Regional and community banks haven’t lost to Silicon Valley – yet. But they face some serious challenges. Unexpectedly, the desire for convenience may be today’s banks’ biggest advantage in the coming battle with Internet start-ups.
Who Are These FinTech Upstarts?
The startups in question include hundreds of fledgling Internet-based companies offering financial services ranging from personal and student loans and mortgages to retirement accounts and international wire transfer services.
Some are person-to-person enterprises. Others are more traditional lenders and investment firms. But all are targeting borrowers and investors anxious for better rates and lower fees. These new entrants to financial services offer flashy websites, compelling products, and extremely low fees. So how can banks hope to compete with such low-cost, high-tech offerings?
It is true that a person might be able to borrow at an advantageous rate from one of the new marketplace lenders like Lending Club or Prosper. A college graduate might refinance a student loan with competitive pricing from companies like SoFi or CommonBond. A young investor might even choose a new investment website like Wealthfront or Betterment because of their unique algorithms.
But engaging with each of these individual firms requires initiating and maintaining yet another relationship involving passwords and PIN numbers, logins and IDs. Granted, these firms have tried their hardest to make the onboarding process as simple as possible. But it remains to be seen whether consumers will be content maintaining multiple financial service relationships or if they will long for simpler times when their bank could keep all of the same services under one roof (or one website).
Let’s be clear. Banks face stiff competition from startups and will have to make serious adjustments in order to remain competitive with the aggressive fintech companies prowling outside their doors. They will have to emulate the latest product offerings, improve their electronic delivery systems and learn how to utilize today’s social media.
How Will Banks Respond?
The largest banks have already started dabbling in the fintech space, sponsoring incubators for startups and investing in new online ventures. Former bank chief executives like Wells Fargo’s Richard Kovacevich, Citigroup’s Vikram Pandit and Morgan Stanley’s John Mack have all taken stakes in startups that directly compete with their former institutions. They obviously see opportunity in the fledgling firms.
However, markets shake out. In the mid-1990s, Lycos, Ask and AOL were some of the biggest names in search engines. Google was launched a few years later, but proceeded to capture nearly two-thirds of the search market in the ensuing two decades. Clearly, Google understood what the market wanted and provided it. Today those other engines represent less than 1% of market share combined. Consumers preferred Google’s offering. It was simple, clean and convenient, offering all the options that consumers wanted in one place.
“In One Place” May be the Key.
Companies like Google succeed for a variety of reasons. Better product is only one of them. Sometimes they succeed thanks to better marketing or superior service. But the value of convenience cannot be ignored.
The fintech revolution will leave banks behind unless they can find a way to compete. Banks’ secret weapon may be that they already offer all the right products in one convenient location. However, the next few years promise to be a trying time for banks as fintech firms force them out of their comfort zone and push them to take risks that they would have otherwise avoided.
This post was originally published May 4, 2015 in American Banker.