Since 2015, an estimated 4,000 fintech (“finance” + “technology”) firms have come into the marketplace, garnering more than $25 billion in capital. While that number is only a fraction of the value of the traditional banking industry, these companies are disrupting traditional financial businesses as they gained their share of customers. The influence of this market disruptor is undisputed. App based financial providers like Square, PayPal, Apple Pay, and Venmo came on the scene and quickly revolutionized how consumers exchange money.
There’s no doubt a new age in money exchange is at hand. These companies are targeting traditional banking functions one by one (‘unbundling’ the services), offering ways to make each one faster, cheaper, and more mobile – directly responding to the known desires of a large and influential millennial customer base.
The shift raises a few considerations. First and foremost, how should banks respond to the new players and market expectations? What advantages do banks have over these disruptors, and is it possible to collaborate?
“We have to think about what we are not doing so we don’t make opportunities for these entrepreneurs.” - David Lobach, Jr., CEO, Embassy Bank
Fintech and the Future of (Community) Banking
In a recent report by the Economist Intelligence Unit, 90% of bankers surveyed stated the belief that fintech firms will play a major role in the future of banking. And most observed that banks are currently stagnant in their response to this disruption. Dated practices and a general lack of agility to accommodate new consumer demands were leading reasons for this lack of agility – across banks of all sizes, though large banks have been generally more able to keep up with innovation simply as a result of having more resources available to push technologies forward.
For community banks, dealing with regulatory burdens and keeping up with rapidly shifting technology are hurdles. In addition, many of these institutions have built their legacy on meeting the needs of their customers face-to-face, and now these apps are addressing challenges and frictions faster and cheaper. So it’s hardly a surprise that fintech has been successful thus far in skimming off banks’ best customers and driving down fees. Without the ability to compete head to head, community banks have to consider the best response to this revolution.
Competimates?
There’s no disputing that fintech firms win on technology, innovation, and agility. They also lack some of the regulatory pressure experienced by banks (for now). But they also face real concerns about the security of their platform and a need to woo new customers.
As we’ve said before, community banks in particular have unique strengths. That point is true in this case as well. Besides legacy in their communities, traditional banks have a number of advantages over fintech. Experience with regulators and a diversified product set are two. And most institutions have access to an existing (and in some cases multi-generational) customer base, as well as a deeper seeded sense of trust and stability.
We aren’t alone in envisioning a marketplace where the two forces can act as competimates (competitive but also mutually beneficial). Combining fintech’s culture of innovation and technology use and the resources and legacy knowledge of community banks, the financial industry – and customers – truly stand to benefit. An evolution is at hand. The question is what role your bank will play.
The HORNE Banking team actively monitors all of the factors in this changing space, from cybersecurity concerns, to regulatory impact, to the desires of the changing banking population. We can help you spot and take advantage of your opportunities for stability as the market changes.
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