Jeff Judy

Jeff's Thoughts -April 6, 2016

Alarmed at the Lack of Alarm

A couple of issues ago, I discussed the rising mention of "fintech" in my conversations at conferences and other professional activities. Generally I think of "fintech" as the delivery of financial services without "bricks and mortar", without the customer coming into a building and interacting directly in person. As I mentioned then ("Does Fintech Matter?") , there are hundreds of young companies that specialize in delivering specific services completely on-line.

At the end of that article, I offered a simple poll question:

How seriously does your institution take fintech as a source of competition?

The answer appears to be, "not all that seriously"! As of this writing -- the poll's still open and you may see slightly different percentages -- the responses were:

How seriously do you consider a threat that you are "just monitoring for now"? This is, of course, a highly unscientific poll. But still, I was surprised that only 30% of respondents were taking any action to counter this threat.

Perhaps it is because fintech is still more a threat to our industry's future than it is a cause of current pain. That is, most institutions are not losing a lot of business just yet to fintech, so there's little sense of urgency.

My sense of urgency comes from thinking about the next generation of customers, business and consumer. The customers we're making our money off of now are more established. They have had time to accumulate the resources and needs that fit our model.

Many younger customers have not yet reached that stage. But we can't assume that when they do, they will turn to us. If they have learned to meet even one need through fintech providers, there's a good chance they will do the same as they recognize additional needs for financial services.

Our institutions are built around the department store model: many services from one provider. Traditionally we have done things like facilitate payments (checks, debit cards, credit cards), supported wealth management (give them a safe place to store their money, pay interest) and fill gaps in their resources (credit). People shop at a department store (now represented by Walmart and Target) because it saves them the time and trouble of going to one shop after another, and that same convenience was once a big factor for many of our current customers.

But in the on-line world, there is no time and energy penalty for shopping with multiple providers. Many fintech companies provide a single service, whether that's payment (Apple, Google, and others), credit (mortgage firms, crowd funding sites), or anything else the customer might need. Instead of looking for a single provider, the customer will pay with one provider and get credit from a different one without even thinking about it.

What would it mean to your institution if, say, almost no one in the next generation turned to you for a mortgage? Could you end up being nothing more than a vault, a safe place to deposit money which is then used to produce revenue for a lot of different competing financial services?

What can you do to capture the next generation's business? I don't have all the answers, but I know this needs to be elevated as a topic of conversation. Some institutions are already countering the fintech threat.

Of course, forging and strengthening personal relationships is a competitive advantage of traditional institutions. Beyond that, many good responses to fintech involve being active on-line directly or indirectly.

Some insitutions have developed their on-line interfaces to a high enough level to offer the convenience and speed of response the next generation demands. If necessary, several institutions may band together to spread the cost and effort of building on-line services. Others have essentially formed partnerships with fintech companies, using them as "back-end" delivery support in return for maintaining a "front-end" presence with the customer. Traditional institutions still have strengths in personal customer relationships and in market visibility that can be used to leverage services from the fintech providers.

Again, this is a new world that will require innovation, that will demand new solutions. The industry will respond, as a whole, once fintech inflicts enough pain in our collective pocketbook.

Personally, I think waiting to feel that level of pain may mean waiting too long.


More Reading ...

Here are a few sources I have found helpful in thinking about fintech:

And, of course, talk to your peers about what they are seeing and doing. There's a lot of collective knowledge about fintech in our industry. We just need to make the effort to engage that knowledge with a little more urgency.