April 21, 2016
Today, traditional financial institutions are facing competition as they have never faced before. The rapidly increasing number of FinTech startups are penetrating the market share and shrinking banks’ profits. Moreover, it seems like traditional banking business models have been forced to transform under the pressure of FinTech. FinTech, which was competition before, has found its way into banks’ service chain. Banks are either outsourcing their credit business or financially backing alternative lenders to get access to consumers’ pockets.
As there is a FinTech startup for almost any bank service, it is legitimate to assume some services may get lost to traditional players. The most dangerous loss may occur in retail and commercial banking.
Retail banking suddenly has become a tough business for banks as payments technology has made enormous advancements. Companies like PayPal and mobile payments providers have shifted both attention and expectations towards how smooth payments can be done without banks.
As mobile POS solutions have advanced, there’s even lesser space left for banks. Small businesses and individual craftsmen were granted endless freedom on how to conduct their businesses and how to get paid. Paper checks almost look funny now with FinTech enhancing electronic invoicing and check deposits. In fact, bank checks overall will look obsolete in a short time since small portable devices from Revel, FreshBooks and other POS solutions providers have invaded the market.
Alternative lenders not only almost made FICO irrelevant, but are actively killing the bank credit service, taking away banks’ bread and butter.
Individual borrowers can find an endless number of tailored solutions for their personal needs through alternative lenders, which brought banks to the doorsteps of those companies. While Bank of America plans to invest $3 billion in promising FinTech ventures, Amex poured funds into Clip, the Mexican equivalent of Square.
All the rush comes from the fear of missing out on something big. In particular, 20-30% of the retail banking revenues is estimated to be at risk from FinTech disruptors by 2020. What is even more frightening for banks is that about $17 billion in loans were provided in the US through P2P platforms in 2015 while mobile payments in the US were worth $60 billion in 2015.
Commercial banking and business lending won’t be a life jacket for banks either. As alternative lending is gaining momentum, business loans from non-traditional players are not falling behind. In fact, they have been so successful that banks are willing to give up their own departments to outsource the service. Moreover, traditional banks are actually standing behind alternative business lenders in order to have a chance in the market.
In the US alone, around 80-90% of the capital lent through the two largest P2P lenders – Prosper and Lending Club – is institutional money. It means that when a lender originates a loan on a platform (even a P2P platform), it is most likely secured by an institutional player. The JPMorgan Chase and OnDeck partnership is a prominent example as the bank turned to an unlikely outsider in the question of originating new business loans. In 2016, JPMorgan will start using OnDeck to help originate loans for part of the bank’s four million small-business customers. OnDeck Capital, which has extended as much credit in its eight-year history as JPMorgan does in a few months, will help the bank process applications more inexpensively and quickly, in hours instead of weeks.
Since the beginning of 2016, some banks got involved in deals around alternative players. For example, in January, Pinnacle Bank acquired a 19% stake in Bankers Healthcare for $114 million, a company that provides lending and insurance services.
In the same month, global banking and financial services company, Commerzbank, participated in a funding round for banking platform Mambu, resulting in a total of $8.7 million raised by the company.
Along with Pinnacle Bank and Commerzbank, financial institution Alterna Bank has also made its move towards alternative lenders by investing $15 million in Lendful.
Retail and commercial banking may not be lost to banks, but it may be going through the second birth and a major overhaul. New business models will create a harmonized relationship between banks and alternative players when banks leverage their financial power to get to the market through FinTech startups.