Big Banks and Tech Wars
The attack on big banks is at its peak. Challenger banks (currently more than 65 in the US alone) are looking irresistible with sleek designs, generous perks and transparency. Then there are popular internet platforms actively adding banking as a feature, to enhance platform stickiness and better monetize existing user bases. Consumers are flush with alternatives.
The past decade drastically lowered barriers to entry in fintech and the new decade will likely commoditize vanilla financial products (checking, savings, roboadvising, etc.). I believe however that US banking cannot be written off yet and that the disruptive forces will prove less catastrophic and more transformational to the business of banking over time. Banks that are able to leverage strategic technology partners, and open up their APIs early on will still be around, and even thrive when the dust settles — mostly because the business of banking goes beyond just serving consumers, and is extremely complicated in the background.
Retail operations are not sustainable, will perish
This is a no-brainer. Traditional banking is a business of customer retention versus acquisition. A typical old bank (think Chase, BofA, Citi etc.) spends almost $800-$1200 or sometimes more to acquire a new user — then delivers mostly lame and sluggish user experience. Then over the next 5–10 years, the bank skims consumers off of thousands in fees, interest, penalties etc. to recoup all of its spend and more.
Internet platforms approach the game differently. Users flock to the platform for an entirely different service and stick around for added features. The economics are kinder too. Cash App and rival Venmo spend about $20 per new user acquired. Perhaps Uber, Apple and other spend something similar or less to convert existing users. The money saved by not running retail operations is put to guerrilla growth tactics by much efficient and nimbler tech marketing teams.
Over the next decade, expect a lot of banks to fold retail operations and digitize consumer relationships entirely. There is not one task in today’s date that one needs to go to the bank branch to accomplish. Millennials and Gen Z are not suckers for sales driven relationships and have grown up getting everything on demand. Actually walking into a branch to get serviced will be looked at as a colossal waste of time, resources, and consumer attention.
Last Moat for Big Banks — Regulation
All challenger products are built on existing banking infrastructure however. Square was one of the firsts to apply for a complete banking charter — an arduous process that takes years, an endeavor not every resource constrained venture can afford to pursue.
I believe at a high level US banking’s has two indisputable strengths to carry them in this game 1. Deep regulatory understanding and 2. Profit margins to fund innovation. Both characteristics are irrelevant in directly competing against technology but highly useful levers to build long term moats. Voluntarily, or by compulsion, banks will have to focus on these strengths to keep winning.
The business of banking comes with deep compliance procedures, back-end operational systems, risk management and reporting requirements and so and so. Most of this knowledge is held in dispersed organizational silos, which is terribly hard to centralize. At worst, expertise is lost with employee churn. But most major banks have a complex web of processes that govern standard operating procedures and allow them to stay compliant.
Similarly, massive profits give banks a cash cushion to act aggressively. I wouldn’t put it past them to take a page from the brokerage wars and slash all fees, in a bid to stop leakage and protect share — effectively forgoing near term profits (dent could amount to a painful 30% of annual profits) in favor of long term growth. This is tough, and likely will alarm investors. But as Charley points out in his ATT newsletter, we may have a special candidate.
Banks’ Game-play
Banks need to own the regulatory advantage, at-least until the storm passes — and it will pass as the venture and interest cash dries out. Perhaps that is exactly what they are doing. Tier 2 and 3 banks particularly, those with regional businesses, ones with a banking charters but lacking the delivery chops to service global customers are working with challenger banks to facilitate the disruption by opening up their APIs. Lincoln Savings Bank, Fifth Third, Metropolitan, Web bank, Evolve, etc. are a few famously well known within fintech circles.
Once the challenger fights are over, and winners are called out, expect traditional banks to swoop in and acquire what’s left, consolidating and strengthening their position without getting involved too deeply in expensive share wars.
The Enablers > The Challengers
The opportunity to get excited about challengers is past us. Challenger banks that raised on lofty valuations face the uphill struggle of delivering on their promises. I believe some of the most exciting banking startups right now are the ones helping banks strengthen their moats. Banking wholesale and re-sellers Galileo, SynapseFi and Cambr are the leading enablers of the challenger movement, that allow banks to service challengers, take in deposits and participate in the global shift for a low risk and discounted involvement on the Bank’s part.
Others like Mantl — an NYC based fin-tech that’s helping banks build modern, sleek digital on-boarding experiences, is helping stop the consumer operations leakage. Mantl’s clients include credit unions, mid level banks that typically lack the product chops to delight consumers. Another NYC based venture, Alloy, helps Banks and fintechs with seamless KYC. (They raised a $11M Series A). In the investing space, companies like DriveWealth — an investing infrastructure provider looks promising too and is known to take on industry legend Apex Clearing.
Large opportunities are still a green field for new companies. APIs and infrastructure to simplify everything from compliance, regulation, identification, management, reporting, orchestration etc. count as great opportunities.
Conclusion
Challengers are more suitable to serve consumer needs to the modern environment and banks might be better off losing their loss making retail operations after all. But not all is lost. Once the challenger banking revolution loses steam, which it eventually will, banks can swoop in and acquire the winners. This is win-win-win situation with banks, consumers and private investors all getting a favorable outcome.
In the meantime, banks should focus on leveraging their strength including their comfort with regulation and access to capital to enable the generational transformation. Banks need to actively build APIs, tools, integrations to leverage scale, regulatory understanding and capital resources to make money off of the arbitrage. Banks that will realize this early on can slowly devour smaller banks that fall casualty to disruptive attack and further benefit from economies of scale.
Lastly, companies that are helping banks adopt technology at the pace of broader innovation have a gigantic opportunity in-front of them. These will be some of the largest money makers of the next decade.
Feel free to reach out to me on Twitter with any thoughts and ideas.
