It’s September 2018, fintech is officially a word in the Merriam-Webster dictionary, and it’s Fintech Week here in Boston. One theme that gets repeated in this space is the battle between fintech and legacy financial services institutions. A few years ago, Silicon Valley was going to disrupt Wall Street. Now, the banks are fighting back harder than ever.
Last month, JP Morgan announced that it was rolling out a new digital brokerage service that will give its banking customers free stock and ETF trades (up to a limit). This announcement undoubtedly hurt the fortunes of Robinhood, the unicorn startup that popularized free stock trading. JP Morgan is not alone. In 2016, Goldman Sachs launched the digital first Marcus platform to offer online savings accounts and personal loans. The big four commercial banks (JP Morgan, Bank of America, Wells Fargo, and Citibank) among others teamed up for Zelle, a digital payment service that’s taking on the likes of Venmo.
As the competition continues, let’s examine the advantages each side brings to the fight.
Fintech Startups Are Fighting Hard
Fintech startups have been mounting an increasingly bigger threat to legacy financial institutions. Fintech startups are continuing to raise record amounts of venture funding, with over $2 billion in Q1 2018 alone. The growing list of fintech unicorns shows they can acquire customers and compete against the incumbents.
- Talent and Technology: With their relaxed culture, numerous work benefits, and opportunities for upside through stock options and rapid career advancement, startups have a lot of advantages when it comes to attracting talent. Startups also get to start from a clean slate, avoid the costs and frustrations of legacy technology.
- Risk Taking and Agility: Because startups don’t have millions of users and a legacy brand to protect when starting out, they can take risks without alienating or putting existing business units at risk. This allows them to experiment and find new ways to grow. Startups are quick to adopt new ways of thinking like applying behavioral economics principles to their core products. This is exactly what Qapital has done with goal based savings.
- Telling a Better Story: Consumers, especially millennials, love a good story. We’re all emotional animals and companies that can best connect with customers win. After the financial crisis, many fintech startups were able to capitalize on the failings of big banks through better storytelling. Though, not every effort has been a success. SoFi famously flubbed with their tone-deaf Super Bowl commercial where they told you that “you’re probably not” great.
Banks Are Still On Top
Traditional financial institutions like banks, insurance companies, and asset managers are big and that’s an advantage all by itself. JP Morgan, Bank of America, Wells Fargo, and Citibank together account for 45% of total banking assets in the U.S. These behemoths have a lot going for them and that makes it hard for startups to make inroads.
- Size and Breadth: Big financial institutions have vast amounts of resources, both in terms of money and people. They have the money to acquire and outspend startups. With millions of customers and physical branches that many consumers still rely on, traditional firms are ubiquitous. Legacy financial institutions also have vast amounts of data collected over decades to help them better make sense of and serve their customers.
- Regulation: Financial services is a heavily regulated space. Companies have to deal with regulators like the SEC and CFPB as well as countless local regulators. Compliance is expensive and licenses to operate are often granted state by state. Legacy institutions have the advantage of operating and lobbying in this space for decades.
- Trust: Money and banking are built on trust. Legacy financial institutions have been around for a long time and their physical locations give people a tangible presence. This engenders a level of trust that startups have to build from scratch. Despite the financial crisis and the increase in the number of fintech startups, 68% of consumers still believe traditional banks are trustworthy and look out for customers’ best interests.
The reality is that both sides need each other just as much as they need to compete with each other. Some of the largest fintech startups have taken funding from banks. They often rely on banking, insurance, and back office partners to deliver their core products.
Likewise, legacy institutions have embraced innovation and technology as they learn from the best of fintech. They’ve backed initiatives like Barclay’s fintech accelerator. They’re leveraging new technology and ways of thinking to upgrade their existing operations and offerings. When all else fails, they’ve also gotten more acquisitive, gobbling up more fintech startups in 2017 than ever before.
My prediction is that this trend of competing and working with each other will continue. Legacy firms will still be around while a few big fintech winners will emerge. We will see a new JP Morgan or Charles Schwab emerge out of this current crop of fintech startups. In the meantime, big financial institutions and fintech companies will work increasingly closer together, until the lines blur.