Start-Ups Bring Needed Disruption to Banking
Short-term disruption of the financial services industry will most likely come from within: when banks partner with financial services entrepreneurs and embrace innovation. It's happened repeatedly in the payments sector: PayPal and Wells Fargo ten years ago, Square and JP Morgan Chase Paymentech today.
Since the start of the economic crisis, 239 financial services start-ups have raised almost $1.6 billion in venture capital financing, according to the Money Tree Report published by PricewaterhouseCoopers and the National Venture Capital Association.
These start-ups have a common dilemma. On the one hand they're seeking to disrupt the financial services industry by doing what banks don't; on the other hand, bank partnerships are often necessary to deliver the broad range of new services to a national customer base.
Many start-up founders are calling for regulatory change to allow nonbank innovators to operate nationally under a Federal charter, but they recognize that regulatory change is not going to happen over night. Congress moves slowly and deliberately; and lawmakers and financial industry participants are still dealing with Dodd-Frank and its intended (and unintended) consequences.
Bankers should welcome the opportunity to benefit from the billions invested in innovation and partner with the hundreds of start-ups that are building world-class products that banked customers clearly want.
WV United Federal Credit Union, a two-branch credit union based in Charleston, West Virginia, is actively promoting both Square and Dwolla on its home page as payment solutions for business customers. The credit union is likely not anticipating significant revenue from these referral relationships, but it will win big in the customer satisfaction stakes by expanding its product offerings and responding to its customers’ needs.
There are a number of compelling offerings that banks can bring to their consumers with little investment: PayNearMe's cash payment service can turn any under-used teller window into a busy bill payment station much like they’re doing in 7-11 stores.
Kabbage and OnDeck Capital offer small business loans online, and can just as easily offer loans to bank customers in store, increasing the productivity of loan officers and retaining small business customers.
Dwolla, Square and WePay are changing the payments landscape by offering simple to deploy and cost competitive alternatives to the merchant processing offers available through traditional channels.
Alternative credit providers Lending Club, Prosper, Progreso Financiero, and BillFloat (my own company) have built systems that can allow banks to compete in the underserved near-prime and sub-prime credit markets.
BancBox is offering data interfaces to banking systems, making it easier for partner banks to integrate their core account offerings into new solutions developed by technology providers.
The regulatory environment is ready for these relationships. As far back as 2001, the OCC published detailed risk managed principals for third-party relationships in bulletin 2001-47. The guidance covers all the prudent elements of a successful business plan and partnership: an assessment of a bank's needs and requirements; proper due diligence; written contracts that clearly outline responsibilities and obligations; and ongoing oversight of the third party and its activities by the bank.
Clashing worlds of banks and innovative disruptors can converge and deliver high demand and affordable financial services solutions to consumers. Both groups will benefit. The start-ups will grow their businesses and deploy their technologies. The banks stand to retain and satisfy their customers while increasing account activity and revenue.
Ryan Gilbert is CEO of BillFloat, a provider of consumer credit and bill payment solutions.