Banking is changing (with or without banks)
Traditional banking as we know it, is dead. A great customer experience is no longer a smile and a lollipop — and innovation isn’t unchaining the pens (Sorry Huntington).
The disintermediation of financial services, by financial technology companies, is as prolific as it has ever been. Over the last decade we’ve seen a drastic increase in the number of new entrants, and in the pace at which these new entrants are scaling. The traditional banking model is being attacked on all fronts — from consumer facing products and services to the rails that support our entire financial system.
So does this mean we should all go out and short the BKX?
Not exactly. Though fintechs are putting tremendous pressure on banks — traditional financial institutions have two valuable things that the fintechs don’t: Scale and Capital (Not to mention that it’s next-to-impossible to get a bank charter).
Nonetheless, the role of traditional banks is evolving quickly, and there is no doubt that fintechs are going to be a big part of their future.
If Jamie Dimon’s 2014 letter to shareholders is any indication, it’s clear that the leading banks have been fully aware of the changing environment, and the growing influence that fintechs are commanding.
“Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.”
— Jamie Dimon
While it’s easy to see why many banks may view fintechs as a threat, I believe that the relationship between banks and fintechs will ultimately be more symbiotic in nature. We’ve already begun to see a number of partnerships, strategic investments, and acquisitions in the space — which will inevitably continue to accelerate.
You can be assured that the great debate about fintech occurring within every leading bank’s corp dev and strategy team centers around three main questions: Should we build it? Should we buy it? Should we partner with it? I’d argue, for most, the “build” scenario is not a viable option for a multitude of reasons:
- Infrastructure deficiencies. Over time, consolidation within the banking space has led to complex and outdated technological infrastructures. In a rapidly evolving market, banks are finding it difficult to build and deploy innovative, digital, products and services.
- Regulatory pressure. As banking moves online, regulators have introduced new rules to govern the changing environment. The financial crisis has also introduced a number of new regulatory frameworks such as Dodd-Frank. Notwithstanding the positive systemic advantages — new regulation tends to stifle the pace of innovation and increase costs associated with compliance — and when you are competing against financial technology companies that aren’t subject to the same level of oversight, a regulatory arbitrage emerges.
- Security. As data becomes more accessible from the cloud, the threat of a data breach increases drastically. These breaches can have significant implications on a banks reputation, and bottom-line. Not only are there significant costs to consumer remediation (i.e. fraud reimbursement, free credit monitoring, card re-issuance, etc.), but there are also significant operational costs (i.e. increased call center volume, tech infrastructure refactors, etc.). The need for the smartest security minds and leading-edge technology is imperative.
- Fierce competition from rivals. Banks are competing as aggressively as ever to acquire new customers (and their deposits). With marginal differentiation among incumbents and increasing commoditization of existing products, the pressure to offer customers innovative solutions is greater than ever.
- Customer experience. The ability to transact online has become ubiquitous — whether that’s ordering dinner or applying for a mortgage. Customers demand a frictionless online experience, and are comfortable bringing their business elsewhere if they don’t get it. The speed at which fintechs are able to offer consumers differentiated, value-added solutions also places a burden on banks to keep up.
All of these challenges create massive opportunities for fintechs, as friction equals opportunity. Across the financial services ecosystem, we’ve seen a tremendous amount of disruption. Some of my favorite innovators in this vertical include:
- Lending: LendingClub, Avant, Affirm, Bolstr, Sofi, Eearnest
- Investing: Wealthfront, Robinhood, Motif, Addepar
- Payments: Stripe, AvidXchange, Square, Remitly, Marqeta
- Insurance: Lemonade, PolicyGenius, Attune, Sure, CoverHound
There are also some really exciting, massive, opportunities that have emerged in ancillary verticals such as regulatory compliance, security, and sales & marketing.
Any way you look at it — it’s an exciting time to be building and/or investing in fintech companies. And as banks think about what their future looks like, fintech is undoubtedly a major part of that picture.
(Disclosure: I am a co-founder of Bolstr.com)