A New Decade of Hope in Financial Services

Earlier this week, the clock struck midnight on the 2010s, and the new decade began. Within financial services, the 2010s marked a transformative era.

Coming out of the Great Recession, consumer opinions of banks were at all-time lows. The mortgage crisis acted as a tipping point for many consumers, and the lack of trust for banks encouraged these consumers to explore other options with their money. Around this same time, the subcategory of fintech emerged and companies such as SoFi, Avant, Oscar, Acorns, Robinhood, and Chime emerged as competitors to banks.

Although the past ten years have been some of the best years for consumers within financial services, there are still numerous issues that have yet to have been solved. Around this time of the year, a lot of people like to make bold predictions about the upcoming year, or in this case, the upcoming decade. The purpose of this piece is not to make any bold predictions, but rather to highlight some of the issues still needing improvement within the fintech space.

One of the largest issues still around today is that there are two separate banking systems in place today, one for those with access to credit and one for those without access. Ironically neither of these work well. People with access to credit have grown used to poor UX and low expectations; people without access have been poorly served or not served at all.

One of the reasons that the expansion of product features and user experience are not more highly prioritized is that it is expensive to be a bank. Financial institutions spend billions annually on compliance, leaving little room for product development or innovation. New entrants not being burdened with the same compliance standards has been one of the loudest complaints by incumbents, and this issue will surely be brought up more in the coming decade as banks continue to lose market share to neobanks and other fintech companies.

Outside of poor UX, banks make it difficult on their customers and potential customers by implementing high fees and forcing these same customers to deal with structural problems due to legacy systems and the burden of a physical footprint. From a business standpoint, it has been much easier for banks to pass along fees to consumers rather than deal with the problems of eliminating branches and their employees.

Additionally, software infrastructure is a huge mess with 75% of IT spend going towards maintenance at some of the larger banks. At many of these banks, these costs equate to 10–15% of their workforce dedicated to compliance. Again, many of these maintenance and compliance costs are passed off to consumers in the form of higher fees.

For reference, in order to launch a new bank that offers just two basic financial services products (a checking account and a debit card), the new bank must comply with regulation (which is clearly a huge commitment especially for a new company with less capital), must find the right sponsor bank that understands the associated risks (which is increasingly rare), and then build out the rest of the product (card processor, card printer, ways to hook into other bank accounts for data, a sleek design and UX, and 101 other things). Clearly this process has been broken, and it is why many of the larger incumbents have been able to coast by without improving much for their customer base.

Today there are reasons to be optimistic as a consumer. The past decade brought three primary solutions enabling existing banks and new companies to better serve customers: APIs, new distribution channels, and better data.

APIs have democratized expertise which in turn has made it easier to create financial services products of all sizes. Because of this, almost any company can offer banking services. This form of embedded finance has become increasingly visible with companies such as Uber and Starbucks launching their own financial services products.

Additionally, in today’s world products spread more easily through improved channel distribution (messaging and social media); products that are exponentially better than existing solutions can and should easily grow through organic traffic. Not only does this lower cost of user acquisition for firms, but it also frees up more resources to go towards additional product features and an improved user experience.

As we enter into the 2020’s there are still a number of opportunities I am excited to see addressed within the fintech space. To note a few:

• additional opportunities for the unbanked
• alternative credit scoring methods opposed to FICO
• student debt solutions
• expansion of income share agreements to other areas outside education
• flexible work and gig economy enhancements
• wealthtech entering into new markets with emerging middle class population
• property owner software tools
• automated compliance

The past decade marked a transformation of the financial services industry. Both consumers and businesses have had their lives improved by fintech applications. As we enter into the new decade, you can’t help but be excited for what the next decade will bring.