Bank­ing on change: Tech star­tups tar­get fi­nan­cial ser­vices

Kuwait Times - - BUSINESS -

It may not be much longer be­fore bank branches join video-rental stores and record shops as relics of a by­gone era. Sil­i­con Val­ley is pres­sur­ing banks to change their ways or risk be­com­ing the lat­est in­dus­try over­taken by tech­nol­ogy. Hun­dreds of star­tups are of­fer­ing eas­ier and cheaper ways to save, bor­row, spend and in­vest. They are do­ing it by shift­ing the bat­tle­ground to smart­phone apps and web­sites, which func­tion as dig­i­tal of­fices that are ac­ces­si­ble around the clock with min­i­mal staffing, and by low­er­ing fees.

Given how much cus­tomers dis­like it, the fi­nan­cial ser­vices in­dus­try seems ripe for “dis­rup­tion,” as Sil­i­con Val­ley likes to call in­dus­try up­heaval. These fi­nan­cial tech­nol­ogy, or “fin­tech,” star­tups may also soon get fur­ther val­i­da­tion from a key bank­ing reg­u­la­tor. Comptroller of the Cur­rency Thomas Curry last week an­nounced plans for a spe­cial na­tional bank char­ter that would al­low fin­techs to of­fer their prod­ucts with­out hav­ing to get reg­u­la­tory ap­proval state to state. Part of Curry’s mo­ti­va­tion lies in his be­lief that fin­tech can help con­sumers who ei­ther don’t want or can’t af­ford to es­tab­lish ac­counts with tra­di­tional banks.

At this point, the fin­tech sec­tor hasn’t proven it can be a vi­able or trust­wor­thy al­ter­na­tive to tra­di­tional banks and stock bro­ker­ages. Few of the star­tups have ever posted a profit, and one of the big­gest, the Lend­ing Club, is try­ing to re­cover from a break­down that trig­gered the res­ig­na­tion of CEO Re­naud La­planche ear­lier this year. The Jus­tice Depart­ment is in­ves­ti­gat­ing the events that led to La­planche’s abrupt de­par­ture.

“The dis­rup­tion in bank­ing is com­ing later than other ar­eas be­cause of the com­plex­ity of the reg­u­la­tions and the amount of trust re­quired,” La­planche said in an in­ter­view ear­lier this year, while he was still CEO. “Trust­ing you with my sav­ings is not like book­ing a trip on­line.”

Banks, mean­while, have demon­strated their re­siliency and re­source­ful­ness. With the help of tax­payer-backed bailouts, the in­dus­try has sur­vived a fi­nan­cial cri­sis of its own mak­ing, and now ap­pears to be tack­ling the fin­tech threat. They are clos­ing branches, lay­ing off work­ers, pour­ing money into their own tech­nol­ogy de­part­ments and even buy­ing or team­ing up with fin­tech star­tups.

Tak­ing the threat se­ri­ously

“When­ever I talk to big banks, they ask, ‘What are the dis­rup­tors do­ing? Which of their ideas can I copy?’” says For­rester Re­search an­a­lyst Oli­wia Ber­dak.

A re­cent sur­vey of the fi­nan­cial ser­vices in­dus­try by the re­search firm Gart­ner Inc. found that 70 per­cent of re­spon­dents con­sid­ered fin­tech star­tups to be a big­ger threat than their tra­di­tional ri­vals.

With their guard up, the much big­ger banks are more likely to drive many of the fin­tech star­tups out of busi­ness if they don’t ac­quire them first, says Gart­ner an­a­lyst Rajesh Kan­daswamy. But even in that sce­nario, he pre­dicts “many of the ideas com­ing out of fin­tech will sur­vive in one way or an­other, which will be ben­e­fi­cial for con­sumers.”

About $850 bil­lion in con­sumer bank­ing rev­enue in the US alone is at stake. Fin­tech cap­tured just 1 per­cent of that last year, ac­cord­ing to a Citibank study. By 2023, though, Citibank ex­pects fin­tech to con­trol 17 per­cent of a $1.2 tril­lion mar­ket.

Em­bold­ened by pre­dic­tions like that, fin­tech­nol­o­gists tend to be brash, like many of the en­trepreneurs who have suc­cess­fully re­shaped other in­dus­tries.

A big, bold ap­proach

“Dur­ing the next 10 years, we are go­ing to cre­ate an in­ter­na­tional com­pany that will be like noth­ing the fi­nan­cial ser­vices in­dus­try has ever seen,” boasts Baiju Bhatt, co-founder of Robin­hood, a stock bro­ker­age that does not charge any com­mis­sions for its more than 1 mil­lion cus­tomers to buy and sell shares. To make money, Robin­hood re­cently in­tro­duced a $10 monthly ser­vice that al­lows trad­ing when the stock mar­ket is closed and of­fers higher bor­row­ing lim­its.

At Af­firm, an on­line lender, CEO Max Levchin is at­tempt­ing to re­shape fi­nance for a sec­ond time af­ter mak­ing his first big splash in Sil­i­con Val­ley as a co­founder of PayPal, a dig­i­tal pay­ment ser­vice born in the 1990s.

Helped by his pedi­gree, Levchin has raised $525 mil­lion to back Af­firm’s fo­cus on con­sumers who do not like or can­not get credit cards. In­stead of pro­vid­ing a re­volv­ing line of credit with high in­ter­est rates that com­pound, Af­firm has de­vel­oped its own for­mula to iden­tify bor­row­ers able to re­pay loans in equal in­stall­ments in time frames rang­ing from three months to one year.

Af­firm also re­fuses to charge fees for late pay­ments, to fur­ther dis­tin­guish it­self from banks and other credit card is­suers.

“I just don’t think you can run a busi­ness by screw­ing your cus­tomers these days,” Levchin says. “I would like to think we are re­turn­ing to what lenders are sup­posed to do.”

Cus­tomers still aren’t to­tally sold

Al­though many con­sumers rarely ex­pect big banks to act in their best in­ter­ests, they typ­i­cally con­sider them to be a safer place to keep money be­cause of their long his­to­ries in busi­ness, says For­rester’s Ber­dak. Like the big tra­di­tional banks, most dig­i­tal-only banks also of­fer govern­ment-backed in­surance on de­posits, but Ber­dak says that is not enough to over­come lin­ger­ing doubts about their long-term prospects.

Lend­ing Club, for in­stance, has been op­er­at­ing un­der a cloud since re­veal­ing that pa­per­work for $3 mil­lion in loans had been fal­si­fied un­der La­planche’s lead­er­ship. La­planche de­clined to com­ment about cir­cum­stances sur­round­ing his res­ig­na­tion.

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