How to Eat a Bank — One Business at a Time ?
Over the past few weeks something interesting has been going on in the Banking world — several executives came out speaking on the impact of FinTechs on the traditional Banking business. In his recent letter to the shareholders, Jamie Dimon, CEO of JP Morgan warns “Silicon Valley is coming.” He talks in detail about the growing competition for Wall Street from the FinTech companies and startups focussed on varied technologies such as bitcoins, mobile payments, peer to peer lending etc.
What’s going on & Why are the Banks scared?
“Banks are under attack” wrote RRE Ventures Tom Loverro recently. Banks like Citi and Wells Fargo are getting unbundled by the FinTech startups. The traditional business models of Banks has been threatened. Their monopoly on the way customers conduct business is being questioned.
FinTech startups are giving a tough time to the Banks. Money is pouring into the FinTech startups through the aggressive Silicon Valley investors, Venture Capitalists and the Angel Investors. Relaxation of the investment norms for the crowd funding startups through redefinition of an accredited investor has opened up the flood gates. SEC’s recent ruling on the Title IV of the JOBS Act has given a fillip to the investment climate by enabling common citizens to invest in private companies. Crowd funding startups like the Funders Club, Angel List etc. has been investing heavily through their thematic funds focussed on Bitcoin, FinTech areas.
Global remittance business is around USD 500+ Billion. P2P payments tech companies are one up on the game. Easy access to tech has made this possible. Banks are unable to cut their transaction fee which these startups are able to do. Companies like WePay, Venmo, BrainTree, LevelUp & Dwolla have been doing well through their near real time payment options and innovative business models.
P2P Lending is yet another area of concern for the traditional lenders. In 2014, the total US outstanding consumer credit stood at $3311.8 billion. Meanwhile, the total US business lending portfolio stood at $628.3 billion in the same year. Out of the USD 6.6 Billion lending portfolio, online platform’s share stood at USD 2.3 Billion. Few leading players worth mentioning are OnDeck, Lending Deck, SoFi, Kabbage & Lending Tree. Non-traditional players like Google have started to venture into this lucrative area considering the business potential. Google has come out with itsMortgage Calculator and also now the funds available in Google Wallet is insured with a bank like FDIC insurance. FinTech startups are able to navigate the legal land mines through their innovative approach and have went on build mega billion dollar businesses.
Wall Street Bankers are joining Tech companies. The attraction of these FinTech startups has been so high that the bankers are willing to join these companies even without a salary !! Folks like David Pinski of ING Direct and later at Capital One joined Zumigo since he felt the technology is pretty cool. Jay Sidhu of erstwhile Sovereign Bank went on to start a digital only Bank Mobile with his daughter in tow as the Chief Strategy Officer. Even in India, CFOs of the system integration companies like Wipro and Infosys have applied for the Bank licenses. Two former CFOs and board members of Infosys — V Balakrishnan and T V Mohandas Pai — and the recently retired CFO of Wipro, Suresh Senapaty, have come together to try and establish a virtual bank in India.
What are the Banks doing now?
Not to be left behind, as Jamie Dimond articulated to his shareholders, Banks are keeping a close watch on these disruptive competitors. Their responses to the situation has been very varied and diverse based on the appetite of their Boards.
- Invest in FinTech Startups — Banks like JP Morgan has been leading this initiative. Notable JPM investments are Square, Motif Investing and Can Capital. Apart from the above, JPM has been noticeably absent or refrained from investing in the crypto currency or digital currency area.
- If you can’t build one then buy one. To scale and disrupt quickly, Banks are looking to acquire startups both for the product IPs and also the founding team’s talent. Later is found to be a key reason since the acquired team helps the Bank to integrate and transform the existing operations rapidly. It’s a win-win for both. BBVA’s acquisition of Simple, Capital One’s acquisition of Adaptive Path are few of the recent examples. There is also a different but ingenious move from a small but niche Kansas based payments player who bought a Bank !! Citizens Bank of Weir (CBW) was bought by a husband and wife entrepreneur Suresh Kumar & Suchitra to launch their money transfer business. Now the one branch bank has become a laboratory for banking innovation. CBW is now a prime partner of Ripple and is tapping the domestic market real time settlement which has never been tried before. CBW is coming up with a new product called ONE Card which uses the Ripple protocol for real time settlements.
- Partner and Progress. Citi has been trying to innovate through its Citi Mobile Challenge initiative. BBVA partnered with Dwolla to integrate its realtime payment capabilities into its services. Banks have also been running and sponsoring both internal and external hackathalons to identify and incubate early stage startups. Innovation labs and skunkworks groups are other means for identifying internal and partner talent for the Banks. Wells Fargo, Capital One and Bank of America seem to be pioneers in this approach. Wells Fargo recently adopted three participants from its accelerator program for startups: Context360, MotionSavvy and Bracket Computing. They were selected from a batch of 360 applicants. Analysts groups like Gartner has been advising the Banks to procure customer engagement design talent through external channels.
Looking into the future — What Banks should be doing?
- Customer is the king — Customers are looking for choices. What they wish to have is Banking and NOT Banks. Hence focus on Banking. Banks have been found failing to meet the customer expectations. The recently published World Retail Banking Report 2015 finds that the customer experience levels are stagnating as compared with the non-bank players who with their agile and innovative value propositions make it difficult for banks to keep up with rising expectations around personalized, engaging and seamless customer experiences.
Source : World Retail Banking Report 2015
- Stay in continuous Beta — As every agile tech company would suggest, the key to success and staying relevant to the changing trends and evolving customer behavior is be in Beta — always. Banks should try and stay agile as much as possible on customer facing technologies. Although the legacy Banking systems are a big hassle to change, the focus should be on staying relevant and close to the customer as possible. Digital Banking is only a means to the end but not an end in itself. Focus should be on providing a comprehensive and seamless connected experience to the customer across all the digital channels rather than using it primarily for cross sell and up sell.
- Look out for geeks in garages — Innovation has been a big challenge for the large Banks mainly because of their size of operations and the overbearing regulatory and compliance related requirements. However, disruption comes in all sizes and forms and hold the key to new markets and opportunities. FinTech startups does not have neither the overhead of such challenges nor need to comply to such a brutal regulatory requirements. Staying close to the geeks helps. If Bitcoins does not interest the Banks but Blockchain technology should definitely be of an area of interest. Just think different.
- Disruptive technologies will not kill Banks — There is a lively debate going on right now on how Banks are pretty much like the Pharma and Aviation companies and how too big they are to disrupt. Experts like Chris Skinnerbelieve that the closest Banks got to feel something like Uber is Bitcoin. But folks like JP Nicols beg do differ and equate it to the rail road industry where the entry cost is prohibitively high for any big time disruption. As he rightly points out, failure to innovate is never listed as the cause of death for banks. It’s just an underlying condition that observers discover in the post-mortem. Banks are not being disrupted they are just being re-architected.
- Build Human Centric APIs and Microservices — Humanize data. Banks are drowning in data which is growing at a rate which they are unable to control. Proliferation of the channels and a wave of new ways to Bank has increased the difficulty level by several manifolds. The waves are yet to hit the shore since IoT and wearables are yet to become mainstream. Data is the new oil and its the core to how they can differentiate themselves in the market place. The need of the hour is to give more context and meaning to the data by building API based Banking apps and microservices which are easy to scale and flexible to build and deliver rapidly.
Source : Awesome Banking APIs
You would certainly see many more instances of tech startups trying to eat the lunch of these big Banks. Monopolized and established norms of fixing the fee and charges for transactions which is key source of revenue would also be challenged. And many more challenges and surprises are in store for the Banks if only they understand that what people want is Banking and NOT Banks.
We shouldn’t be surprised if we soon see companies like Facebook, Google and Amazon starting Banks. They have the required infrastructure, technical ability and digital acumen to establish and run the Bank of the Future. In fact, Tencent and Alibaba have announced that they would soon be launching a Retail Bank.
Think more like a Tech company and less like a Bank seems to be the mantra for the Banks of tomorrow since every company now is a software company
What do you think?
How much can the Banks withstand and beat this new upsurge? How does this Uberisation of Banks would impact both the service providers and customers alike? Is this a beginning of a paradigm shift to the way Financial Services would function in future? How are the Banks responding to this new found reality? Is it true that the Banks are not being disrupted but they are just re-architected? Are they too big to be disrupted like the Aviation and Pharma industries? What are the other disruptive trends you have noticed and are bound to evolve in the near future?
Do share your thoughts below as comments.
Ramesh Babu is the Global Practice Head for Banking in the Products and Solutions Group of Wipro. A veteran data evangelist and analytics thought leader, he champions the Analytics, Data & Omni-Channel themes for Banking customers globally.