As an ex-consumer banker, I am bullish about traditional U.S. consumer banking making a technology comeback over the next two to three years.
In the years following the financial crisis, banks were strapped with costs associated with their large asset books (think Basel) and the regulatory upkeep tied to the Dodd-Frank Act. As a result, incumbents’ budgets for growth, innovation and transformation were virtually nonexistent. During this same period, fintech companies not only made technological improvements to deliver customer value, but also won the hearts and minds of a small sliver of early adopters by delivering transparency, personalization and humanization. This combination created contextually relevant and personalized experiences in a digital environment.
It got to a point where industry gurus forecast that these upstarts would disintermediate chunks of traditional lines of business — e.g. lending, payments, retail wealth. This prognosis that had some CEOs scurrying to hire tech executives and build innovation labs in the hopes they would transform their traditional companies into a “reimagined big bank with fintechlike features.”
But despite the added competition from startups, traditional consumer banks still own the majority of deposits, assets and customers. As post-crisis costs and regulations ease, and interest rates head upward, incumbents will only solidify their positions.
They will match fintechs’ offerings and lock in future market share because of these four drivers:
Deregulation frees up budgets for innovation
The new political climate in the U.S. will likely usher in a series of policies that could remove some long-standing directives, including the fiduciary rule and diminishing the power of the Consumer Financial Protection Bureau. Over time, banks could shed as many as 15% of their employees who are dedicated to managing and monitoring these rules, including compliance officers, risk control managers and auditors. Technology companies will also be positioned to capitalize on more relaxed and potentially straightforward rules, but overall deregulation will allow banks to focus on their growth and transformation strategies.
Higher interest rate
On March 15, the Federal Reserve raised its benchmark federal funds rate to a range of between 0.75% and 1%. This is an economic development that more noticeably favors traditional banks over fintech firms. Most traditional consumer banks engage in transactions that allow them to yield a fairly large spread as rates rise. If banks can use these additional funds to support growth initiatives that have recently been tabled or postponed, it can easily support innovation initiatives without increasing overall spend. In this case, the banks with the biggest deposit books will win.
Fintech funding changes
Investment in fintech has proceeded at a rapid pace of late, but the jury is still out over whether funding will continue at such a strong clip or slow down. I believe that fintech funding will keep rising but at a slower pace as the market becomes somewhat saturated with little or no differentiation. Ultimately, banks have what fintechs need to be sustainable: a large customer base. Banks’ client-facing advantages present a significant opportunity for them to automate and digitize functional business activities either on their own or working alongside fintech startups. Regardless of whether fintech funding increases or not, I foresee a world where closer collaboration, partnerships and co-creation take hold.
Coming small-business lending boom
Small businesses are a sizable contributor to the GDP. But since the crisis, small businesses have had limited borrowing opportunities from traditional banks, largely because of heightened capital requirements imposed by banking regulators. This burden will likely not disappear, but banks’ appetite to lend to small businesses is due to return as more favorable economic factors lead companies in multiple sectors to want to borrow more money. Moreover, small businesses will benefit from lower corporate tax rates along with protectionist directives given the political climate.
Together these four factors will benefit U.S. banks in a very positive way — initially they will mitigate compliance-related budgets to pave the way for a bolder, broader growth agenda around customer-centricity. Once budgets are available and recast, the real race will begin to determine how traditional banks, not fintechs, will win with their customers. Banks will quickly deploy technology throughout the enterprise by adopting and embedding fintech principles dealing with agile delivery, journeys and data. The real transformation and technology race begins now.