If nothing else, the recent proliferation of fintech startups has turned bankers introspective.
"Could we have been a Lending Club or Prosper? Why didn't we think of this?" Manolo Sanchez, CEO of BBVA Compass, said last week at American Banker's Digital Banking 2016 conference in New Orleans. "They resuscitated the traditional personal loan. The biggest innovation was to bring back a basic solution that all of us banks decided to abandon."
Online lenders originated $22 billion in U.S. consumer and business loans in 2015, according to Autonomous Research. While that was just 6% of the total volume for such loans, the sector is expected to grow 75% in 2016, the financial research firm estimates. Goldman Sachs analysts have predicted that banks stand to lose 100% of the student, consumer and mortgage loan business to marketplace lenders over the next five years.
On the payments side, the picture is similar. Online payments are led by PayPal and Stripe; mobile payments by Venmo and Starbucks. In mobile apps, banks have improved their standing — where once Intuit's Mint dominated, in late June, Chase, Bank of America, PayPal, Wells Fargo, and Credit Karma were the top five apps in the Apple store (Mint was not far behind at No. 10).
Sanchez sees the fintech phenomenon as an opportunity as much as a threat. But to regain ground, banks have to restore the sense of purpose they once had, that fintech startups have in spades.
"A lot of startups start with a mission, and everything is built on that mission," he said in an interview. "The big incumbent organizations are so complex and so huge. It's difficult for them to do that."
Banks do have a purpose — to help clients navigate their financial needs and allow them to take control of their finances, he said. "To be a purpose-driven organization, it can't just be a slogan, it has to be lived and breathed by the bankers and staff," Sanchez said.
Michelle Moore, head of digital banking at Bank of America, said she doesn't see a competitive threat from fintech companies.
"I think there's room for all of us in this environment," she said. "The fintechs are very niche focused on single lines of business, whereas banks offer an entire portfolio, particularly Bank of America with our scale. We have checking, savings, and any lending product you need."
Startup lenders are serving the lower end of the FICO scale, she pointed out, whereas Bank of America chooses to focus at the higher end, though it does have a mortgage product for people who just don't have enough of a down payment but are creditworthy. (They can get a 97% loan to value ratio mortgage, with the clause that they go to financial education classes.)
When Moore thinks about fintech companies, she thinks, "What can I learn from them? What are they doing that's new and innovative and hip?"
David Reilly, chief technology officer at Bank of America, said the bank is seeing quarter-over-quarter growth in consumer loans. The bank doesn't need new customers, he said (it has 47 million consumer and small business clients already).
"We need the customers we've got to do more business with us," Reilly said. "That's where our opportunity is. The way to do that is through fantastic customer service on the product we've already given you."
Bank of America also has a $3 billion annual innovation budget, some of which goes to fintech startups, and it mentors them through several programs, including its own innovation lab and one in which it partners with Accenture and 15 other large banks.
Dominic Venturo, chief innovation officer at U.S. Bank, also sees the fintech players that are "unbundling" banks as each focused on solving one interesting problem better than anybody has before.
"And that's great, because that makes us all better," he said. "We look at it and we say, they've rethought how that is going to work, we need to make sure we're going to continue to compete in those spaces and do that as well."
U.S. Bank (like BBVA Compass and others) looks at fintech companies as potential partners. "They don't necessarily have to be a competitor," Venturo said.
U.S. Bank is a partner and mentor in the fintech section of Plug and Play, an accelerator in Sunnyvale, Calif.
"We've been informally engaged with some companies. We're beginning to see early results," Venturo said.
Technologically, some of the achievements of fintech competitors may be hard to match, Sanchez acknowledged, such as an eight-minute online mortgage process.
"The concept of a new generation mortgage process is harder than it looks," he said. "There are a lot of regulatory requirements that get into play, there's a lot of legacy."
Online personal loans, where Lending Club and Prosper have done well despite recent hiccups, are not technically or culturally challenging and banks can get them back, Sanchez said. BBVA Compass has a personal loan called Signature Express that's currently sold through the branches but will be offered online.
"The question is: Why didn't we execute on that before?" Sanchez said. "I think that's the question that keeps coming up. If banks will be successful at taking advantage of the digital era, what's stopping us from being first movers? We have been an industry that's been brought down by all the issues in the financial crisis. We have not been daring and focused on our clients. If we had, we would have been able to show them there is use, value in banking."
Venturo also sees opportunities for banks in online mortgages and auto loans.
"Because you only do those so often, you want them to be easy, you want to get the best deal, you want to trust the party you're doing business with and then you want to move on," he said. "Those are all ownable spaces by banks, I would argue. It's really hard to maintain a sustainable differentiation because everybody is studying what everybody else does, so therefore the competition is strong."
Apps that are appealing to millennials are necessary but hard to create, Sanchez pointed out.
"People ask me, 'Why did you buy Simple? You paid over $100 million,' " Sanchez said. " 'With a budget like that, couldn't your developers have created Simple?' The answer is no, we couldn't have done this. Simple is not just a deposit product app. It's really a concept, a millennial bank. They're going to help you take care of your finances. They don't show you your account balance, they show you a 'safe to spend' number. Consumers create their own goals and they tell you what is safe to spend."
The Simple team, which is led by co-founder Josh Reich, has a way of engaging customers that BBVA Compass has not yet been able to emulate, Sanchez acknowledged.
"When I look at reviews on the App Store, if BBVA Compass customers upload an app of ours that doesn't work as intended, they'll say, 'You guys are a bunch of losers, you got this wrong again,' " he said. "If it's Simple, they'll say, 'Something seems to have changed, please fix it. I think this is the solution and we love you.' "
To compete with millennial-friendly finance apps like Simple (and Level, Chime, Acorns, digit, Moven, and others), Bank of America offers checking account customers a SafeBalance account in which transactions will be declined and returned unpaid when the customer doesn't have enough money in her account. It also offers Better Money Habits, a set of financial literacy videos created in partnership with Kahn Academy, the nonprofit provider of free online courses. The bank provides a free FICO credit score on its mobile app and website.
Banks may need to do more to become beloved by young people the way Simple has. They could look to some of the fintech newcomers, such as Aspiration, Chime and Dyme, for inspiration.
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