OBSERVATIONS FROM THE FINTECH SNARK TANK
The thought of the banking industry becoming like the healthcare industry should scare the bejesus out of anybody. But don’t jump to conclusions. There could be some positives in that scenario.
Here are three ways banking could become like healthcare–and two out of three would be for the better.
Over the past 15 years, the healthcare industry has transitioned to a new paradigm for care: Outcomes-based healthcare. The Canadian Institute for Health Information defines health outcomes as:
Changes in health that result from measures or specific health care investments or interventions.”
Health Catalyst writes:
In outcomes-based healthcare, health systems focus on reducing variation in how they treat a wide variety of diseases and conditions—a process that requires all clinicians to provide accurate diagnoses and treatment algorithms to improve patient outcomes. Outcomes-based healthcare also targets a more proactive approach to healthcare: creating a healthcare system that strives to maintain healthy populations and prevent illness.”
This is a concept desperately needed in banking.
The prevailing approach to financial health is education- and literacy-driven not outcomes-based. But as Jen Tescher, CEO of the Center for Financial Services Innovation, wrote in American Banker, “Financial literacy programs don’t work. Financial education rarely leads to lasting knowledge gain, and it does nothing to change behavior.”
An outcomes-based banking approach to financial health would focus on outcomes like:
- Spending. Is spending less than income?
- Bill pay. Are bills paid on-time and in-full?
- Savings. Are there sufficient savings to cover emergencies and 6 months of living expenses? Are savings on-track for longer-term needs?
- Debt. Are loan payments made in-full every month? Are monthly loan payments no more than a certain percentage of income? Are reasonable interest rates paid on outstanding loans?
- Performance. Do deposits, savings, and investment earn competitive rates of return?
To be sure, even the healthcare industry hasn’t fully transitioned to outcomes-based management. Health Catalyst identified three barriers: 1) Limited analytics capabilities; 2) Limited access to information; and 3) Inappropriate organizational structure.
Sound familiar, bankers?
These hurdles could be addressed, however, by a second way in which the banking industry might become like healthcare: banking networks.
I’ve seen a few doctors recently (all good, thanks for asking). Thanks to the fact that they’re all are part of the Lahey network here in the Boston area, I don’t have to worry about sharing my medical records–the network takes care of that.
The Centers for Medicare and Medicaid Services defines a provider network as a “list of the doctors, other health care providers, and hospitals that a plan has contracted with to provide medical care to its members.” According to PWC, networks are becoming more prevalent in healthcare because they:
“Help payors reduce costs and increase the quality of care. Payors can give themselves a clear competitive advantage by designing high-performing health networks using three criteria: 1) Total cost of care; 2) Quality of care; and 3) Consumer preference, which factors in patients’ willingness to pay for choices in providers, specialists, and systems.”
The US needs something similar in the banking industry.
In the US, calls for easy financial data sharing (i.e., Open Banking) often ignore the reality that data sharing isn’t as easy as just giving consumers “control” over their data. Sharing data requires common definitions and standards to make it usable.
Regulatory mandates aren’t going to make this happen (regulatory mandates rarely produce any tangible benefits, am I right?).
Instead, like the Lahey network in healthcare, banking needs networks to facilitate data sharing and integration. While they don’t call themselves banking networks, there are analogous efforts currently underway from:
- Big banks. Large banks like BBVA and Capital One have API stores or developer exchanges which facilitate data sharing between organizations. But from my discussions with these (and other large) banks, they’re mostly technology-focused initiatives with no plans to actually develop a network of providers.
- Consortia. Organizations like the Financial Data Exchange and Credit Union Financial Exchange are steps in this direction. But both have yet to have widespread impact on data sharing, both across institutions and between institutions and fintech players.
Two types of players will more likely to emerge as banking network providers:
- Big tech. With the ability to provide identity management, underwriting, account opening, and money movement capabilities, a banking network of providers could leverage Amazon’s reach to find new checking account, credit card, and loan customers–and provide safe and easy data sharing between financial providers in their network. Apple, Google, Intuit, and PayPal are all candidates to create these banking networks.
- Fintech vendors. To date, much of the analysis surrounding the Fiserv/First Data and FIS/WorldPay mergers has focused on how these firms will achieve huge economies of scale in transaction processing. The real competitive differentiators that emerge, however, could center around new data–and data sharing–services the firms bring to market.
Any way it happens, banking networks are another way in which banking could become like healthcare–for the better.
I said there were three ways banking could become like healthcare–and two out of three would be for the better. Well, here’s the downside: Third-party payers.
In its report Breaking New Ground in Fintech, Omidyar Network writes:
There are three basic categories of payers that financial health revenue models can rely on: 1) Consumers themselves; 2) Third-party sellers who pay for advertising and referrals,; and 3) Third-party beneficiaries, who themselves accrue value in some way when a consumer uses the financial health tool, which can be direct monetary value (e.g., interchange) or more indirect value (e.g., employee wellness program that reduces employee churn and/or increases productivity).”
Omidyar cites WageWorks and Even as examples of fintech firms pursuing a third-party beneficiary (or payer) business model. Interchange (paid by merchants) is another example of third-party payment.
How viable is this model going forward? Omidyar identifies three conditions to determine whether a third-party payer is viable:
- Third parties derive sufficient value from consumers using a solution to pay. The fintech must demonstrate to third parties that they benefit from consumers using the solution.
- Third parties perceive the value created and attribute it to the solution. The fintech must show causal links between consumer use of the solution and value received by third parties.
- User engagement with the solution is sufficiently high to generate material revenue. The fintech’s user engagement is high enough to create consistent value for third parties (whether through interchange, data sales, or outcomes of interest to institutions).”
The bigger question is whether or not we’re evolving to the point where we have FMOs (financial maintenance organizations). Just as HMOs (health maintenance organizations) determine what will get paid for and how much to pay, it’s conceivable to think of an FMO that determines how much interest on a mortgage the FMO will pay to the bank or lender.
If this doesn’t scare bankers, nothing will.
Date: April 25, 2019