Tech star­tups tar­get fi­nan­cial ser­vices

The Denver Post - - TECH KNOW - By Michael Liedtke

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.

A big, bold ap­proach

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.

“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.

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.

About $850 bil­lion in con­sumer bank­ing rev­enue in the U.S. 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.

“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 on­line lender Af­firm, CEO Max Levchin is at­tempt­ing to re­shape fi­nance for a sec­ond time af­ter mak­ing his first big splash in Sil­i­con Val­ley as a co-founder 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.

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 dig­i­talonly banks also of­fer govern­ment-backed in­surance on de­posits, but Ber­dak says that is not enough to over­come lin­ger­ing doubts about their long-term prospects.

Fin­tech’s tar­get mar­ket so far has been the millennial gen­er­a­tion, the 18- to 34-yearolds who typ­i­cally have a deeper at­tach­ment to their smart­phones than any bank.

They are cus­tomers like Fred Miller, who opened his first ac­count as a teenager a decade ago and quickly be­came dis­il­lu­sioned with the ar­ray of fees charged for ev­ery­thing from late pay­ments to ATM with­drawals.

Af­ter years of frus­tra­tion, Miller de­fected to Sim­ple, a dig­i­tal bank that Aus­tralian im­mi­grant Josh Re­ich started in 2010 af­ter con­clud­ing that U.S. banks “went out of their way to screw cus­tomers out of their money.”

Be­sides es­chew­ing ser­vice fees, Sim­ple also of­fers money man­age­ment tools that help their cus­tomers set aside money. Miller cred­its those tools for help­ing him and his wife, Emily, re­pay $30,000 in stu­dent loans and squir­rel away enough money for a trip to New Zealand ear­lier this year.

Miller doesn’t think it would have hap­pened had they kept their money in a tra­di­tional bank.

“I never re­ally un­der­stood how a bank could let me spend money that wasn’t in my ac­count and then charge me a fee for it,” Miller says. “How is any­one sup­posed to get ahead in life if their bank is not friendly to them?”

Robin­hood co-founders Vlad Tenev, left, and Baiju Bhatt pose at their com­pany head­quar­ters in Palo Alto, Calif. Robin­hood is a stock bro­ker­age that does not charge com­mis­sions. As­so­ci­ated Press file

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