Using Fintech
to Offer New Products- a Three-Part series
Part Two- Fintech is Here to Stay
While the overall public impression of banks and financial
institutions took a major hit during the 2008 financial crisis, in large part,
the damage was being slowly repaired. However,
it is obvious that the relationship between financial institutions and the public
has changed forever. Even before the coronavirus
hit the economy, a broad wave of
consumer distrust buffeted the banking industry's reputation over the past
year, bringing an end to a run of positive change in public perception in the
years after the financial crisis, according to the annual American
Banker/Reputation Institute. Let's face
it, the current times are not exactly the best for the image of banks. In addition to the mortgage crisis, there
have been several highly publicized scandals involving some of the larger and
best-known banks. The rollout of the current
economic stimulus plan has had mixed results at best. Even though many of these things go through
cycles and the conventional wisdom is that “it will all blow over”, the current
times are somewhat different
As pointed out in Bankshot[1]
banking journal- “What’s at stake? Customers have more choice than ever when it
comes to where they do their banking, including from an increasing array of
fintech competitors with arguably less cultural and emotional baggage than the
traditional banking industry. Now, more
than ever before, there are real alternatives to banking.
Most of these alternatives are being provided by financial
technology companies AKA FinTechs. As we
noteddin the first part of this series, there is a huge potential pool of
customers that FinTechs have been designed to meet; the unbanked and underbanked.
The FDIC conducts a study of the number of households that
are underbanked and unbanked in the Us every two years. The most recent study was conducted in
2017. The highlights from this study
are as follows:
·
In 2017, 6.5 percent of U.S. households were
“unbanked,” meaning that no one in the household had a checking or savings
account. Approximately 8.4 million U.S. households, made up of 14.1 million
adults and 6.4 million children, were unbanked in 2017.2 An additional 18.7
percent of U.S. households were “underbanked” in 2017, meaning that the
household had an account at an insured institution but also obtained financial
products or services outside of the banking system.
·
Specifically, a household is categorized as
underbanked if it had a checking or savings account and used one of the
following products or services from an alternative financial services (AFS)
provider in the past 12 months: money orders, check cashing, international
remittances, payday loans, refund anticipation loans, rent-to-own services,
pawn shop loans, or auto title loans. Approximately 24.2 million U.S.
households, composed of 48.9 million adults and 15.4 million children, were
underbanked in 2017.
The survey points out that a large
portion of the population in this survey are turning to alternative financial
institutions for their banking need. The
need for nontraditional banking services is one of the main drivers of the
financial technical “fintech” industry. Many
bakers seem to understand that fintech companies present the possibilities for
significant change in the industry. According
to a survey conducted by PWC:
·
FinTech is a driver of disruption in the market.
Financial Institutions are increasingly likely to lose revenue to innovators,
with 88% believing this already is occurring. The perceived business at risk
trend has continued to rise, to 24% on average this year among all sectors.
·
Incumbents are becoming more aware of the
disruptive nature of FinTech, shown well by the fact that, in 2017, 82% of
North American participants believe that business is at risk, up from 69% in
2016. Insights from PwC’s DeNovo also indicate that 30% of consumers plan to
increase usage of non-traditional Financial Services providers and only 39%
plan to continue to use only traditional Financial Services provider. In addition, asset backed lenders have
largely increased their share of lending (the lending club and other peer-to-
peer business).
Fintech companies have been in the
business of designing products that address some of the concerns raised by the
unbanked or underbanked. For example,
speed of delivery, consideration of alternative means for credit underwriting
and ease of delivery.
Despite the idea that fintech equals disruption, it doesn’t
have to be a negative thing. Disruption
often results in improvement in efficient and better service. In fact, there are several places where
fintech companies and financial institutions, especially community banks have
converging interests.
Community banks and credit unions have overall higher levels
of trust and a better public image than their larger brethren. Because community banks are smaller, they
are more nimble and making changes to products lines can happen quickly and in
response to customer needs. The
independent bankers association published the “Fintech strategy Roadmap in
2017” as a guide for the many opportunities that fintech companies can
present. A summary of these
opportunities includes;
o
Increased Operational Efficiency and Scale
o
Increased Access to Customers with a Younger Age
Demographic
o
Increased Access to Loan Customers in New
Markets
o
Enhanced Brand Reputation
o
Enhanced Customer Experience
Disruption is simply that- it doesn’t necessarily have to be
a bad thing. In fact, disruption can
result in greater efficiencies and more effective. Some good news, these companies have done all
of the research and development work with venture capital funds! They have worked out a lot of the bugs that
are usually part of delivery of a new product.
Some more good news, these companies are burdened by a regulatory scheme
that really limits them. That is that
they are considered MSB’s and must get state licenses to operate in each state. Because of this, many FinTechs are looking
for a partnership with a bank- in this way they get around the need for
licenses.
In Part Three, we will discuss best practices for partnering
with Fintech Companies
***For More Information on FinTech’s and
Financial Institutions visit www.VCM4you.com***
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