PayPal is Eating Your Bank’s Lunch

Part two of a five piece series on emerging threats to banks from non-financial companies.  To read part one, “For Banks, the Sky IS Falling,” click the hyperlinked title.

I am not big on scare tactics, so apologies in advance of my next sentence.  But when HP’s chief technologist for financial services, Ross Feldman calls PayPal “the poster child of new technology,” adding, “they are the No. 1 scary emerging player in the eyes of bankers” how can you not be concerned?  PayPal, a subsidiary of eBay, is already a major player in the person-to-person payment business (P2P) and is poised to take a massive bite out of traditional banking revenue.

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What is PayPal Up To?

To preface this part of today’s post, keep in mind that as an unregulated entity, PayPal is not subject to the same regulations and compliance expenses as banks.  I share this oh-so-salient point as the company moves towards mobile payments with its apps and one-touch payment services.  The fact that PayPal embraces these offerings isn’t surprising, as so many bank users — myself included — prize 24/7 convenience.  Certainly,  companies that don’t meet user demands will not survive.

Moving away from individual expectations to small business demands, I am seeing more small businesses switch from traditional merchant accounts offered by the banks to those like PayPal’s.  As Nathalie Reinelt of Aite Group’s Retail Banking group shared, “ubiquitous smartphones and inefficiencies in legacy payments have propelled the digital wallet into the payments ecosystem—consumers are interested in it, merchants are willing to adopt it, and financial services companies cannot ignore it.”

So What’s A Banker to Do?

Where I see PayPal falling short — admittedly, most banks too — is an inability to help customers make decisions on what to buy, and where and when to buy it.  So let me shout it as loud as I can: exploit this achilles heel while you still can!  There are companies like MoneyDesktop (a leading provider of online and mobile money management solutions), Ignite Sales (a company whose “recommendation solutions” helps increase customer acquisition & retention while optimizing profitability), etc. that have been stood up to keep banks relevant.  There is a real opportunity for banks to do more than simply allow the same types of services digitally that were once only available in-person.

The window of opportunity is open for banks to expand what banking means to consumers by offering online services that go beyond their traditional business model.  The question boils down to this: will the board & senior leadership accept the risk to try something new to make sure they aren’t just warding off advances from the B of A’s of the world — but also the PayPal’s and their peers?

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To comment on this piece, click on the grey circle with the white plus sign on the bottom right or send me your thoughts via Twitter (I’m @aldominick).  Next up, pieces on two of the biggest non-bank competitors whose names you may have heard of: Facebook and Walmart.

In the Face of Intense Competition

Financial institutions face intense competition from non-banks like PayPal, American Express, Walmart and Quicken Loans…  and a rapidly changing demographic that demands new approaches to attract and retain customers (be it individual or business).  Today’s post takes a look at two financial technology companies working to keep banks relevant as customers increasingly expect a“one stop shop” in all areas of their lives.

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Over on FiveThirtyEight.com

On FiveThirtyEight, Nate Silver’s newly launched website at ESPN, the editorial team leverages statistical analysis to tell compelling stories about politics, science and yes, sports.  While much digital ink has been spilled on this week’s NFL draft,  the site’s chief economics writer, Ben Casselman, authored a piece that caught my eye.  Thanks to a keynote presentation by Fox News’ Juan Williams at this January’s Acquire or Be Acquired conference, I’m far more aware of the changing demographics of the United States — and what that means for financial institutions.

 

Based on my conversations with Juan in the desert, I found early inspiration for today’s piece while pouring over Ben’s What Baby Boomers’ Retirement Means For the U.S. Economy.  In combination with economic shifts — both domestically and globally — it is clear that changing demographics are transforming businesses.  As we trend towards a younger populace, Ben writes “all else equal, fewer workers means less economic growth… If more of the population is young or old that leaves fewer working-age people to support them and contribute to the economy.”  Clearly, banks need to be prepared to serve a population that will live longer.  Maybe more importantly, they need to court their most valuable customers — Gen X&Y and Millennials (relationships built, “gulp” through online & mobile experiences).

Putting Checks into the Cloud

In the world of checks, VerifyValid acknowledges that “paper is simply a vessel for holding information. The real check is the data fields it contains: the check number, the amount, the routing number, the recipient, and most important of all, the authorizing action which says that the account holder agrees to pay the stated amount to the payee.”  I had a chance to see Paul Doyle, the company’s Founder & CEO, inspire a crowd of CEOs and board members at The Growth Conference last week.  Flying home from New Orleans, I spent some time learning how the company overcame the challenge in providing this information electronically in such a way that prevents fraud.  As I see it, VerifyValid lowers an organization’s costs while increasing efficiency and financial security with every payment.  IMHO, their 2 minute, 25 second video is worth a watch.

Making Money Simple, Attractive and Intelligent

Located “in the heart of Utah’s Silicon Slopes,” MoneyDesktop is redefining the way millions of people interact with their finances.  As one of the fastest-growing financial technology providers, MoneyDesktop positions banks and credit unions as the financial hub of their account holders — think Mint on steroids — with its personal financial management, data-driven analytics and marketing technologies.  Some 450 financial institutions rely on this software-as-a-service vendor… and I saw last night they have plans to grow significantly in the months to come.  They write, and I agree, that account holders are changing.  “There is an ongoing shift away from traditional brick & mortar banking (and) technology is providing better ways for account holders to interact with their money, and with financial institutions.”  An interesting company delivering a very clean and user-friendly experience.

Aloha Friday!

Can Banking Be Right-Sized?

Size matters?
Size matters?

Although its been said many times, many ways, I can’t tell you what size really matters in banking today. Pick a number…  $500M in asset size?  $1Bn?  $9.9Bn?  Over $50Bn?  7,000 institutions?  6,000?  3,000? Less?  As a follow-up to last week’s guest post by Bank Director magazine’s editor, I spent some extra time thinking about where we are heading as an industry — and the size and types of banks + bankers leading the way.  What follows are three things I’m thinking about to wrap up the week that shows that size matters; albeit, in different ways.

(1) Not a single de novo institution has been approved in more than two years (astonishing considering 144 were chartered in 2007 alone) and the banking industry is consolidating.  Indeed, the number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer — falling below 7,000 for the first time since federal regulators began keeping track in 1934, according to the FDIC.  Per the Wall Street Journal, the decline in bank numbers, from a peak of more than 18,000, has come almost entirely in the form of exits by banks with less than $100 million in assets, with the bulk occurring between 1984 and 2011.   I’ve written about how we are “over-capacity;” however, an article on Slate.com takes things to an entirely different level.  In America’s Microbank Problem, Matthew Yglesias posits America has “far far far too many banks…. (that) are poorly managed… can’t be regulated… can’t compete.”  He says we should want the US Bankcorps and PNCs and Fifth Thirds and BancWests of America to swallow up local franchises and expand their geographical footprints.  He sees the ideal being “effective competition in which dozens rather than thousands of banks exist, and they all actually compete with each other on a national or regional basis rather than carving up turf.”  While I have no problem with fewer banks, limiting competition to just the super regional and megabanks is a terrible thought.  Heck, the CEO of Wells Fargo & Co. wrote in the American Banker this August how vital community banks are to the economy.  So let me cite a rebuttal to Slate’s piece by American Banker’s Washington bureau chief Rob Blackwell.  Rob, I’m 100% with you when you write “small banks’ alleged demise is something to resist, not cheer on” and feel compelled to re-share Mr. Stumpf’s opinion:

…we need well-managed, well-regulated banks of all sizes—large and small—to meet our nation’s diverse financial needs, and we need public policies that don’t unintentionally damage the very financial ecosystem they should keep healthy.

(2) To the consolidation side of things, a recent Bank Director M&A survey found 76% of respondents expect to see more bank deals in 2014.  Within this merger mix exists strategic affiliations.  While the term “merger of equals” is a misnomer, there are real benefits of a strategic partnership when two like-sized banks join forces.  Case-in-point, the recent merger between Rockville Bank and United Bank (which will take the United name).  Once completed, the institution will have about $5 billion in assets and be the 4th largest bank in the Springfield, MA and Hartford, CT metropolitan area.  According to a piece authored by  Jim Kinney in The Republican, United Bank’s $369 million merger with the parent of Connecticut’s Rockville Bank “is a ticket to the big leagues for both banks.”  In my opinion, banks today have a responsibility to invest in their businesses so that they can offer the latest products and services while at the same time keep expenses in check to better weather this low interest rate environment.  United Bank’s president-to-be echoed this sentiment.  He shared their “dual mandate in the banking industry these days is to become more efficient, because it is a tough interest rate environment, and continue to grow… But it is hard to grow and save money because you have to spend money to make money.”   Putting together two banks of similar financial size gives the combined entity a better chance to this end.

(3) In terms of growth — and by extension, innovation — I see new mobile offerings, like those from MoneyDesktop, adding real value to community banks nationwide.  This Utah-based tech firm provides banks and credit unions with a personal financial management solution that integrates directly with online banking platforms.  As they share, “account holders are changing. There is an ongoing shift away from traditional brick & mortar banking. Technology is providing better ways for account holders to interact with their money, and with financial institutions.”  By working directly with online banking, core and payment platforms, MoneyDesktop positions institutions and payment providers as financial hubs and offers marketing tools that dramatically impact loan volume, user acquisition and wallet-share.  As technology levels the playing field upon which institutions compete, banks that leverage account holder banking information to solidify relationships bodes well for bank and customer alike.

Aloha Friday!