Fintech ideas that banks are already stealing
by Ryan Ong
FINANCIAL technology (Fintech) is really catching on, and last week, Singapore just hosted the biggest Fintech convention in the world. Amid the expected rah-rah, there were a fair number of banking executives who were walking around with shark-eyes.
Despite their “we should look for venues to work together” speeches, I doubt anyone was fooled as to why the banks were really there: they were scoping out the competition. They were likely working out whether they were going to kill it, or kill it and then eat it afterwards. Here are the Fintech ideas that banks are already “stealing”:
The relationship between banks and Fintech
The relationship between banks and Fintech is hard to pinpoint as “adversarial” or “co-operative”.
On the one hand, some forms of Fintech – such as credit card comparison sites and home loan comparison sites – are mostly on the side of the banks. They make most of their money by directing the customers to the banks (more on this below). The banks, of course, tolerate them because they bring in customers.
On the other hand, some forms of Fintech threaten to replace entire segments of the banking business. The P2P lending websites, such as Capital Match and MoolahSense, could well replace banks in the area of small business loans. Most notably, Fintech companies such as Nutmeg have begun to pose a serious threat to the notion of private banking, by replacing the traditional relationship officer or private banker with online wealth management.
Recent developments though, suggest that big banks are taking a third alternative.
Many Fintech companies just fill in the gaps
The company that embodies the Fintech threat to banks right now is BankSimple, an American-based, web-only bank. It does everything your bank can do, but it exists in a purely virtual space. CEO of BankSimple, Joshua Reich, uttered some famous words about challenging banks, right at the launch of Bank Simple: “By not sucking, we will win.”
Reich is an advocate of the belief that banks are too big and complicated, and just by “not sucking”, Fintech firms can easily beat their more traditional counterparts. In essence, a lot of what makes Fintech work is that they identify weaknesses in the banking system – be it long processing times, pushy bankers, tedious loan applications, and so forth – and then fix it.
In Singapore, home loan comparison sites do precisely this: it’s tedious and difficult to compare home loan rates between all our banks, and to fill in all the paperwork. So the mortgage broker at the home loans site does it for you.
Now that banks are waking up to the fact, they’ve begun to realise that they’re not that far behind after all. The Fintech companies still lack the sheer size and working capital of the banks to implement things on a massive scale. All the banks have to do is let the Fintech companies innovate, and find solutions to their process. Then the bank steps in, copies the method, and swallows the potential competitor whole.
Some Fintech products and services are going to be more susceptible to this than others.
Banks have already begun the process of taking over P2P lending
P2P lending is a service that lets users lend money to each other – or to businesses – over the Internet. This began with “microloans”, such as loaning out $50 or $100 to someone with a little bit of interest; a way to use spare cash for gain. It has since grown to become a serious investment vehicle.
MoolahSense and Capital Match, two homegrown P2P sites, now provide an alternative source of financing for Small to Medium Enterprises (SMEs), and some users do loan out substantial amounts (returns can be as high as 19 per cent, which makes it an attractive proposition for the high risk portion of a portfolio).
And now, Goldman Sachs has become the first bank to launch a P2P lending service. While Fintech lovers often claim that banks lack the innovation and flexibility to match Fintech counterparts, they seem to be forgetting that money is a sort of superpower. The cost of setting up a P2P lending website is peanuts to a bank, and they even have the sheer capital to guarantee loans that go bad.
For most P2P lending sites, the lender can take a capital loss if the borrower defaults. This was recently the case with TLC cars: the car dealership had sourced loans from P2P sites, and the lenders were left empty handed after the company’s owner disappeared.
If a bank launches a P2P site that’s also backed with its own guarantees, it will draw customers from smaller Fintech companies. And unlike those smaller companies, the bank can afford to fail repeatedly.
On a somewhat related note, banks have been accused of using P2P sites in a way that kills the concept of P2P. That is, the banks themselves are browsing these P2P sites, and making loans to businesses via P2P lending (often at much higher interest rates than if the business had approached the banks themselves). The banks then seize all the good lending options, and leave the other P2P users with the lousy deals.
This would deny one of the societal benefits of P2P lending, which is less reliance on big institutions and more reliance on each other. If banks take up the lion’s share of P2P lending, we’ll go back to the old situation of being indebted to big institutions.
Banks are moving in on Blockchain Technology
HSBC is already testing a transaction platform that uses blockchain technology. One of the underlying drivers of cryptocurrencies such as Bitcoin, blockchain is (among other things) a method of verifying transactions.
At present, when you make a digital financial transaction – like buying something on Amazon with your credit card – it’s verified by the credit card company and the bank. This isn’t very fair to you, and opens up a lot of opportunities to rip you off. If tomorrow your bank decided to fabricate transaction records that say you owe them $10,000, you’re going to be in for a rough ride. There are other ways to prove they’re wrong of course, but you get the idea: it’s too easy to fake transactions when one party has more muscle than the other.
With blockchain technology, multiple unrelated sources witness the transaction; and it’s not possible for any one party to fabricate it. Think of it as handing money to someone in a dark alley, versus handing money to someone in a well-lit area with 200 witnesses. The latter is fairer and safer.
At first, when banks began showing an interest in cryptocurrencies, there was a ripple of excitement as everyone thought they’d be interested in accepting Bitcoin. Barclay’s was the first bank to do this. Now, it turns out the banks couldn’t give a horse’s behind about cryptocurrencies: they were interested in the blockchain technology that powered it.
Again, the banks let someone else struggle to build what they need, and then crashed the party later to take it over.
On the upside, it’s probably all still good for the consumer
If you set aside the notion that banks will own you (even more than they already do now), the good news is that banks taking over Fintech companies may not affect you much. If they take over and they provide the same convenient service, what does it matter to the end user?
Fintech sites are filling in many of the problems with traditional banking, but they might be a little overconfident regarding their edge. They might do well to remember second-mover advantage, and that what they’ve build over a decade the banks can pay enough to imitate within the year.
Fintech companies need to pursue that one great quality that banks can’t buy and copy – customer service, and a good relationship with their users. Because if there’s one thing banks – or anyone – can ever own, it’s good service.
Featured image by Natassya Siregar.
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