Think the disruption in banking is a thing of the (recent) past, mostly caused by the rise of digital and mobile solutions? Think again. There’s no doubt that bankers were caught flat-footed in the last decade, but thinking that disruption is one-and-done may be banking’s biggest mistake. With new technology being developed at lightning speed, fintech is a distinct challenge. But it’s far more than technology that’s challenging banking today. It’s a wholesale rethinking of the entire banking category. In this roundup, we’ll take a look at the current state of competitors to banking and provide some insights into how banking catches up.
Along with mobile banking, payments were probably one of the first tests to the traditional banking model. The consumer thinks, “I’ve got money and I want to use it.” But it’s more than a swipe at the grocery store they’re looking for. First generation payment companies like PayPal (https://www.paypal.com/us/home) took advantage of our desire to use our money in a secure and fast manner, paying online with a couple of clicks. On the seller side, Square (https://squareup.com/) made card swipes something for every size company, not just the big boys. Then came Venmo (https://squareup.com/), a more agile and mobile solution – now also owned by PayPal. That’s when the floodgates opened for mobile, digital wallets enabling what the industry calls Peer-to-Peer (P2P) transactions.
Today, nearly everyone is getting in on the payments game. Google Pay, Apple Pay, Samsung Pay, PopMoney, Circle Pay (by Goldman Sachs), even social media like Facebook has gotten in on the payments game with Messenger, where friends can send and receive money. It would be shorter to list who hasn’t entered into payments at this point. How these transactions work and whether they store the money or tap into your bank account matters little to the consumer who is just looking for something easy, fast and universal. The fact that there are so many different categories of companies offering payments displays their full embrace of the cashless economy, moving further away from tangible cash.
What payments have brought to consumers is freedom to use their money – whether paying a friend at dinner, a neighbor at a yard sale or a merchant in-person or online – securely and easily. Banking’s answer to payments is Zelle. While the service works well and is already embedded into your bank’s app, the biggest problem is consumer expectation. Since this service is offered by the bank, consumers see it as an extension of the bank’s transfer money function, and this is where it gets sticky. Banks are restricting the number of transactions and limiting the amount of money you can send, so roommates Zelleing rent money? Nope. What this service needs for success is to marry the bank’s higher limits with payment flexibility.
Where fintech has really eaten away at banking’s corner on the market is in lending. Whether it’s mortgages, home improvement or business loans, banks' notorious vetting process is no longer the only game in town. In fact, most other lending options give quicker approval and offer the same, if not better, terms. On the mortgage front, you have Rocket Mortgage which offers decisions in minutes rather than days (or weeks) and QuickenLoans, one of the first to get into online consumer mortgage lending, also offering quick terms and approvals. But make no mistake; this is not a new category. There are now dozens upon dozens of online home lending options including companies from tangential industries, like credit cards, entering into banking’s formerly untouched lending territory.
Another important development in lending is the next generation of loan originators not requiring borrowers to define what the lending is for. As the only lender available to most consumers in decades past, banks erected walls between different categories of lending, offering terms and a particular set of requirements for each type. Is the loan for capital business investments, home improvements, purchasing a car or buying a home? The bank needed to know how you were going to (responsibly) spend the money. This new category of P2P lenders don’t really care how you’re spending it, as long as you pay it back.
With competition coming from every corner, what can banks do to compete in a category they used to own? It’s understandable that banks – being regulated as they are – have a more traditional mindset. While banking does need to provide solutions consumers are looking for, the industry will always be at least one step behind the latest fintech inroad into their territory, simply because institutions cannot be as nimble as scrappy startups. But what they can do is rethink their categories, value and relationships to consumers. What are profit centers that banks have taken for granted that can be reimagined? Instead of simply protecting banking’s turf, they should be defining what new areas banks can expand into.
Further, banks have advantages that no app will ever be able to provide. They have long-standing trusting relationships with consumers and a local element – the branch – that no P2P network can match. How they can maximize their advantages will determine how the next chapter in banking’s history is written. In fact, it’s such an important issue that our experts are out on the road talking about optimizing the branch network and we’ll be bringing home their thoughts in our upcoming content. In the meantime, our next installment on banking competition will focus on one particular player, Amazon, and how it overwhelms nearly every industry it enters. Rest assured, there are ways for banking to fight back.
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