World reimagined: the upstarts of FinTech are forcing legacy banks to evolve and adapt
For years, the United States has lagged behind the rest of the developed world, and even some emerging countries, in innovation in retail banking. That is finally changing, first with the evolution of digital payments that take advantage of the smartphone, and now increasingly with traditional retail banking companies facing competition from tech companies.
Some are application-based solutions, like those of PayPal (PYPL) Venmo or Square’s (SQ) Cash App, which can be used to digitally reimburse a friend for dinner, while others allow users to scan and pay their bills through a linked bank account or credit card. Like other industries that are disrupted by tech and the smartphone, the way we do our banking is revolutionizing, and tech companies that aren’t hampered by a bank’s legacy business model are leading the way.
When internet companies first emerged, new business models emerged to take advantage of this new technology, focusing on user growth with little thought on the cost structure. Later, after the dot-com bubble burst almost finished bursting, we wrote in 2001: “It may not sound like that, but behind the scenes of American businesses there are tens of thousands of technology professionals, business analysts and consultants who are trying to find out how their business can use the Internet. “
FinTech David meets Banking Goliaths
Until a few years ago, most banks that offered online banking services included account management, bill payment, and a few other basic services, including the ability to switch from paper statements to electronic statements. With smartphone banking apps, the ability to deposit checks was added for those who wanted to skip the line at the bank or at the ATM. The smartphone also activated other financial apps that would allow users to verify their portfolio with Fidelity, TD Ameritrade or other brokers.
However, the smartphone’s engine of creative destruction has also spawned new tech companies like PayPal., Venmo, chime, tassels, enhancement, SoFi, square, Cash App, Stripe, and Plaid that bring the kind of speed and flexibility that Gen Z and Millennial customers just can’t do without, Gen X guys are enjoying and Baby Boomers are seeing new.
Initially, most of this flexibility was linked to money transfer. Until 2017, the only way for a traditional retail bank customer in the United States to send money to a friend was to write them a check (which takes a few days to clear), go to the ATM and withdraw money, or even initiate a wire (which had charges on both sides and would be a few days to process). Today very few people would find this acceptable.
First FinTech Steps
For more than two decades, PayPal has been at the forefront of the digital payments space and has been, according to some accounts, one of the driving forces behind the success of eBay (EBAY). Before the launch of what was then called “Confinity”, eBay users sent checks and money orders to each other. What PayPal did was so revolutionary that it connected all the “walled gardens” that retail banking institutions are. Customers of Bank of America (BAC) could now send money electronically to customers of Chase Bank (JPM), for example, simply by using the website or the mobile phone app.
Banking empires strike back
Services like PayPal, Venmo, and Cash App require an existing traditional bank account and essentially use the same ACH network that powers direct deposit and check clearing services. In 2017, the service previously known as clearXchange was relaunched as Zelle. If you are a traditional banking user, especially with Bank of America or Wells Fargo (WFC), you’ve probably seen a button on the app to send / receive money through a transaction that references your email address or cell phone number.
Zelle is owned by Early Warning Services, a private financial services company owned by Bank of America, Capital One (COF), JPMorgan Chase, PNC Bank (PNC), US Bancorp (USB)and Wells Fargo. Clearly, they recognized what PayPal was doing and wanted to build a wedge around their business as they sought to build a weapon against the rising tide of upstart person-to-person finance (P2P) companies.
An important point to consider is that banks need to consider a number of risk management and regulatory hurdles that make them less agile and less responsive to clients than many of the more disruptive players mentioned above. -above. One of the obstacles with Zelle is the limits on the amount of daily and monthly transfers, which can vary from bank to bank, as well as being able to associate only one bank with an email address or a given mobile number.
On the payments side, companies like Square, Stripe, and Plaid offer more manageable alternatives to existing payment companies like Visa (V), Mastercard (MC) and American Express (AXP).
They’re also starting to overlap with additional services targeting traditional retail banking customers, as evidenced by an eagle-eyed developer who recently noticed inactive code in a recent Square app update, making clearly refer to savings and checking accounts. Square Financial Services, a subsidiary of Square, was approved for a U.S. banking charter earlier this year, but we’ll have to wait before we know exactly what comes next.
Meanwhile, JPMorgan Chase recently shut down its Chase Pay method, choosing to integrate “the most popular features directly into the Chase mobile app and chase.com.” Interestingly, at the end of this service, JPMorgan Chase relied heavily on PayPal as well as Apple Pay, Google Pay, Samsung Pay, and other digital wallets.
Companies like Robinhood, Acorns, Betterment, and SoFi also do double duty, providing customers with a place not only to save money, but also to invest it. In fact, it was the popularity of these apps that essentially forced traditional brokerage houses to offer fractional stock trades in 2020.
Meanwhile, we’re also seeing digital banking platforms focus on the underbanked, with one example being Greenwood Financial, a neobank that focuses on black and Latino customers who have historically been denied access to credit. and other financial services at much higher rates than white customers. . A neobank is a fully online financial institution that usually partners with a traditional bank, so deposits are FDIC insured, unlike services like PayPal or Cash App.
Whether it’s traditional banking, payment structures, or investing, there are still gaps between what is offered (and regulated) and what consumers want. Some would see it as a set of weak points, while others would see an opportunity. We suspect the lines between companies like Square and PayPal will continue to blur with those of companies like Bank of America, JPMorgan Chase, and others. The difference will be the front-end consumer experience and user interface, while technology and artificial intelligence will reduce time and costs.
How likely are these two types of financial firms to overlap? Hard to say, but could Square potentially partner with Robinhood like Bank of America did with Merrill Lynch to become a FinTech One-Stop-Shop player? Could traditional banks potentially acquire one or more FinTech companies and bring their capabilities in-house?
The answers to these questions are the same – maybe. A more definitive answer will probably be obtained in the years to come. From our thematic perspective which focuses on structural changes that are changing the rules of the game, we see many more changes coming to the world of finance.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.