The latter half of 2012 saw several startups, tech companies and alternative financial services providers make headlines, a trend we at BankThink expect to pick up steam as regulation leaves traditional financial institutions less inclined to innovate. Here are eight nonbanks that could become major competitors in the industry over the next year.

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Square expanded beyond a foothold in the small business market in August when it announced a partnership with Starbucks, a move that put its technology front and center at a national chain and helped to earn company CEO Jack Dorsey (pictured) the title of American Banker's Innovator of the Year. The company went on to close out 2012 by introducing a gift card system that users can redeem via its Wallet and Apple's Passbook app. "Square is growing at an unbelievable rate," says Jennifer Tescher, chief executive of the Center for Financial Services Innovation. Moving into 2013 (and beyond), it will be interesting to see if the company lives up to its reported $3.25 billion valuation.

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The retail giant has been steadily adding financial services to its superstores over the last few years, selling everything from international remittances to check cashing to bill pay and money transfers. But its most recent offering, Bluebird, a prepaid debit card launched in partnership with American Express, should keep Walmart on banks' radar since the card, though lacking FDIC insurance, is being marketed as an alternative to their debit and checking accounts products.

"They know how to bank the underbanked," a demographic financial institutions "don't pay a lot of attention to," says Mary T. Monahan, executive vice president and research director for mobile at Javelin Strategy & Research.

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The digital payments service had an uneven year as plans to launch its pilot program in test markets over the summer summer were pushed back to October. But Isis's head of marketing Ryan Hughes was quick to point out the delay wasn't due to any major issues and the joint venture from telecommunication giants Verizon, T-Mobile and AT&T, led by CEO Michael Abbott (pictured) has too many mega-companies on board to be ignored. (American Express, JPMorgan Chase and Capital One Financial signed on as partners in 2012.)

"If there is someone who can penetrate the NFC space, [Isis has] the best partnerships to do so," says Dan Gualtieri, a research associate at financial services analyst firm Corporate Insight.
Google made major changes to its digital wallet over the course of the 2012. First, the tech company announced users would be able to make payments via any debit or credit card, not just those issued by banking partners, which, prior to the change, were few and far between. Next, it nixed its Google-branded prepaid card as a point of entry, electing instead to have consumers link their payment methods of choice to Google Wallet via a separate virtual MasterCard instead. It remains to been whether these changes speak to an improved or increasingly disjointed business strategy, but the tech giant should still be kept under close surveillance in the New Year.

"They have the name and, if they can get the distribution, they can be a big player," Gualtieri says.

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The peer-to-peer payments system also had an eventful 2012, inking deals with individual retailers like Home Depot, and ultimately broadening its reach via a partnership with financial services company Discover. But its expanding network is only one reason to keep an eye on PayPal in the New Year.

"Consumers trust PayPal," Monahan says, citing its solid performance in a recent Javelin study on consumer perceptions of trust, innovation, and privacy among multichannel financial services providers and major tech competitors. "It finished second to Visa, ahead of all the big banks and mobile network operators."

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Aside from nonbanks' infiltration of the mobile wallet and payments field, Tescher also anticipates "a lot of action in the alternative credit space" as smaller companies attempt to capitalize on traditional lenders' growing avoidance of subprime consumers by offering them short-term credit. One of the companies to watch in this space, Tescher says, is ThinkFinance, an online business that has been steadily widening the range of installment products it offers to the underserved.

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Another potential player in this space to keep an eye on is Wonga, a short-term lender based in the U.K. that "has long made noises about coming across the pond," Tescher says. The company recently brought Mark Troughton, formerly Green Dot's president of cards and network, on board as President of the Americas so "2013 may be the year," she adds.

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The online retailer has yet to make decisive entry into the financial services space, but has the potential to be a competitor in the future.

"With their tablet, they could go into mobile," Monahan says, adding the company has already demonstrated its ability to make fast gains in markets its sets its sights on. Amazon's Kindle Fire, for instance, captured 22% of the tablet market within nine months of its debut.

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