Within ~1.5 years of the launch of its mobile maps app, Google had erased over 80% of the top GPS companies' market capitalization. Similarly, in just over seven years since venturing into the music space, Apple became the world's largest music retailer. History is replete with examples of new entrants - backed by technological superiority and innovative business propositions - wiping out established companies in almost no time. With this in mind, can established banks today say with any certainty that this won't be repeated in their industry? Today, more and more nonbanking organizations are foraying into the banking sector. Startups like Stripe and Square have earned multi-billion dollar valuations. Today, around one-third of U.S. revenue for Starbucks is paid via its own loyalty cards.
Banks' nonbank competitors span nimble technology players, telecommunications companies, start-ups, retailers, fintech firms, peer-to-peer lenders, crowd-funding websites, internet/mobile service providers, and many others. The threat of traditional banks getting relegated to the limited back-office utilities roles by the nonbanks is quite real. If you are still unconvinced, the three news stories below from the past few months may help change your mind.
By Aug '15, Europe's largest peer-to-peer lending platform, Zopa, had facilitated over £1 billion in loans to over 200,000 people. In July '15, it had experienced over 120% YoY growth in its lending business. Zopa by now has over 2% share of the UK's unsecured personal loans market.
In Mar '15, the Chinese e-commerce giant Alibaba, announced that it is developing facial recognition technology to enable mobile shoppers to substitute their passwords with selfies. Today, China's financial sector is experiencing immense transformation owing to innovative business models from major internet companies like Alibaba that are rapidly adopting microfinance with a digital edge. Alibaba had launched Alipay.com in China - a third-party online payment platform involving no transaction fees.
In Mar '15, the Chinese smartphone manufacturer Xiaomi moved into the financial services arena by enabling an interest-bearing mobile wallet account. Within couple of months, it also launched an online money-market platform - Xiaomi Huoqibao. Today, online money-market accounts are experiencing high popularity in China - thanks to their heavy promotion by the tech industry entrants and also because they offer substantially higher interest rates than traditional banks.
Whether it's lending, payments, cards, wealth management, insurance, or any other banking functions (except deposits where there are regulatory constraints for nonbanks); the nonbanks are making rapid strides. The following are a few examples:
1.Payments: Google, LevelUp, Apple, PayPal, Sage, Starbucks, Square, Walmart, Alibaba, WorldRemit.
2.Lending: Funding Circle, On Deck Capital, Lending Club, Amazon, Kabbage.
3.Money/Wealth Management: Nutmeg, Moven, LootBank
4.Mortgages: Zillow, Quicken Loans, loanDepot
5.Invoice financing: Payplant, InvoiceFair
So what gives these nonbanking players a competitive edge over the traditional banks? In my view, there are three key factors:
1.Digital superiority: Non-banks have aggressively proceeded with digital innovation, ranging from leveraging real-time predictive analytics, open APIs and ecosystems, multi-channel portals, ultra- automated decision engines, cloud, IoT, geo-location and biometric capabilities, and more. Unlike traditional banks who have typically managed their systems via closed structures like proprietary data and communication networks, nonbanks have been aggressively leveraging their APIs and related ecosystems to ensure openness. Zillow and Apple, for example, have a large number of APIs that let their partners integrate into their digital platforms. Similarly, nonbank SME lenders such as Kabbage, Fundera, OnDeck, have digital access to external databases that have a vast amount of information on SMEs. These lenders are capable of real time risk profile assessment using traditional as well as alternative data sources e.g. Yelp reviews, Quick Books entries, etc. Their cloud-based credit scoring capabilities and lending decision engines are underpinned by predictive models that leverage thousands of data points. Further, many new entrants don't follow the limiting linear digitization strategies of traditional banks. For example, Atom bank in UK started with the mobile banking only and planned to add internet banking capabilities only later.
2.Superior customer experience: Many nonbank entrants are globally successful digital companies who are capable of providing superlative user experience. Nonbanks have been proactive in enabling needs-based, simple, and hassle-free solutions to customers. They are capable of servicing market segments that traditional banks have been reluctant to service due to high costs or for other reasons. LootBank's offering of mobile money management with prepaid cards for students, Amazon's lending to its merchants, Payplant's invoice finance servicing for app developers are a few such examples. Nonbanks are able to provide value-for-money to customers. For example, PayPal offers select merchants fixed rate loans which get paid as a percentage of their daily business sales on Paypal, obviating the need for minimum monthly payments. In its foreign exchange business, Transferwise has enabled formidable pricing strategy. Many nonbanks have also seamlessly integrated their product merchandizing, media content, payments/ordering services and other key financial features into their digital channels - all of which are backed by a real-time personalized customer experience provisioning. Biometric authentication, beacons usage, one-click payments, social media integration, to name just a few, also aid in enabling superior customer experience. CityFalcon has leveraged Twitter to provide investment insights to traders; PayPal and Moven have aggressively leveraged their superior digital technologies to acquire tech-savvy millennial customers. Thus, it is no wonder that PayPal is the number one online payment service in many countries.
3.Agility and speed: Unlike traditional banks, digital nonbanks are not subjected to stringent regulatory requirements. Consequently, they can capitalize on this by aggressively innovating. Thus, their continual and frequent innovation, high risk appetite and operational productivity, and sharp focus on value-addition are part of their mantra. They release new innovative service/product with remarkable efficiency and speed and respond to customer needs much faster than traditional banks. PayPal and Square, for example, allow their merchants to start accepting payments within one day (almost a week faster than most traditional banks). OnDeck Capital can decide in less than 24 hours, the credit worthiness of a business customer, and it takes only two weeks or less for fund disbursement (with good number of loans getting disbursed within 48 hours!). QuarterSpot allows business owners to apply for loans online in just a few minutes. Similarly, the balance transfer between the Yu'E Bao investment account and Alipay account can happen in just one click.
I believe it's high time that traditional banks take note of the lessons in the David versus Goliath legend! Don't you agree?