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Banks and Nonbanks Need Each Other

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Last year, inspired by some flashy headlines and exciting product launches, American Banker highlighted eight firms that could become major competitors in the industry in 2013. Unfortunately, I'm not sure any of these firms managed to cement its status as a true disruptor over the last year.

One area that was expected to heat up – the alternative, short-term credit business – instead cooled down with heightened regulatory scrutiny thwarting tech startups' attempts to reinvent the payday loan. The U.K. lender Wonga battled a barrage of bad press, while in the U.S. Think Finance caught Arizona's ire for its workplace loan product.

Payments technology was more of a mixed bag.

Walmart turned Bluebird, its prepaid debit card co-piloted by American Express, into a true checking account in March, then stayed relatively quiet on the payments front for the rest of year. Google made notable updates to its Wallet, and Isis, the mobile venture led by AT&T, T-Mobile and Verizon Wireless, launched nationwide. But these developments came at the tail end of 2013 and haven't had much time to make an impact.

Amazon, too, made a few moves, launching a virtual currency in May and purchasing GoPago, a company that lets consumers use mobile apps to prepay for goods, in December. But the retail giant's foray into banking still looks a lot like its recently revealed drone delivery system: at least a few years off, and largely theoretical.

Even Square, the Jack Dorsey-helmed payments startup that seemingly every bank and fintech company measures itself against, ran into trouble repeatedly this year for operating without proper state money transmitter licenses.

Futurists often argue that it's easier for nonbanks to innovate since they're not subject to the pages and pages of regulations those with bank charters must comply with. Some believe this ability to innovate could ultimately disintermediate banks and dramatically overhaul our current models of banking

But Square's licensing problem, in particular, highlights just how hard it can be for nonfinancial firms to step in and take over an industry, particular a heavily regulated one like financial services. It's also telling that PayPal, which did strengthen its position as a bank rival with a few solid acquisitions this year, released a paper in favor of payments regulation reform in October.

Unfortunately, regulation hasn't trended toward simple since the financial crisis and there are signs regulators will only increase their scrutiny of nonbanks and shadow banks. That's why I tend to think tales of disruption in the industry are largely overhyped and that this world where banks no longer exist is likely to remain in pundits' imaginations.

Banks need startups to test the waters with new products, but startups also need banks for their capital, infrastructure, large customer bases, established regulatory relationships and compliance training. Most fledging fintech companies, incidentally, will cop to the fact that they are not trying to disintermediate anyone and, instead, are in the market for business partners.

(The big exception here, it seems, is Bitcoin, the cryptocurrency/peer-to-peer payments network which managed to capture mainstream attention and, even, Ben Bernanke's blessing over the course of 2013.) 

In all likelihood, what we'll see as we head into 2014 and beyond is more partnerships between successful-ish startups and traditional financial services providers. We'll probably also see more partnerships between retailers and national banks a la the Wal-Mart-American Express Bluebird arrangement. 

Eventually, I suspect these partnerships will morph into the model Lauren Pollak of Jump Associates envisioned in her Future Model of Banking post: the startup will develop and provide products and services; the financial firm will serve as back-end service provider. For now and the foreseeable future, the story of banks and nonbanks will be one of interdependence rather than creative destruction.

Jeanine Skowronski is the deputy editor of BankThink. You can contact her at Jeanine.skowronski@sourcemedia.com or follow her at Twitter @JeanineSko

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Comments (1)
There is no doubt that many Banks are stuck between the fond memories of yesterday and the reality of today and tomorrow. Too many are drawn to the fairy tale of 'It's A Wonderful Life' without recognizing the impact of the changes that have occurred and the changes that coming in the next several years.

Too many banks have capability that is either unwanted by the market or is easily replicatable thus reducing organizational value to nothing more than discounted cash flow of existing business with growth assumptions at or near zero. As a result, we continue to see vast gap in pricing between buyers and sellers which has rendered M&A a non-factor for vast majority of Community and Regional Banks. Organic growth is weak, as is ROE (which is still well below cost of capital) resulting from inability to attract customers, growth wallet share and differentiate in the marketplace.

The article suggests that Banks ought to leverage their capability by renting out infrastructure to non-banks. In theory, this makes sense, BUT ... how many such providers does the industry really need? 5? 10? 50? 100? and what about the remaining 6,800 banks?

The conclusions in this article are damning considering that a) only a few providers can be viable in the industry, and b) business models required to execute on infrastructure service provider strategy requires massive scale, which immediately eliminates 98% of all Banks (and 99%+ of all Credit Unions).

Though I agree that infrastructure service model is a good line of business for $100b+ asset size bank, 98% of the banks need to refocus their attention on the core --- developing unique and valuable value proposition for their customer segments, and executing to perfection. It is not a foregone conclusion that non-bank start-ups are better at product development and marketing than traditional banks.
Posted by Serge Milman | Optirate | Friday, December 27 2013 at 11:42AM ET
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