Three Types of Disruptors Banks Need to Watch
By Mary Wisniewski
BBVA Compass is outsourcing small-business loans to online lender OnDeck. Eastern Bank in Boston hired the leadership from a onetime fintech darling to champion its new innovation lab. JPMorgan Chase released an updated mobile app that showed design touches influenced by some of its newer recruits, such as Yahoo!’s former design executive Tim Parsey.
All are examples of mainstream banks turning to tech entrepreneurs, even disruptors, to help them better compete in the digital age. As banks look to modernize their designs and customer experiences, they are buying, poaching talent from, or working with digital-first companies that are perceived to be more in touch with consumer demands.
Their challenge, of course, is figuring out which technologies have the most promise, or might pose the biggest threat to their business models. If they see the threats as legitimate, their next decision is whether to try to beat the upstarts or team up with them.
That’s why representatives from some of the nation’s largest banks were on hand at an intimate fintech gathering in New York Wednesday, where entrepreneurs were there to showcase and debate the merits of the latest in financial products and services. And if the buzz from investors was any indication, some of the biggest opportunities are in peer-to-peer lending, cryptocurrency and providing tech-based services to individuals whose preferred method of payment is cash. Here is a closer look at these three categories and their potential impact on the banking business.
P2P Lending Threatens Smaller Banks
Peer-to-peer lending was originally created to serve consumers and therefore wasn’t seen as much of a threat to banks that had little interest in making small loans to individuals. But with institutional investors now pouring money into the sector, peer-to-peer lenders are eagerly expanding into more areas of lending, including real estate and small business, and are even looking to offer insurance.
For banks, this could mean a loss of business to more nimble firms that can offer more flexible loan terms and quicker turnaround times.
“Banks will wake up and an entire generation of customers will [have] left,” Matt Burton, the chief executive of Orchard Platform, a New York company that aggregates lending products for prospective investors, said at the conference.
Smaller banks “are most at risk,” added Simon Hermiz, founder and CEO of NoteX360, an aggregator of alternative lending products for institutional investors. “They are most in need of tech solutions to cut costs and to become more efficient with lending.”
To be sure, some community banks are forging alliances with alternative finance companies in a bid to reach new audiences.
Golden Pacific Bancorp, for example, is partnering with Better Finance (formerly BillFloat) to launch a more automated loan platform that will take much of the cost out of underwriting a loan. The bank says the technology will allow it to offer very small business loans, say $5,000 or $10,000, that in the past might not have been worth the time and effort.
The Sacramento, Calif., bank intends to sell its technology, SmartBiz, to other banks.
Keeping Watch on Cryptocurrency
“The future of finance will be in cryptocurrencies,” said Reggie Middleton, founder of BoomBustBlog. “It’s a big opportunity for banks.”
Where that opportunity lies, though, is still an open question. Wells Fargo, for example, recently created a group to study Bitcoin, the virtual currency introduced five years ago by a pseudonymous programmer, and published a primer on Bitcoin in March. Other banks, such as Citigroup and Bank of America, have published reports about the digital currency for their clients.
Banks’ newer research projects are designed to identify the risks and opportunities within digital currency — rather than getting involved in the Bitcoin business directly. “It’s a wait-and-see approach,” said Barry Silbert, founder and chief executive of SecondMarket and founder of the Bitcoin Investment Trust.
Cash, in Some Circles, Remains King
The mobile wallet may someday emerge as the payment method of choice for debit and credit card users, but for some segments of the population, cash is and always will be king.
An April report, using evidence from the Diary of Payment Choice conducted by the Boston, Richmond and San Francisco Federal Reserve Banks in 2012, found that consumers choose to transact in cash more frequently than any other payment instrument — particularly for small-value transactions.
“Cash has never been as strong as it is today,” said Clinton Townsend, founder and chief executive of FreeATM in New York. FreeATM’s business model is to make ATM transactions free for users by charging for ads to run on designated ATMs.
It is one of several young companies creating tech solutions geared at the cash-heavy crowd. PayNearMe, in Sunnyvale, Calif., helps people who are generally paid in cash (think waitresses among others) and tens of millions of Americans who rely on cash to, say, make purchases online or pay their rent, among other use cases.
The ATM Industry Association also recently announced a new group dedicated to brainstorming ways the machines can be better used to help reach unbanked and underbanked consumers.
Banks, meanwhile, have been experimenting with ways to make ATMs do more, such as distributing $1 and $5 bills and letting consumers pay their bills through the machines.