By Ray Birch
PALO ALTO, Calif.—In less than 10 years no one will be talking about fintechs.
All of the concern, discussion and angst among credit unions today that fintechs will steal their members away or somehow change the business model of banking will fade away as the Silicon Valley startups gradually disappear, with their various capabilities and offerings absorbed into the “everyday ambient background,” asserts Matt Harris, managing director at Bain Capital Ventures.
“The point is that fintechs will no longer be this external thing that is happening to credit unions and banks,” Harris told CUToday.info. “Fintechs are something credit unions and banks have to embrace and internalize. I think that within 10 years, either a credit union will view itself as a financial technology business—in other words a fintech—or it will no longer be relevant and on its way to going out of business.”
Harris insists that a “technology-enabled” approach to offering financial services has become table stakes in the eyes of consumers.
“If you don’t have a consumer banking app where customers can not only check their balance but also execute payments—not only bill pay but peer-to-peer payments—and get a sense of their spending and have this kind of delightful modern experience they get with Facebook, Twitter, Instagram or all the other apps they use, then they won’t prefer you as their financial services provider.”
Harris said that what he described is simply a tangible example of how technology is becoming interwoven within financial services.
“I think too many banks and credit unions are relying on their core system providers, like Jack Henry and Fiserv,” said Harris. “They say my core provider has this app and that is what I will use. All that does is guarantee you look exactly like everyone else. Figuring out ways to move beyond the core providers and work with more innovative vendors and partners, figuring out how to have tech at the core of what you do, is mission critical for survival for banks and credit unions.”
Big Banks' Approach
Brian Scott, SVP of sales and solutions consulting at PSCU, thinks the big banks are paying attention to fintechs in a different way than credit unions.
“I was at Money 20/20 and one thing that struck me is that at every session I went to there was a fintech company and every one had large bank associated with them,” said Scott. “So, LevelUp has been a fintech in the payments space for years now and now all of a sudden they are partnered with Chase Pay. PayPal has largely been on their own and now they are partnered with BofA. Moven Bank is now all of a sudden partnered with TD Bank. The trend, I see, is fintechs being less disruptors and more partners with financial institutions.”
Scott sees all the new partnerships clearly signaling a shift toward FIs—at least the big banks—partnering with fintechs as opposed to competing with them.
“I don’t think it will be long before you see fintechs like Square and all the others partnering with a bank,” said Scott.
Harris believes what is driving the new partnerships is a “harmonization” between the two formerly opposing sides.
“The startups are realizing they can’t be outside the existing financial system and hope to succeed, and that in order to offer lending or banking services, and payments services, you need a deep partnership with existing financial services companies,” said Harris. “Some of the startups, too, realize that going it alone and trying to build a customer base can be really expensive and painful. They know if they don’t have a partnering strategy to work with an existing financial institution they probably won’t get the scale they need. And I think they also realize that most consumers still want to get their financial services from a bank or a credit union.”
Fintechs’ needs align with that of FIs, insists Harris.
“There seems to be a coming together of the two sides into a model where if you are an existing financial institution and you don’t have a fintech strategy—which is to say a technology first, progressive modern, customer friendly approach—you will probably be left behind,” he said.
Scott asserted that the partnerships will also slow the pace of innovation.
“When a fintech is absorbed into a big company I think that naturally slows their pace of innovation,” said Scott. “And at times, banks are partnering with a fintech almost to buy out a competitor, maybe taking a piece of the fintech and incorporating it into what they do.”
Harris said that there are other factors slowing the pace of fintech innovation today.
“Financial services is one of those deals where if you move too fast you are going to make mistakes,” said Harris. “There is a fundamental governor on speed as it relates to things like lending and payments, where there are billions of dollars moving around, and there is credit and liquidity risk. You have to be more measured in your growth because the stakes are higher, the regulations more stringent and risk more abundant.”
Harris pointed to recent problems experienced by LendingClub and SoFi.
“LendingClub had problems with loan documents that were improperly adjusted and their stock fell sharply. We saw at SoFi this year where their culture, all the way to the top, was clearly inappropriate for a company with fiduciary obligations,” said Harris. “Nimble is good, but moving too fast in financial services is a problem when you are regulated institution or fintech.”
Both Harris and Scott recommended that credit unions move beyond thinking of fintechs as competitors that bring problems to seeing them as potential business partners, as appropriate—a theme heard often last year during credit union meetings across the country.
“What the credit union executives need to understand is there are some fintech companies that would be delighted to engage with them to co-develop solutions,” said Harris. “CUs should think about collaborating with fintechs to solve customer problems.”
Scott believes more CU/fintech partnerships will happen, especially when a deal is struck with a well-known fintech.
“Once the seal is broken . . . ,” said Scott. “What if a credit union, or a group of credit unions, partnered with LevelUp, Square or PayPal, just like the big banks. That could open the door.”