More than a decade ago, bankers successfully fought off the retail giant Walmart as it tried to buy a bank by arguing that it was dangerous for commerce to mix with banking.
But as technology has disrupted the financial system — and the e-commerce giant Amazon has begun to break into banking without actually attempting to own an institution — bankers are adjusting their stance.
“We’re in a much different era than when we had the Walmart fight,” said Cam Fine, president and CEO of the Independent Community Bankers of America.
The ICBA was among the banking groups that successfully lobbied to block Walmart’s 2006 application to become an industrial loan company, which would have allowed the retailer to offer banking services, like checking accounts, without having to form a bank holding company subject to supervision by the Federal Reserve Board. That application sparked congressional hearings, as well as public hearings by the Federal Deposit Insurance Corp. and hundreds of comment letters.
In contrast, news earlier this month that Amazon was looking to offer checking-like accounts via a partnership with a large bank like JPMorgan Chase has prompted a very different response. There are no outraged press releases or vows to fight Amazon tooth and nail.
One reason for that is that Amazon's strategy differs significantly from Walmart's. Walmart wanted to own a bank so it could cut down on its interchange fees. Amazon has not sought a banking charter, but focused on striking partnerships with those in the industry.
Another difference is that the banking industry has already been aware of the threat of online digital upstarts and many have sought to make deals of their own with fintech firms to ensure they aren't left behind. As a result, many bankers would rather focus on partnerships than try in vain to keep Amazon from cutting its own deals.
With the Amazon partnership, “it’s more a concern of where will community banks fit in the new payment ecosystem that is emerging, which is an online digital payments system,” Fine said. “I think what you’re going to see between now and five years from now” are “community banks seeking out what we generally term as fintechs.”
Fine added that they would likely oppose a partnership if bank regulators allowed Amazon to begin offering credit without having to comply with all the related banking laws.
Especially during the past year, the fintech industry has shifted from being a disruptor to a partner with banks. That’s partly because banks are looking to offer more digitized services to customers and new fintech firms are searching for a way to gain more business by using a cheaper source of funding through bank deposits.
Fintechs now “realize they don’t have the credibility a bank has from the trust, fiduciary and safety and soundness perspective,” said Tom Collins, a senior director in the West Monroe Partners’ Financial Services practice in Los Angeles. “Initially, many people viewed these fintech partnerships as a threat to banks, but . . . they realize they both bring something unique to the table.”
Even the financial regulators have become more open to such partnerships.
“Three or four years ago, we would have been thought of as the regulator who is like the angry Dad on the porch with a shotgun” when it comes to partnerships, said Donna Murphy, deputy comptroller for compliance risk policy at the Office of the Comptroller of the Currency, during a banking conference mid-March. “I’d like to think that at the OCC, what we’ve been working towards is looking at ourselves more like a marriage counselor.”
To be sure, many bankers have concerns about the potential magnitude of a Amazon-JPM deal, but they don't see a good way to oppose it since such a joint venture would be legal. Others say they are ready for the challenges that Amazon represents.
“We’re not sitting back and waiting for someone to come in and eat our lunch,” Citizens Financial Group CEO Bruce Van Sant said during the Consumer Bankers Association's annual conference in Orlando, Fla., on March 13.
Some bankers have suggested, however, that the industry is underestimating the threat posed by Amazon.
“I don’t think people have thought enough about what this might do,” said Lynn Fuller, chairman and CEO of Heartland Financial, a $9.8 billion-asset Iowa bank. “We are clearly in a technological revolution here. ... We’ve created this incredible convenience for consumers but it’s very susceptible to fraud and there are social implications to people’s jobs and security.”
A partnership to the scale of Amazon and JPMorgan could combine a significant amount of data sharing because Amazon tracks consumers’ spending patterns while JPMorgan has data on its customer’s borrowing behaviors. That would give them a significant head start on many other partnerships, which may include financial data but not have much information on spending habits. Whatever the arrangement, it should be a two-way street, according to regulators.
Banks need to “sure that whatever the fintech or third party has responsibility for, the bank has access to that” data, Murphy said in an address at the Orlando conference. “We’ve seen issues where those agreements were not spelled out, there were not direct assurances or the bank thought they had those assurances but hadn’t perhaps done enough due diligence on their third party so they couldn’t get access to that data.”
The industry’s response to any Amazon partnership, either with JPMorgan or another big bank, is simultaneously appropriate and “underestimating" the threat, said Jo Ann Barefoot, co-founder of Hummingbird Regtech and a former deputy comptroller of the currency.
Banks “really should be commended for being able to compete and not trying to block new entrants in fintech,” Barefoot said. “On the other hand, I think everyone is underestimating the impact of digitization in finance we are embarking upon ... not just with Amazon.”