A weekly wrap-up from Silicon Valley on what’s making the news in fintech, banking, and disruptive trends
How Big Banks are Embracing the Fintech Revolution
The Citi researchers predict that the fintech revolution will wipe out nearly a third of all the employees at traditional banks in the next 10 years.
Such a stark outlook helps explain the seriousness with which Citi and its big-bank peers are suddenly treating the latest threat to their hegemony. “Fintech is different,” says Stephen Bird, Chief Executive Officer of Global Consumer Banking at Citigroup. “It will change your life and my life. And will change this institution and every other bank.”
How Banks Could Regain Ground from Fintechs
Goldman Sachs analysts have predicted that banks stand to lose 100% of the student, consumer, and mortgage loan business to marketplace lenders over the next five years.
On the payments side, the picture is similar. Online payments are led by PayPal and Stripe; mobile payments by Venmo and Starbucks. In mobile apps, banks have improved their standing — where once Intuit’s Mint dominated, in late June, Chase, Bank of America, PayPal, Wells Fargo, and Credit Karma were the top five apps in the Apple store (Mint was not far behind at No. 10).
Manolo Sanchez, CEO of BBVA Compass, sees the fintech phenomenon as an opportunity as much as a threat. But to regain ground, banks have to restore the sense of purpose they once had, that fintech startups have in spades.
How Big Banks Can Stop Fintech Upstarts from Getting Your Money
Big banks have the advantage in this fight — at the moment. These institutions have well-earned reputations for safety and security. They benefit from strong, multi-generational customer relationships, have considerable brand equity, and offer myriad financial products and services.
Except well-funded, agile FinTech startups including SoFi, Billguard, Square, Wealthfront, Venmo and Neighborly are innovating and nibbling away at banks’ market share. They’re doing this by offering custom solutions for everything from student-loan refinancing and payment processing to lending and facilitating neighborhood investment.
Still, those betting that banks will go the way of the mainframe computer are likely to be disappointed. If banks address the threats by embracing and investing in the technologies that are enabling the FinTech disruptors to level the playing field, they will continue to thrive.
The Pains of Starting a Fintech Bank
Don Allen Price, a longtime industry executive, left Comerica in November with a plan to start the first nationally chartered, digital-only bank, similar to the challenger banks of the U.K. But discouraging signals from regulators and a lukewarm reception from prospective investors have made the process slow going.
His struggles highlight a larger issue in an industry famously resistant to change: Everyone complains that banks don’t innovate fast enough, but facts on the ground often make it hard to do so.
Price, who most recently served as the chief financial officer for the retail and wealth management units at Comerica, has a similar goal as many of the fintech startups that have proliferated in the last few years: create a digital, customer-oriented experience. Unlike startups such as Moven or Simple, he didn’t want to partner with a legacy banking institution, since doing so would undermine the benefit of starting fresh.
The Future of Financial Technology
As the World Retail Banking Report noted, 96 percent of banking executives believe banks need to push ahead with further digitalization and adopt more fintech products as part of this drive. However, while the importance of this is recognized, it has yet to be fully adopted into practice, with more than a quarter of bank managers continuing to view fintech as a competitor rather than a potential partner. Furthermore, only 13 percent of those who agreed to further adoption of fintech was important to have the systems in place to support it.
Will Fintech Make the World a Better Place?
In a recent paper, Thomas Philippon from New York University finds the annual cost of financial intermediation in the U.S., which is roughly 2%, is the same now as it was in the late nineteenth century. This leads him to conclude that the US finance industry has shown no efficiency gains at all over 130 years.
Will Fintech solve these problems? Finance has always been an energetic early adopter of information technology. So the question is whether Fintech will reach places that earlier technological innovation didn’t.
There are reasons to think it will. Fintech automates complex processes, enabling disintermediation. It brings the intensive use of data and analytics giving the customer much better information, visibility, and access to choice. Fintech thrives on relatively low barriers to entry and, mostly, has low capital requirements, suggesting there will be much greater competition in some areas.