Functional vs. Magical: Why Banks Can’t Be Fintech
Originally a thread on X/Twitter:
1/21: Many people have asked why #Banks can’t just copy #Fintech functionality and then crush them with their scale and advantaged funding and regulatory apparatus. It’s because they’re in the “functional relief” business vs. the “magical transcendence” business. Unpacked:
2/21: While so many Banks want to believe that they can compete with best-of-breed Fintech companies, it’s a **mostly** true generalization that the two factions don’t approach product construction and service delivery in the same manner.
3/21: For any given product or service, Banks ask themselves: “What problem does the customer want us to solve?” and “How can we deliver a solution in a safe and compliant manner?” and “What friction can we reduce in the process that will remove costs and improve throughput?”
4/21: Fintechs start by assuming there are already solutions that exist in the market that work but aren’t yet perfect. They ask: “What can we do to improve upon existing market solutions that will create a magical and transcendent experience for our customers?”
5/21: Banks want to make sure their solutions work. Fintechs want to make sure their solutions delight. Banks want to improve their existing products. Fintechs want to reimagine what’s possible. Banks are about trust and stability. Fintechs are about community and belonging.
6/21: The truth is that Fintechs need to find their reason d’etre while Banks don’t. Most Banks already have a complete product suite, a distribution strategy that’s worked to get them to their current scale, and self-sustaining P&Ls that are designed to weather systemic shocks.
7/21: But these same Banks are starting to lose business to Fintechs because customers will choose “magical transcendent” experiences over “functional relief” transactions if given a choice. And given the Cambrian Explosion of Fintech startups customers now can make this choice.
8/21: Breaking down the dimensions of functional vs. magical and relief vs. transcendence is another way to explain the differences. (I would bet that every single reader of this thread has an example they could share that validates this framework so share away).
9/21: Functional vs. Magical — Does it work vs. Does it amaze
Functional: Designed to be practical and useful rather than attractive
Magical: Beautiful or delightful in such a way as to seem above known norms
10/21: Relief vs. Transcendence — Glad it’s done vs. I want to do it again
Relief: A feeling of reassurance and relaxation following release from anxiety or distress
Transcendence: An experience outside of norms that attaches you to something larger
11/21: There are many products and services offered by Banks that are transactional in nature and completion defines success. This is the definition of “functional relief”. I know the Bank will solve my problem but I also know it won’t be pleasant.
12/21: Functional relief in action: I recently went to a @wellsfargo branch to initiate a large wire. I entered the branch with angst and left 30 minutes later breathing easier knowing it was done. The steps in the middle were time consuming but the transaction was a success.
13/21: Contrast this to other Fintech “money movement” products: @Venmo, @Remitly, @TransferWise, @CashApp. Their experiences represent magical relief because they’re frictionless, can be executed anywhere in seconds and create relief when transactions are completed.
14/21: Banks could hire great developers and adopt modern design principles to improve on the “functional vs. magical” spectrum. Most don’t or try and ultimately fail. But where they’re structurally disadvantaged is in their ability to create transcendent experiences.
15/21: The ability to generate the feeling that one is part of something bigger than themselves is incredibly powerful. A sense of belonging. Association with a cause or mission. A belief that one’s actions matter. There are many ways to generate transcendent experiences.
16/21: The truth is that Banks aren’t positioned to do these things well but Fintechs have blank sheets of paper to work with. They can create communities of like-minded individuals. They can define and champion compelling causes and missions.
17/21: So, given functional parity, would a consumer prefer a checking account managed by their local Bank or one managed by @NuBank or @Chime or @Current or @Aspiration? For the typical consumer these next generation companies not only have great products. They are more.
18/21: The more can be defined by the association with community and purpose. Is it possible for a consumer to be proud when they use a debit card managed by a traditional Bank? Do they ever want to proactively talk about a traditional Bank to their friends?
19/21: In contrast, many Fintechs are designed around community and purpose. When an influencer recommends @Current or @CashApp to their followers, it signals community and coolness. @SoFi created community in spades. @Robinhood is defined by the movement it created.
20/21: Banks are like your smart Uncle who’s an accountant at E&Y. Fintechs are like your cool Uncle who’s an accountant at Google. Both can answer your tax questions but they’re not the same. You look for excuses to talk to one and you look for excuses NOT to talk to the other.
21/21: The TL;DR: Banks aren’t doomed but the goal of delivering “magical transcendent” products and experiences is easier for Fintechs than for Banks. Banks can and will improve where they can, but the creation of community and cause might be beyond their capabilities.