With major disruption happening across the financial services and payments sectors — especially as blockchain and Bitcoin gain more traction and visibility — financial technology (fintech) companies are set to make waves in the 2017 payments and finance markets.
Fintechs have experienced significant growth this year, in terms of investment and the number of startups proliferating across the globe, although less so in emerging markets. According to Accenture, the global fintech market saw a 67% increase in investment growth in Q1, with investments in Europe and Asia doubling during the same period.
Even if bank customers don’t yet realize it, this is fantastic news: More companies committed to creating faster, more efficient (and cost-effective) ways to conduct financial transactions. But for the banks and finservs with big payment operations, the fintech boom means risk and the threat of being dislodged from their long-standing perches.
An Industry Shifts
Just as the once-dominant automakers now face serious competition from upstart vehicle manufacturers and self-driving car technologies and similarly, as NASA is opening the space program to private investment initiatives like SpaceX in order to continue innovating, the banking industry is also facing massive changes to its traditional business models, thanks to technology.
The financial sector’s risk(s) comes from myriad competitive areas, the most recent of which is a ruling from the U.S. Office of the Comptroller of the Currency (OCC) allowing fintech companies that either generate digital payments or lend money to apply for government-approved bank charters. The ruling extends to fintechs engaged in the following ‘traditional’ banking activities:
Although it’s not a done deal, the OCC is “moving forward in considering applications from financial technology companies to become special purpose national banks.”
So why the move to clear a broader path for fintech firms to reach bank status? The federal government believes it needs to do so because of a compelling public interest.
A review of the OCC statement clearly reveals that Uncle Sam believes fintech companies hold great potential to make the banking experience easier, more flexible, and with greater control for financial consumers. That’s especially true for the underbanked and unbanked communities, a demographic that currently includes 51 million U.S. adults. It’s also why this opportunity is also a threat to traditional institutions. Unlike the fintechs, banks haven’t focused on underserved customers for one reason: unprofitability.
The Risk and Reward Conundrum
For some banks, the opening up to fintechs is a threat akin to Walmart getting into the checking business, or Apple getting into the payments arena. It’s disruptive to their entrenched models.
Even though the OCC did not provide timeline details about accepting or issuing the special-purpose bank charters, fintech firms that were approved for what the OCC calls “limited” charters would also be under “regular” federal government oversight, a scenario that banking industry insiders are applauding. Financial industry experts have stated that maintaining high standards is the best way to ensure customers have access to the best financial products and services.
Getting into Bed with the Upstarts
Not all banks, however, are cowering from the fintech invasion; Goldman Sachs is working with a number of fintechs to offer new digital services to customers. JP Morgan, Citivest and BBVA are also opening business incubators for fintechs in a “sign of the times” approach.
JP Morgan, for example, has rolled out a six-month incubator program for startups for called “In-Residence.” The program offers these companies access to JP Morgan facilities, systems and expertise. Fintech firms with “potential” can gain further funding and nurturing, and have their businesses merged into the JP Morgan banking network.
Goldman Sachs is up and running with a new fintech partnership program of its own, including new investments with mobile payments provider Square, along with a separate deal with Motif Investing, a fintech online brokerage firm. Morgan Stanley, Bank of America and Citibank are also new investors in Visible Alpha, a young fintech company that specializes in stock data analysis.
These partnerships provides banks with direct access to fresh, innovative products and services that can boost their technology brands and, ultimately, bring in more revenue. For the fintech firms, their big bank deals gives them access to a massive distribution network and puts them in front of an abundance of potential new customers and business partners.
That’s just a sign of the times. A new report from the law firm Manet, Phelps & Phillips, states that banks (especially community and regional banks) want to partner with fintech companies, and that 86% of survey respondents said it was very important to do so.
Of course, only time will tell how deep fintech’s inroads will be into the traditional banking sector. But the need exists to collaborate quickly. All a bank director has to do is look at the taxi industry, which was so pathetically slow to act when Uber and its new technologies first arrived on the scene – and now faces a death spiral as a result.
Uncle Sam’s stamp of approval via the OCC opens the fintech doorway a bit wider, and instead of wondering who’s coming through the door, banks may have to partner with fintech firms – to survive, no doubt, and to give their customers the best of both worlds.