Where banking-fintech partnerships fall short

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Today’s banks are about as familiar with new business models as Blockbuster was before Netflix emerged, which sheds light on potential economic parallels as fintechs begin partnering with banks.

In 2004, Blockbuster dominated the video market. With roughly 9,000 stores worldwide, it forced most independent competition out of business. Though it thrived for years with its retail distribution model, Blockbuster was slow to adapt to the changing entertainment industry and consequently, failed.

By 2011, Blockbuster’s attempts at renting out DVDs was far behind Netflix, which had already figured out yet another way to distribute video, further cutting distribution costs and increasing convenience for consumers. Blockbuster launched a discs-by-mail option and a streaming service while keeping stores open, but it was too little, too late. Today, a single store is all that remains of Blockbuster. Netflix, by contrast, has moved up stream and now spends billions on original content.

If Blockbuster was like a traditional bank, the Blockbuster on Demand streaming program would resemble today’s fintech partnerships. A good idea, but essentially a slick interface bolted on top of an unchanged corporate monolith. Netflix, from its foundation, was built for disruption and geared to leverage technology to match changes in the economy and society.

Yet if traditional banks are the Blockbusters and fintechs are the Netflix, why haven’t fintechs put any banks out of business?

The reality is that most fintechs, despite their sophisticated methods and sleek processes, must ultimately interact with the banks they sought to disrupt.

Outside the U.S., a different model has emerged. Newly founded “challenger” banks that are fully licensed and regulated embody a fintech culture of innovation thrive in the European Union and United Kingdom. Yet, in the U.S., fintechs run afoul of regulatory red tape. So domestic fintechs remain in business with the old banks.

Because money continues to flow through the legacy banking system, traditional fintechs aren’t alternatives to the conventional systems. They’re supplements or add-ons. Even if fintechs are lowering pricing in the market, they are not lowering costs.

Fintechs are simply enjoying some of the margin their bank partners enjoy. Perhaps clients of fintechs save a basis point or get a slick user experience, but the underlying economics are unchanged. This is incrementalism, not innovation.

However, fintechs likely have a future beyond banks. American banking infrastructure is evolving, if at a glacial pace. For example, the Federal Reserve recently announced its FedNow real-time payments initiative yet it’s not due to launch until 2023 or 2024.

Achieving a future where fintechs don’t offer mere cosmetic upgrades to the cumbersome American banking system requires a leap of faith. A fintech with a banking license could inaugurate a paradigm shift in the U.S. financial system the same way that Europe’s challenger banks Monzo, Revolut and Starling have redefined expectations of how finance and payments work.

The Office of the Comptroller of the Currency recognized and addressed this by offering a special-purpose banking charter for fintechs that has been fraught with controversy and litigation by state regulators.

In a mobile-first and increasingly digital world, customers don’t necessarily want the old amenities. Most customers don’t need friendly tellers or ATMs on every corner, or even physical branches if banks could do everything online.

What people expect, which traditional banks struggle to provide, is money that’s as mobile as its holders: bespoke services for every client and 24/7 availability. Like video streaming providers, the bank of the future is invisible. There’s no hassle, branches or demands on its users’ autonomy; it’s accessible everywhere at any time. And, at a structurally lower cost.

Every bank has an app nowadays and most try to appear tech-forward, even if the tech comes from third parties or white-label solutions used by thousands of other banks. What’s needed is a combination of the virtues of a traditional bank — like regulated trust and dependability — with the speed, innovation and convenience of the new fintechs.

The rules have changed, but the banks haven’t. If banks continue moving at Blockbuster speed, they could be outpaced and outflanked by a Netflix of money. Simply layering better artificial intelligence and user experience on top of legacy cultures is not enough.

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Consumer banking Mobile banking Mobile technology Mobile payments Fintech Fintech regulations Licenses and charters OCC Federal Reserve