A weekly wrap-up from Silicon Valley on what’s making the news in fintech, banking, and disruptive trends
The Digital Divide: How Bank CEOs Can Take Advantage of Fintech Disruption
What it is: Perhaps no other industry faces the wave of digital disruption more than financial services, which is inclusive of banking, insurance, investment and a broad range of other businesses that manage money and consumer finances. The doomsday scenario headlines frequently appear, predicting the new breed of technology-driven companies that will send banks into oblivion. Built at the convergence of financial services and technology, known as Fintech, these new players represent both an industry and paradigm shift to approaching business intelligence, risk management, regulation, payments processing, and lending.
Why it is important: During the early days of the Fintech revolution, Fintech companies claimed they will make banks obsolete. What has often been overlooked, however, is how many of the advances in Fintech rely on the established financial service infrastructure to succeed. Enter, the stage of partnerships marked notoriously by significant agreements between established banks and the newcomers, like ApplePay and PayPal to name a few. But now, the realization is slowly settling in that it’s the financial services providers operating in the banking, investment and insurance industries that are best positioned to capitalize on the evolving FintTech ecosystem.
Dimon Says Auto-Loan Market Stressed, Sees Pain for Banks
What it is: Americans surged into dealers’ showrooms as cheap gasoline and a growing job base helped boost auto sales to a record year for sales in 2015. Now, banks are worried the party could be over. U.S. auto sales fell in May for the second monthly decline this year and reinforced the idea that demand for cars and trucks has plateaued. The results for last month, whose Memorial Day weekend promotions make it a bellwether for gauging buyer appetite, show consumer demand for cars leveling off faster than executives predicted.
Why it is important: Analysts predict a surge in previously leased vehicles for sale will pressure used- and new-car prices, which could lead to consumers owing more on a loan than the auto’s value. The Manheim U.S. Used Vehicle Value Index fell in three out of the first four months of the year, dropping 2.4 percent to 122.8. U.S. Bancorp CEO Richard Davis, said Thursday during an investor presentation in New York, that the auto-lending market is “overheated,” mainly because of pricing competition.
Community Banks Outperform Banks In General
What it is: Profits declined 2 percent in the first quarter at U.S. commercial banks and credit unions but increased more than 7 percent at community banks, the Federal Deposit Insurance Corp. (FDIC) reported. The 5,664 FDIC-insured institutions identified as community banks reported $5.2 billion in net income in the first quarter, an increase of 7.4 percent from the first quarter of 2015.
Why it is important: In the aggregate, the 6,122 financial institutions reported net income of $39.1 billion in the quarter, down 1.9 percent compared with the same quarter in 2015. The decline was largely the result of a $4.2 billion increase in provisions for loan losses set aside to recognize potential future loan losses — mainly commercial and industrial loans, and especially in the energy sector — and a $2.2 billion decline in non-interest income.
James Chessen, American Bankers Association chief economist, said, “While the first quarter wasn’t one for the record books, it was a solid one for banks by any historical measure. Business and commercial real estate loans grew strongly, and will serve as an important driver of growth in the second half of the year.”
Lessons from the Top-Performing Banks
What it is: All banks are faced with tighter margins, higher costs to do business, and heightened competition for customers. But high-performing banks still managed to deliver double-digit returns on equity capital last year, no small feat at a time when the S&P 500 and other benchmarks barely made it into the black (and only when adjusted for dividends).
Why it is important: The traits that set the industry’s top performers apart from the pack are: 1) they are more efficient and therefore more productive, 2) they are more agile, 3) they provide alternative options to consumers, 4) they are action-oriented with can-do attitudes, and 5) they are focused and aligned.
Wall Street is Turning Up The Heat on Startups
What it is: The tide may be turning against financial technology startups. Wall Street banks are reclaiming market share from competitors in the form of billions of dollars in peer-to-peer payments. They’ve done so by simplifying how consumers transfer cash between each other.
Why it is important: Bank of America has processed $16 billion in mobile payments so far this year, CEO Brian Moynihan said in a speech at the Alliance Bernstein Strategic Decisions Conference in New York Thursday, much of which is via the newly launched ClearXchange platform, a consortium of U.S. banks that banded together to use the same technology to allow consumers to transmit funds digitally. It lets bank customers transfer money between each other simply by using their mobile phone number or email address. If it catches on, it could represent a threat to major financial technology companies, like PayPal.
Community Bank Successfully Competes Against Digital Lending Startups in Student Loan Refinancing
What it is: Arjun Sirrah takes great pride in his company’s national-level success as a community bank in Connecticut competing against digital lending startups in student loan refinancing. The 10-year-old Darien Rowayton Bank in Darien, where Sirrah has been chief technology officer of its affiliate DRB Lending since 2014, has $588 million in assets and has securitized more than $1.5 billion in loans in the last couple of years.
DRB has managed to succeed in an environment filled with disruptors like Social Finance, Earnest and CommonBond; fintech players who moved in with faster and often times cheaper versions of financial services. It has done so by upgrading its technology and by providing its customers with an easy-to-use product. The company is now taking its tech-based approach to banking to a new realm — later this year it plans to enter the mortgage market with the same commitment to simplicity.
Why it is important: Transparency and ease of use are the value propositions for technology, Sirrah said. Delivering on that is easier if the bank doesn’t have some of its older technology. DRB has been revamping its processes since he arrived, making sure they’re engineered for agility so it can keep up with feedback loops.
Sirrah says much of the company’s success is due to the collaboration of the technologists with the front-line staff. His engineers are on a first-name basis with the customer service representatives and communicate openly and frequently in order to implement that feedback into weekly development sprints. They’re also involving a lot of mortgage experts in the process who aren’t on the digital team.
Largest (and Newest) Banks Set Standard for Mobile Banking Excellence
What it is: The impact of having a leading mobile banking experience has been documented often over the past several months. From having an impact on consumer satisfaction to improving the perceived level of convenience of a financial institution, the importance of making continuous improvements to mobile banking applications can’t be overstated.
The 2016 Mobile Banking Functionality Benchmark from Forrester evaluated the mobile banking offerings of the five largest retail banks in the US. In this study of the largest (and many times most progressive) mobile banking offerings, Bank of America and Wells Fargo were ranked the highest, with all of the largest banks having strong features for research and customer acquisition.
Why it is important: To provide a positive mobile banking experience regardless of how consumers interact, it is important to be able to support a wide range of smartphone and tablet apps as well as strong mobile websites. To accomplish this, leading banks used the following strategies: 1) SMS Banking, 2) Mobile Website, 3) Alternative Operating Systems, 4) Tablet Banking, and 5) Emerginy Touchpoints.
According to Forrester, “To win and retain mindshare and wallet share, digital banking teams need to focus on using mobile banking not only to meet customers’ needs but also to create new sources of value. To fend off the disruptive forces of disintermediation and commoditization, mobile banking must evolve to become a platform for customer engagement.”
How Accenture, Deloitte, KPMG, EY & Capgemini are Helping Fintech Startups to Disrupt FS
What it is: Disruption isn’t being achieved by going it alone, collaboration is vital. Disruption to the financial services market is coming from several different angles, from regulations to customer demand for change and cost. These factors have come together to aid the introduction of fintech companies into the market. Fintechs have appeared and started to disrupt numerous areas of finance, aided by a customer first approach and backed by technology.
Why it is important: Although many consultancy firms work with banks, they are also working with the fintechs that are disrupting their businesses. CBR highlights five of the leading consultancy firms and what they are doing to nurture fintech talent:
Accenture’s runs several Fintech Innovation Labs around the world. The purpose of the innovation labs is to give early and growth-stage companies help to develop, trial and prove their proposition by working alongside its consultants and with banks.
Capgemini has approached the subject more from a services and technology point of view and a focus on blockchain. They are focused on collaboration with fintechs in order to develop blockchain solutions for areas such as micro payments, syndicate loans, asset management, and claims handling.
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