At this point, it’s a cliché to predict the downfall of big banks. Forecast for years, it wasn’t until the 2008 financial crisis when cracks appeared in the business foundation. Fintechs still ranked as somewhat of a novelty and posed no threat to the established giants. Fast forward to the present—where the leading brands give some financial CEOs sleepless nights.
Dozens of the biggest players will reach a $1 billion valuation this year, a seemingly impossible feat a generation ago. Looking at some of the top companies, it’s easy to see how their value skyrocketed so rapidly. The Collison brothers formed Stripe to help small online retailers with payments. Avant gives average folks loans and Gusto provides HR for employers with staffs of less than 100. In short, the billionaires made their buck serving those constituencies large banks might miss. In this way, they’re not unlike community banks and credit unions, whose people-first philosophy resembles that of the emerging tech giants.
Fintech’s next steps
Ironically, savvy fintechs now capitalize on their popularity to become more like big banks. Using their already substantial customer base, companies such as Robinhood are now expanding to offer additional financial services. It’s a smart move for a profitable site that first began as a commission-free brokerage. With highly engaged users, Robinhood and other fintechs like it have seen a huge chunk of assets transferred from traditional institutions—and if that continues in 2020, it will come as no surprise. After all, who wouldn’t want to consolidate on a platform they actually like to use?
Opportunity in the community
With fintech growth unstoppable, what’s a small bank or local credit union to do? Because customers seem increasingly open to alternative financial solutions, these institutions do have a chance to grab a piece of the pie. But they must focus on two major areas: global trading and digital capabilities.
Since their creation, community banks and member-owned organizations have offered many of the same services as their competitors. Yet unlike fintechs, these financial institutions have already proved their resilience. They too suffered through the financial crisis, but weathered the storm considerably better than large corporations who suffered five times the failure rate. Community banks smartly positioned themselves as behind-the-scenes partners with burgeoning tech giants such as Square, Stripe and Robinhood.
Global is the new local
Why then hasn’t either group exploded popularity-wise in the post-recession years? Aside from the obvious technical advantage fintechs enjoy, both big banks and startups boast strong global capabilities. It may seem as though the typical credit union or community banking customer would have little to do with international transactions. But across the world, foreign payments are incredibly common—and growing. Global trading now represents an inescapable part of everyday consumer life with cross-border shopping, travel and investments conducted daily and with ease. Small businesses now find themselves just as likely to sell to a neighbor as a stranger halfway around the globe. Even staunchly conservative portfolios may incorporate at least some foreign holdings.
Parting shot: A crucial case for innovation
Enabling global trades on a seamless digital scale is one of the best methods for community banks and credit unions to expand their value and ensure continued relevance. Because the requirements to facilitate international transactions make for a long list, bigger banks have long dominated the practice. Tackling complex regulatory environments and infrastructure not only proves intimidating but also downright impossible for those that lack endless capital for such investments. But today’s Amazon-accustomed customers used to one-click capabilities—might find themselves less than patient with those who cling to telephone or branch-only transactions.
In fact, while customers prefer community banks and credit unions for their personalization and customer service, they flock to big banks for their digital capabilities. This makes it all the more urgent for smaller operations to expand. Consumers have fickle loyalties, and while these institutions may have a current advantage, their hold is tenuous at best.
Even as big banks pour billions into digital upgrades, smaller organizations can forge an easy path forward by partnering with established services to offer competitive global banking functions. Not only does this save money, but it also allows institutions to launch new services quickly and recapture customers performing these transactions elsewhere.
That established: As fintechs expand their influence and increase market share, innovation represents more than a path to success—it’s the one and only road to survival. Yet adopted and put into action, innovation made visible transcends all clichés of downfall: giving rise to an undeniable upswing.
Stephen Kuhl, CFA, is responsible for financial institutions and strategic partnerships for Western Union Business Solutions, including the portfolio of community banks, credit unions and their affiliated universities across the United States.
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