When I entered the venture capital business in 2014, the potential for financial technology to disrupt traditional banking had captivated investor imaginations. Foundation Capital’s Charles Moldow had recently declared the concept of peer-to-peer or “marketplace” lending to be “A Trillion Dollar Market By the People, For the People” that was poised to disintermediate traditional banks. Lending Club had just filed for its IPO, soon to be followed by On Deck Capital and financial data aggregator Yodlee. In the years that followed, investors poured $100 billion of capital into fintech startups and flocked to splashy fintech events like LendIt and Money 20/20 in droves. Perhaps, in retrospect, we all should have tempered our expectations. The marketplace lending vanguard have since struggled to find their footing in the public and private markets, and truly game-changing fintech platforms have been few and far between as much of the sector’s promise has proven illusory or subject to cooption by incumbents. Now that the initial wave of venture capital interest in fintech has crested and shifted toward the insurance industry, what parallels can we draw between the two spaces and how might outcomes be different this time?
Tech-enabled entrants in banking and insurance face very different industry and regulatory structures, but they have broadly similar goals. In contrast with other parts of the tech ecosystem, fintech and insurtech companies focus less on developing new products and more on leveraging technology to reach new customers and take costs out of the system. These opportunities include:
• Developing digital distribution capabilities to supplant legacy channels (bank branches/insurance agents) for more efficient customer acquisition, retention and cross-sell, particularly but not exclusively aimed at the millennial audience,
• Bringing to bear new sources of data for risk management, both ex ante (credit/insurance underwriting) and ex post (loan servicing/insurance claims), and
• Replacing ageing IT infrastructure across the whole value chain.
The challenge for distribution, which has received the lion’s share of fintech and insurtech investment, is how to create outsized franchise value in what is fundamentally a commodity business. In fintech lending, monoline digital distributors in mainstream asset classes like consumer installment loans and small business loans, including Lending Club, Prosper and On Deck, have struggled with rising customer acquisition costs as numerous competing platforms have entered the market. Making loans online and placing them with investors has not turned out to be a proprietary concept; such models have displayed little in the way of customer loyalty or network effects, and only moderate barriers to entry related to regulatory compliance and capital markets access. With little ability to differentiate on brand or product, online lending became a race to lower cost of capital, or in some cases take more credit risk. Moreover, incumbent banks already benefit from large existing customer bases, brand recognition and cheap deposit funding, and are beginning to figure out the technology around online origination—witness the rise of Goldman Sachs as a major player in digital consumer lending and banking via its Marcus platform.
In contrast with other parts of the tech ecosystem, fintech and insurtech companies focus less on developing new products and more on leveraging technology to reach new customers and take costs out of the system
Meanwhile, fintechs, through partnerships with the likes of JPMorgan Chase, have repositioned themselves as enablers rather than disruptors.
Is fintech lending a cautionary tale for insurtech distribution plays? While similar patterns may play out, there is reason to think insurtechs may have more room to maneuver. First, incumbent insurance carriers must navigate a channel conflict with their captive or independent agents that does not exist to the same extent in banking. Additionally, purchases of core insurance products like homeowners, auto and life insurance policies are often clustered together around major life events, so there may be more opportunity than in banking to target customers effectively and amortize digital acquisition costs across multiple lines. Fintechs are going to great lengths to “rebundle” various banking-related services into more comprehensive platforms, and the same is likely to be true of insurtechs. Licensing and capital-related barriers to entry are somewhat higher in insurance than in lending, though innovative turnkey insurtech development platforms like Boost Insurance are doing all they can to lower them, and reinsurer appetite to partner with insurtechs to write business directly will continue to grow. Finally, annual renewals provide a much higher propensity for repeat business in insurance than in installment lending, and more opportunity to use technology to derisk and differentiate the product—think of companies like Paladin packaging proprietary cybersecurity software and tools with cyber liability coverage, or telematics systems like Roost for homeowners and ZenDrive for auto. But, innovative risk mitigation and engagement tools can also be leveraged by competitors and incumbents. At the end of the day, while insurtechs may have a little bit more of an edge than fintechs out of the gate, digital channels will become increasingly crowded and carriers will eventually adopt similar technology just as banks have. Insurtechs cannot offer undifferentiated products and rely on the same paid search, lead generation and social media marketing strategies as everyone else and hope to be successful.
So how can insurtechs create durable franchise value in distribution? Here again, fintech can be instructive. Some of the most successful fintech lenders have found proprietary sources of high quality risk by integrating with established merchants or service providers at the point of sale, such as Green Sky in home improvement, Affirm in e-commerce, and Solar Mosaic in residential solar installation. Others, like Taulia, C2FO and BlueVine, have embedded themselves in commercial supply chains to make contextually relevant working capital finance offers. Insurtech companies pursuing similar proprietary acquisition strategies include Matic Insurance and DealerPolicy, which integrate closely with financing providers in homeowners and auto insurance, respectively, and Bunker, which serves the liability coverage needs of independent contractors by partnering with gig economy platforms. TicketGuardian and Mulberry offer online point of sale insurance products in partnership with online ticket sellers and e-commerce platforms, respectively, and Sure’s technology facilitates these types of integrations across numerous insurance lines. These companies have the potential to dramatically lower customer acquisition costs relative to direct-to-consumer focused peers, but they may face difficulties in creating a seamless user experience when integrating with partners and carriers with older technology. Moreover, customer lifetime value may be lower because there is less of a direct relationship with the insured.
Other highly successful fintechs have focused less on proprietary acquisition and more on building lifetime value through a superior customer experience and comprehensive product offering. SoFi used its core student loan refinancing product as a wedge to acquire highly creditworthy young professionals before expanding into mortgages, personal loans, banking, and wealth management, all the while offering career coaching and other ancillary services to its borrowers. MoneyLion bolsters its unsecured loan product with a variety of free and subscription-based mobile money management and financial health tools. Insurtechs have the potential to follow similar strategies to win and retain customers by creating not just a streamlined digital application, underwriting and binding process but a better overall policyholder experience via proactive communication, easy and fast renewal, and complementary value-added products and services. This is particularly true of homeowners insurers like Kin and Hippo, who protect the most important asset most people will ever own and are in a privileged position to offer a host of home maintenance and risk prevention features. As in fintech, the ability to sell multiple products, whether as a broker, MGA or full-stack carrier, will be helpful.
While the road will be long and potentially quite capital-intensive, next-generation insurance companies have a chance to gain an edge on competitors and incumbents and take meaningful market share if they can draw the right lessons from the fintech experience.