October 2, 2015
Have you ever tried to compare a bank with Macy's or a shopping mall and a FinTech startup with a Zara outlet? You may wonder what this comparison is about. Even though FinTech startups are emerging rapidly, trying to disrupt the industry and serving niche audiences, banks have been a one stop market like Macy’s for common people. Even if FinTech peer-to-peer lending startups like SoFi specialize in offering student loans, banks also offer student loans, personal loans, mortgage loans and every other loans one can think of. Even as FinTech P2P payments apps like Venmo offer instant money transfer, banks are moving towards similar services enabled by PopMoney, ClearXchange and other P2P solutions. In fact, big banks in America have already incorporated P2P payments within their mobile apps. Even if FinTech startups are revolutionizing blockchain technology, big banks and financial institutions like Santander, Barclays, Citibank and others have started investing time and money in blockchain research.
Additionally, banks are trying to be as aggressive as possible not only in research in the latest technologies but also in sales and business development. Walk into a bank branch 5 times and you will definitely be asked to apply for a credit card 4 times. Once you have an SSN (social security number) in the US, you also start receiving tons of mails every week that say in bold letters - Pre-approved credit card!. Banks have been trying to cross-sell their products and it has proven to be a traditional yet successful method for them. A 2014 study on customer loyalty in retail banking also brought to light an interesting data point that only 27% of people make a purchase at a bank other than their primary bank in the US. This data point proves the ability of banks to retain their customers.
Fast growing FinTech startups need to open their eyes to the new face of the banking industry: Banks are slowly but surely trying to lead the FinTech world, perhaps not even so slowly! In one of the FinTech events attended by Let’s Talk Payments in San Francisco, Xignite Inc. CEO, Stephane Dubois mentioned in passing, All banks have started considering themselves as tech companies. This statement not only caused laughter in the room but also opened our eyes to this analysis on banks versus FinTech startups. FinTech startups in the alternative lending space have probably understood this problem of Macy’s vs. Zara. Only few days ago, Prosper announced the acquisition of Billguard, a personal finance tracking application that enables users to protect & control credit and identity in real-time using their mobile devices. On this acquisition, Aaron Vermut, CEO at Prosper Marketplace said, Until now, nobody has brought together marketplace lending and personal finance management to deliver an offering that truly empowers, protects and educates consumers. Another alternative lending player, Lending Club expanded its loan segments from personal to student, medical and small businesses while Affirm expanded to student loans for coders. SoFi might be known for student loans but it has also started offering mortgages and personal loans. The reasoning behind these lending startups expanding in multiple directions is not just expansion of their businesses but also the need to establish broader customer relationships. Being able to maximize the customer lifetime value is critical in this competitive space.
With thousands of FinTech startups competing with giant banks, there is a possibility of various scenarios taking shape in the financial technology industry in the long run. The banks may either merge and acquire these startups on their journey or the startups may join hands to expand their lines of businesses. There is a chance that both these possibilities may occur hand in hand. Do you see another future for the FinTech industry?