If there are tremors in Silicon Valley, don’t assume it’s seismic activity – but that’s not to say the proverbial ground didn’t just shift.
Digital disruption is reshaping financial services with a force unseen in many other industries. In the never-ending battle between “wealthtech” start-ups and industry giants, Bank of America appears to have scored a major hit with the launch of Life Plan, a digital financial planning service that’s available for free to users of BofA’s app.
Digital Financial Planning Goes Mainstream
Online financial planning is not new — in fact, wealthtech start-ups have been offering digital planning in one form or another for the past several years. What’s striking about Life Plan is not necessarily its functionality, but rather its tremendous momentum in client engagement. In only two months, 1.5 million clients have created financial plans using the new BofA offering. To put this figure into perspective, three of the largest roboadvisors (Betterment, Wealthfront, and Personal Capital) have a little more than 1 million clients combined, according to SEC data.
Point taken, digital financial planning is different than automated investment plans. But the fact is that industry giants like BofA, as well as Schwab, Vanguard, Fidelity, and so on, remain agile “fast followers” in weathtech — disrupting the disrupters, if you will — by leveraging their billion-dollar brands, massive scale, and large installed base of customers.
This isn’t the first time that BofA has played the role of spoiler in wealthtech. In fact, today’s fact pattern eerily mirrors the first wave of wealthtech innovation during the dot.com days of the mid- to late-1990s. As baseball great Yogi Berra once quipped, “It’s like déjà vu all over again.”
WealthTech 1.0 — The Birth of Online Banking
Ask industry observers for historical examples of how technology can revolutionize financial services, and many will quickly cite online brokerage. It’s easy to understand why: online brokers transformed the trading industry in the 1990s with a brash new cost structure and commission model, drawing more than 30% of U.S. adults to trade stocks online.
But while online brokerage often garners the most attention, online banking is actually the bigger success story. Simply stated, few (if any) fintech innovations over the past two decades have become as pervasive as online banking. A near-ubiquitous offering whose penetration of U.S. households soared in only 10 years from 10% to 80% by 2010, online banking eliminates the need to stand in line, is available 24/7, and offers steadily improving security. What’s not to love?
Yet what’s lost in the historical footnotes is that online banking was not invented by J.P. Morgan, Citibank, or BofA, but rather by a group of trailblazing Internet-only banks – companies such as NetBank and TeleBank, whose names are long-ago forgotten. These were the fintech innovators that immediately grasped the market potential of online banking, lacked the “baggage” of traditional bricks-and-mortar banks, and aggressively began seeding the market with digital offerings.
Internet-only banks had a great five-year run in the mid- to late-1990s — replete with splashy IPOs and high-flying stock prices — until one thing happened: traditional brick-and-mortar banks woke up to the fact that consumers were ready to transact online. Soon thereafter, the industry “dinosaurs” flooded the market with product of their own in what turned out to be the beginning of the end for Internet-only banks.
In fact, one might point to a single point in time at which Internet-only banks peaked — when BofA threw its weight behind online banking and launched a competitive offering of its own, the industry giant garnered more accounts in 90 daysthan the most successful Internet-only bank, NetBank, had sourced in its five year existence. Within a few years of that pivotal moment, nearly every Internet-only bank had folded.
Ultimately, it was the banking industry giants — and not the online trailblazers — that truly harvested the spoils of the revolution. Simply stated, Internet-only banks lacked the mega-brands, infrastructure, and robust product portfolio of the industry giants.
A Cautionary Lesson for WealthTech 2.0
Today, the WealthTech 2.0 disruptors have awoken the sleeping beast, mirroring Internet-only banks some 20 years ago. Early in the lifecycle for both online banking and online financial advice, skeptics loomed large and traditional players were slow to enter the market. However, as the online thesis began to play out some three to four years into the trend, the traditional brick-and-mortar competitors caught on. This materially drove up the customer acquisition costs for start-ups, who failed to defend against much bigger brands and asset-gathering capabilities of the traditional banks.