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Credit Suisse had an interesting note last year on the risks banks face with fintech competition, based on their conversations with leading VCs, PE shops, etc. (1/14)
Banks are inherently disadvantaged at customer acquisition due to weakened brand affinity and have historically struggled with customer success. FinTechs excel at both. What is the neobanks edge?
Traditional banks’ innovation cycle is slow and that neo-banks innovate faster. This allows them to quickly create new services around traditional products
Rapid testing and iteration should lead to value added services around core banking products
Rapid testing and iteration should lead to value added services around core banking products
New technology at neobanks allow for new products and services, whereas legacy bank systems are likely more cumbersome as they use programming languages that communicate less fluidly with modern tech infrastructure. (i read somewhere that 40% of banks programming is COBOL)
Lower operating costs could become a factor in neo-banks' efforts to earn share from incumbents.
Frequent engagement with one’s financial institution via the smart-phone app should drive stronger cross sell at neo-banks. (We are seeing more of that)
Frequent engagement with one’s financial institution via the smart-phone app should drive stronger cross sell at neo-banks. (We are seeing more of that)
Scale is important to the neo business model. We believe that the desire for growth will drive up the cost of digital marketing, making a niche relevant for gaining customers. (Cash App and Venmo/Paypal have an edge here)
Small business lending will increasingly migrate to POS terminal and payment providers since they have better cash flow data for underwriting. (companies like $SQ are investing heavily in AI)
Small business lending. The underwriting of small business is significantly enhanced with the exploding of alternative data set and related services providers. Big data technology and real-time account monitoring allow better assessment of risk and pricing.
Community banks are still important for client relations, but are risk of losing market share to digital banks for certain functions like opening a savings account. (imo community banks are an endangered species)
Millennials & Gen Z are already ~50% of the US population (2017). Their preferences will influence winners and losers in consumer financial services. (Neobanks are heavily targeting them via TikTok, Twitch, other social media)
Big banks – The top four banks in the US have the scale to compete with nearly 50% of industry assets, supporting annual technology budgets of over $40b in aggregate.
Sub-scale regional & community banks – These banks will continue to face pressure from both sides of the “barbell” with legacy systems that are expensive to maintain and built on programming languages that communicate less fluidly with modern tech.
Neo banks & Fintech platforms – Modern technology stacks (i.e., no legacy assets) allow for faster product development centered around feedback from their increasingly large users bases (lack of branch costs, e.g., personnel, real estate).
McKinsey estimates that by 2025 up to 40% of banks’ collective revenue could be at risk from new digital competition.
The banking business has been remarkably resistant to disruption. I don't know if this time will be different, but the odds are certainly better. End.
The banking business has been remarkably resistant to disruption. I don't know if this time will be different, but the odds are certainly better. End.
