenge Facing Challenger Banks
Ranchere said that’s most observable in the world of challenger banks, as investors reevaluate the core value such firms offer — and their sky-high valuations.
There was no shortage of news in the challenger-banking space this week. For instance, Credit Sesame announced the launch of Sesame Cash, while Revolut expanded its footprint into Ireland.
But Webster noted that not all of the news was good. For example, Monzo raised funds at a lower valuation level after recently announcing some layoffs.
Ranchere said the challenger-bank space has been lowering valuations since 2020 began because for all the great expectations and grand predictions of disruption, firms have yet to deliver.
“Early on, I think a lot was made of upselling customers, growing visits and growing a base of customers that wanted more products,” he said. “They believed they could quickly broaden the range of services they were offering, [but] that hasn't necessarily happened — or at least not at the pace that was anticipated. I think people were thinking: ‘Oh, soon we're going to be able to service mortgages and all these things,’ and expected that to happen much faster than it has actually happened. And [that] opens the question around: ‘How long does it take for your relatively young customer base to catch up?’”
Ranchere said challenger banks’ target market of millennial consumers have simply amassed fewer assets than their baby boomer parents have, as younger customers are less likely to have investment accounts or own homes. As a result, many firms have remained as sort of the entry-level checking-account substitute that they began as, he said. They’ve found that expanding into a wider range of financial services was neither as easy nor as fast as they’d anticipated during early fundraising rounds with sky-high valuations.
But now, a long-due market maturation is happening — one that Ranchere believes will ultimately be good for the sector. He said investors are taking a hard look at whether hefty valuations still make sense given challenger banks’ progress so far.
Ranchere doesn’t think investors will decide the sector is valueless, as challenger banks have shown the ability to bring in younger consumers with greatly improved UX and upgraded digital offerings. He said there’s clearly something worth developing further, but valuations do need careful consideration given what challenger banks have actually produced.
“The business models out there just don’t sustain the valuations they were put out at — that’s where the gap is,” Ranchere said. “It is less about being a non-viable business model and much more about discovering what the fair value of this business model actually is today.”
‘Financial Wellness’ Tools Bulk Up
However, Ranchere and Webster agreed that players like Credit Sesame are shifting the debate by building credit and financial wellness tools into their challenger-banking offering — modifying the model’s value by boosting value-added services.
Ranchere said the challenge with financial wellness products has always been getting them into the right users’ hands so that they’re actually useful. Finding that connection point is tough, so Credit Sesame’s plan of embedding its new Sesame Cash tool into a banking application makes sense.
Ranchere added that while a lot of attention has been paid to the credit piece of financial services, what needs fuller development are the tools necessary to better build savings. He believes that the ability to save by leveraging digital tools is improving, and that the pandemic is pushing people into a mindset where they feel compelled to save — which is unusual.
“If you look at the saving behavior of people right now, it's really impressive because they have just dropped their spending,” Ranchere said. “And I think there is a growing ability to reassess one's own savings vs. their spending. That is an interesting change in the current market.”
He said financial wellness tools that can help move consumers — particularly young ones — from a “buy now, pay later” mindset to a “save now, buy later” mindset.
Walmart And Shopify Fill In Gaps For Each Other
Meanwhile, the great remaking underway in the world of eCommerce carried on this week as Walmart and Shopify decided to join forces in their battle against Amazon. The two companies agreed to bring Shopify merchants to Walmart’s marketplace.
Ranchere noted that the deal combines each company’s strengths while leveling out their relative weaknesses. Shopify merchants want a crack at Walmart’s massive consumer base, while Walmart wants to broaden the range of goods it sells and truly take advantage of the infinite shelve space that the Internet lets it stock. “I think in a way, Walmart gets its ‘long tail’ via Shopify,” he said.
‘Digital First’ Takes Center Stage
Ranchere said when he steps back and looks at the bigger eCommerce picture, he sees big brands finally viewing digital sales not as something of a sideshow secondary to brick-and-mortar businesses, but as the primary driver for sales.
For instance, he said Nike now sees physical stores that carry its shoes as “merchandise light experience centers,” but expects most actual transactions to take place online.
“I think that's the direction that a lot of brands should go into — asking themselves, ‘How do I make myself unique as an endpoint for the users?’” Ranchere said. “And I think personalization and unique offers are just two angles that at least Nike has shown can [do that]. I think there’s a lot more to look at — and it is where brands need to start looking.”
In fact, both he and Webster expect the trend toward expanded online sales to continue even as physical stores reopen, as the consumers who emerge from their homes won’t be quite the same as when they went in. They will emerge with very different wants and needs — and will gravitate to those stores and brands that fulfill them.