April 13, 2015
Banks and networks seem genuinely concerned these days around the fintech startups that are coming up in the payments space. These startups are creating solutions that are directly attacking the core services of the traditional incumbents, and are offering lucrative alternatives. Let me highlight examples of two core services that banks provide: Remittance and Lending.
The global remittance business is $500+ billion strong. Numerous stakeholders are involved in this business including banks, money transfer operators and even third party players such as mobile operators. Online transaction fees of 5-6%, expected to come further down to 3-4% with mobile payments, are currently 10-11% in the cash-to-cash remittance method. This cost benefit is driving the migrant population to adopt new technology thus avoiding the inconvenience of physically going to the traditional brick and mortar outlet. Banks have not been able to come up with such cost benefits and several banks across certain geographies have already shut down their remittance business under pressure. Meanwhile, new remittance players such as Xoom are showing annual growth rates of over 60%.
Now consider the lending business in the US itself. In 2014, the total US outstanding consumer credit stood at $3311.8 billion. Meanwhile, the total US business lending portfolio stood at $628.3 billion in the same year. Considering the alternative lending scenario, the total P2P lending portfolio stood at $6.6 billion while the total business lending portfolio through online platforms stood at $2.3 billion. Considering these figures, the total alternative lending in US accounted for 0.22% of the total lending space. This might seem a feeble number but it’s certain that this percentage is poised to grow at a highly rapid pace.
Here are some recent updates which highlight how the thought process of established players, in the payments industry, is being influenced by fintech startups:
JP Morgan Chase
Recently, the CEO Jamie Dimon raised his concerns over upcoming tech startups in the annual letter to stakeholders, as reported by Mashable. Jamie cited how new incumbent startups are bringing innovative alternatives to traditional banking services. He mentioned an example of lending startups who are not only issuing loans at a much faster pace but are also using advanced techniques like Big Data analytics to enhance credit underwriting. Jamie is also concerned about the upcoming possible threat by virtual currencies and other payment alternatives. Jamie believes that there are certain issues that traditional players have to deal with and that includes real-time payment systems, need for better encryption techniques and reducing pain points for end consumers.
One of the largest banks in the US, BBVA is looking at ways to be a part of the payments revolution and is taking on many initiatives in the form of acquisitions and partnerships. Last year, BBVA acquired Simple, a company that has created a new standard in the digital banking experience. The investment in Simple is an example of BBVA’s commitment to innovation amid the rapid technology-driven change that is transforming the financial services industry. BBVA is introducing new products and services through a variety of initiatives, developed both in-house and through its investments in leading startups aiming to reinvent the financial services industry. Recently, BBVA also partnered with Dwolla to integrate Dwolla’s real-time payment capabilities into its services.
FinTech is transforming the way individuals and institutions engage with money. Keeping this in mind, Citigroup is searching for developers and designers who can bring the next level of innovation to the company and help change the way the world banks. Citigroup’s goal is to find new innovative FinTech solutions, using the power of Citi’s digital platforms. To achieve this goal, the company has come up with the Citi Mobile Challenge to seek out innovative FinTech developers. The Citi Mobile Challenge is a global program that aims to accelerate digital banking innovation by bringing together the most talented developers and designers to create cutting-edge financial technology solutions. Finalists compete for an opportunity to take their technologies into production with Citi’s support. Through this initiative, Citigroup has found its own means of keeping up with new fintech players in the market.
Startups are indeed coming up with radical solutions giving a tough response to banks and networks. They are some pretty crazy payments innovation and here are two noteworthy examples:
Zero Interchange Fee
LevelUp is aggressively looking at ways to cut down payment processing fees and is implementing its zero interchange fees strategy. Last year, LevelUp, working with 14,000 stores, had been charging 2% as credit card processing fee. This was already lower than that of competition and the company was still able to reach break-even. Later, the company further reduced this charge to 1.95% and has been following its strategy to lower it even further.
LevelUp’s zero interchange fee strategy involves analyzing repeat purchases by consumers. If the consumer visits the same store again within 30 days then the purchases are bundled together and incur one combined charge. LevelUp monetizes on the merchant side as well by leveraging LevelUp promotions.
Blending the words dollar and web, Dwolla aims to allow anyone [or anything] connected to the internet to move money quickly, safely & at the lowest cost possible. It allows any entity to request and exchange money through its self-built network that securely connects to customer’s bank account and allows to move money. Dwolla has developed its own mass-payment service and using this service, the company is offering real-time, peer -to-peer payments to clients and other stakeholders.
Dwolla’s real-time money-transfer has made the company an attractive partner for numerous stakeholders. The company recently partnered with BBVA Compass bank, allowing the bank’s customers to make money transfers. Earlier this year, the Bureau of Fiscal Services announced that it is offering Dwolla as a payment option for enabling real-time payments to federal agencies. With its real-time payment rails, Dwolla is disrupting the payments processing space.