“Chase or Google?” my colleague challenged me, asking which would be more important in ten years’ time.
The answer may well be neither.
Thanks to technology, many services that were once the exclusive domain of banks can now be offered by much smaller and nimbler firms like Lending Club, Square, and Prosper. Google or Apple may well use their mountains of cash to buy some of these start-ups. Or perhaps banks will see the opportunity and scoop them up instead, as BBVA did with the digital banking platform Simple.
There is, however, another possible—and chaotic—alternative. Web-based newcomers like Uber, AirBNB, and ZipCar have disintermediated the established hospitality and transportation industries in an extremely short period of time. We have not yet seen the killer app that will unseat traditional banks, but it might yet be coming.
The next big thing in financial services may well be person-to-person payments. Google Wallet is striving to become the leader in electronic commerce, but it has yet to truly capture the public imagination. That leaves plenty of room for disruption from one of the dozens of person-to-person payment systems currently proliferating around the internet, including the wallet app Venmo and Bitcoin startup Circle Financial.
Likewise, peer-to-peer lending is in its nascent stage, but growing quickly. Lending Club’s initial public offering, expected to come later this year, may raise as much as half a billion dollars. The company already boasts a valuation of nearly $4 billion.
These internet-based competitors are no longer pipe dreams, but real institutions with real money behind them.
The Unnamed Future
I submit that the future of banking—that collection of services that moves money and investments—may well be dominated by firms whose names are unrecognizable to most Americans at present.
If an app were available tomorrow that allowed me to move money from my account to a friend’s securely and simply, I probably wouldn’t care if the logo attached to the app belonged to a Fortune 500 company or a relative newcomer. I am certain that my children, who grew up downloading apps and music from any available website, wouldn’t care.
These upstarts won’t be traditional deposit-taking organizations in need of insurance from the Federal Deposit Insurance Corp. Nor will they seek access to the Federal Reserve discount window or underwriting securities. They will, however, bring with them a whole new set of risks—from greater fraud threats to heightened cybersecurity dangers.
Risk and Regulation
Regulators will be hard-pressed to keep up with oversight of these new entrants into the fringes of their world. However, the public has repeatedly shown that they are willing to accept those risks in exchange for convenience. I for one now deposit my checks by taking a photo with my phone. I pay for my coffee with a QR code on a mobile payment app that allows the coffee shop to debit my account. While both of these services present additional risk, they also make my life a little easier. It’s a tradeoff many consumers are willing to make.
If the future of banking lies beyond traditional banks, what are the established institutions to do? The answer is simple: Don’t get left behind. Banks need to find a way to band together to create universal payment systems and broad direct lending alternatives. Otherwise, they risk becoming a part of the old economy.
This post was originally published in American Banker, July 16, 2014.