As online lenders capture an ever greater share of the small business and personal lending markets, banks are realizing that these firms offer customers an experience that is far better than what their antiquated legacy systems are capable of delivering. Banks face a challenge on the payment side too, where companies like PayPal have captured a significant market share.
Unfortunately, bankers have not put enough stress on developing financial products that customers want. Instead, they have been busy with complying with regulatory requirements and meeting their own internal rules. When a small business borrower or an individual consumer approaches a bank, the interaction is dominated by what the bank needs rather than what the customer requires.
In a recent interview to the American Banker, Manolo Sanchez, CEO of BBVA Compass, said, “A lot of startups start with a mission, and everything is built on that mission. The big incumbent organizations are so complex and so huge. It’s difficult for them to do that.”
A Citi study estimates that a massive $19 billion was invested in 2015 alone in fintechs. Most of this money went to companies that focus on delivering the “last mile” of the consumer experience for small businesses and individual customers. But the real impact of these investments has yet to hit American banks.
In 2015, a mere 1.1% of the $850 billion in total banking consumer revenue was lost to fintechs. According to Citi’s data this will rise to 5% in 2017 and 17% by 2023. The prospect of losing market share has shaken banks.
Manolo Sanchez says, “Could we have been a Lending Club or Prosper? Why didn’t we think of this? They resuscitated the traditional personal loan. The biggest innovation was to bring back a basic solution that all of us banks decided to abandon.”
Some banks are tackling the threat by entering into a tie-up with the enemy. Last year, JPMorgan Chase, the largest U.S. bank, partnered with OnDeck to use the fintech’s technology to deliver loans to the bank’s existing four million small business customers.
Jamie Dimon, CEO of JPMorgan says, “Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.” He admits that, “Silicon Valley is good at getting rid of pain points. Banks are good at creating them.”
BBVA is trying to catch up by moving away from the traditional processes that banks use for approving customer loans. Its personal loan, currently sold through the bank’s branches will soon be offered online. BBVA recently bought Simple, a fintech that specializes in mobile banking, for over $100 million.
Manolo Sanchez makes an observation about customer attitudes towards banks that rings very true. He says, “… if BBVA customers upload an app of ours that doesn’t work as intended, they’ll say, ‘You guys are a bunch of losers, you got this wrong again.’ If it’s Simple, they’ll say, ‘Something seems to have changed, please fix it. I think this is the solution and we love you.”
Bank should realize that there is no stopping the fintech juggernaut. While some of the incumbents are entering into partnerships with these online companies, others are trying to emulate their methods.
But not all banks are concerned about the competition from online startups. Bank of America says that it already has 47 million consumer and small business clients. The challenge is to get them to do more business. David Reilly, chief technology officer at Bank of America says, “… That’s where our opportunity is. The way to do that is through fantastic customer service on the product we’ve already given you.”
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