For Banks, the Sky IS Falling

The first in a five part series on emerging threats to banks from non-financial companies.

For bank executives and board members, competition takes many forms.  Not only are banks burdened with regulation, capital requirements and stress testing, they now have the added pressure of competition from non-financial institutions.  In case you haven’t been paying attention, companies such as Paypal, as well as traditional consumer brands such as Walmart, are aggressively chipping away at banks’ customer base and threatening many financial institutions’ core businesses.  So today’s piece tees up my next four columns by acknowledging the changes taking place within — and immediately outside — our $14 trillion industry.

The race is on…

A few months ago, at Bank Director’s annual Growth Conference in New Orleans, I polled an audience of CEOs, Chairmen and board members and found the vast majority (a whopping 91%) have real concerns about non-banks entering financial services.  These bankers aren’t alone in their concerns about competition from unregulated entities.  Just days after polling this audience, Jamie Dimon, the CEO of JPMorgan Chase, warned an audience of investors that he sees Google and Facebook specifically as potential competition for the banking giant.  As he notes, both offer services, such as P2P, that could chip away at income sources for banks.

…and its not pride coming up the backstretch

As Emily McCormick wrote, Facebook is already a licensed money transmitter, enabling the social media giant to process payments to application developers for virtual products. Likewise, the retail behemoth Wal-Mart launched Bluebird in partnership with American Express late in 2012 so users can direct deposit their paychecks, make bill payments, withdraw cash from ATMs and write checks.  This makes the results of a recent TD Bank survey about millennials banking online and on their mobile devices more frequently than in a branch so relevant.  Specifically, 90% of survey respondents said they use online or mobile tools for their everyday banking activities, such as checking balances or paying bills, and 57% said they are using mobile banking more frequently than they were last year.

Along the lines of “what is the industry losing”: eventually you’re going to have a generation that has learned how to live without a bank.  That’s a very sky-is-falling, long-term consequence of not adapting.  But there’s also an opportunity for retail banks to do more than simply allow the same types of services digitally that were once only available in-person.  Banks could actually expand what banking means to consumers by offering online services that go beyond their legacy business model.

What I am hearing

Of course, non-banks can, conceptually, expand what banking means to consumers by offering online services that go beyond legacy business models too.  However, the sheer complexity of entering this market is one reason why we have yet to see a startup that truly rebuilds the banking industry brick by brick.  At least, that is the perspective shared by Max Levchin, founder and CEO of online payments startup Affirm, a company with the goal of bringing simplicity, transparency, and fair pricing to consumer credit.  As the co-founder and former CTO of PayPal, Levchin is one of the pioneers within the payments industry.   In a recent piece in Wired magazine (The Next Big Thing You Missed: Startup’s Plan to Remake Banks and Replace Credit Cards Just Might Work), he notes

I don’t know if I want to own a bank. But I do want to lend money in a transparent way, and I want to create an institution people love… I want to be the community bank equivalent for the 21st century, where people say: ‘I trust my banker. He’s a good guy who’s looking out for me.’

Coopetition anyone?

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To comment on this piece, click on the grey circle with the white plus sign on the bottom right.  Next up, a look at PayPal, a the e-commerce business that is “eating the banking industry’s lunch.”