With all due respect to the traditional Financial Services (FS) industry, if someone told me five or ten years ago that in 2017, financial services would be associated with words like “innovative” and “disruptive,” I probably would have laughed.
Organizations like banks and investment management firms have traditionally never been considered particularly fast-moving, and when there are trillions of dollars at stake, the general consensus is that’s just fine.
But the FS establishment today is undergoing a massive transformation that is truly unparalleled, even by Silicon Valley’s entrepreneurial standards.
When it comes to money, there is absolutely a mobile app for that
The acceptance level by consumers of alternate banking and financial services providers (“fintech”) is at an all-time high. The level of trust is higher in those organizations that offer tools and services grounded in ease of use, convenience and innovation.
Many people are willing, for example to do their taxes online for free. They’re willing to send and receive payments on a mobile app they’ve never used before. This level of disruption makes Uber’s take on the taxis look like child’s play. Ease of use is the primary driver and that’s very, very telling about both the changes that have taken place, as well as what we can expect in the future.
Smartphones and mobile apps have replaced traditional credit or debit cards for many consumers. By comparison, if we look back at the retail system, it was just three years ago you couldn’t make a purchase without a physical credit or debit card. Now its business-as-usual to pay for everything from your morning Starbucks, to a bag of dog food on Amazon, all online or through your phone.
And it’s not just major retailers that are benefiting from the rise of applications in the retail, finance and payment spaces. Smaller businesses and individuals that use point of sale technologies such as Square can accept and process payments through their smartphones with a card reader or a QR code.
Next, look at the process of transferring money from your bank, whether to an individual or a business.
The ability to transfer funds on an interstate level in the U.S. has been around for a while given that the funds (all in U.S. dollars) travel within the traditional banking system. Today apps like Venmo and PayPal enable people to transfer funds directly from their bank accounts or credit cards to people via their smartphone.
Moving money on an inter-continental basis has been a greater challenge. For decades, consumers have had to go through Western Union to send money internationally, but as the world becomes increasingly more flat, moving money across continents – in different currencies – has the potential to be the next big disruptive push in the way that consumers manage and move their money.
The trade off: Ease of use versus institutional loyalty
Millennials are leading the charge in adopting many of these new banking and payment technologies. Having grown up with the internet, many millennials are less concerned about sharing their data with a new financial organization, or experimenting with new applications. How millennials perceive value differs largely from the way that Generation X or the boomers do, for example. For millennials, it’s less about loyalty to an established institution and more about the quality of service and ease of use a company can offer.
As a result, this is opening the massive FS market to a new generation of entrants. The barrier to entry in the financial space has never been lower. Many of the startups in banking and financial services focus on ease of use, speed of change, mass customization – in short, the tenets that originated in the internet world.
Many of these new players have absolutely no experience in the financial space – and despite what you might assume, many consumers aren’t scared off by that. In fact, it’s often the exact opposite. People are used to doing business online. The reality today is that having a brick-and-mortar presence isn’t a barrier to entry, in many cases it can be considered a hindrance. Online bank CapitalOne is a good example of a financial organization that is thriving, while many traditional retail banks with their physical neighborhood branches are struggling.
Certainly consumers need to be skeptical before transferring funds to an alternative financial institution or mobile app, but I think there is an awareness that many of these startups are investing heavily in cyber defense and encryption because they get it: their business is gone if they get breached.
Consumers are used to the models that come with internet-based services and technologies. Services like the credit reporting company Credit Karma have perfected the “freemium” model for financial services that offers users services for free, but then monetizes those services in another manner. To access your account, you might need to sit through an ad, for example. And consumers are used to this – it’s the same understanding that retailers use with affinity cards. Safeway, as one case, provides its club members with a discount on products, in exchange for information about their purchase histories.
Will everyone move their checking and savings accounts into online banks? Perhaps not overnight, but with many banks charging fees for customers to speak with human tellers at their branches, the appeal of going online suddenly seems much more appealing. Even with insurance, there are startups that offer low-cost policies entirely online simply by having users enter in some numbers. It’s an entirely agent-free process, just a few clicks and you’re suddenly saving up to 30 percent on car insurance!
Disruption comes from within: Recruiting the best minds from tech
Traditional banks are going to be going the way of the Dodo bird if they don’t innovate and embrace modernization. Banks and other financial institutions need to figure out that if they’re not easy to use, they’re probably in for it.
If you look at the banks that are thriving, it is the ones that have adopted and adapted to the digital transformation, the ones that have hired people with data analytics skills and who are using data analytics skills in the space to offer services that are better suited to what their end customers actually want. CapitalOne, for example, has as many presenters at Hadoop conference as traditional tech companies!
At the end of the day, it’s all about the Benjamins. People are incentivized by money – it doesn’t drive every decision, but it’s often the most primary thing. When you’re talking about money being managed by a computer, or depositing a check simply by photographing it, that’s not something I would have anticipated 10 years ago.
Looking ahead, what I think we’ll see as consumers is an arms race to win our business, both by the emerging disrupters and the long-term established institutions. Five years ago the arms race within financial services was fueled by hiring quality talent out of Silicon Valley with a migration of well-known executives to both big financial houses & startups.
What are the other benchmarks for disruption – will it be machine learning and artificial intelligence? Continuing to raise the bar on talent and innovation? Shifting and evolving the business models? A model that can beat a human trader on investing money – that’s one potential outcome. It will be interesting to see if more institutions pick it up. People are starting to take notice.