The Customer Effect
Why fintech companies are acting like banks
- As fintech startups grow their service offerings, some argue fintech companies are acting like banks in their own right.
- The line between financial services startups and banks is getting blurred due to changes brought about by technology.
With the advent of slick bank innovation centers and hip working spaces (one bank's digital innovation factory that Tearsheet reported on earlier this year is an example), banks are acting more like startups. But a move that's getting traction lately is the idea of the fintech startup acting more like a bank, particularly large companies with multiple service offerings. A recent example would be SoFi's application for an industrial loan company charter, a license that allows a nonbank to offer bank-type services. To one venture capitalist, it's not a new trend but one that makes sense for well-resourced players capable of taking on more services. "It's logical that well-funded and successful nonbank institutions get a banking license to better serve customers," said Ryan Gilbert, a partner at Propel Venture Partners. "The team at SoFi is probably as good if not better than most regional banks in the U.S.; we should applaud that, as it's pro-consumer and good for the industry." Gilbert said what's driving the change is the transformation of banking from a brick-and-mortar branch model based on physical assets to a digital-first model where banks become data businesses. "The bulk of the actions are happening on websites or mobile apps, but the future is where banks are invisible," he said. Gilbert added that "invisible banks" will be more open to working with data aggregators to facilitate data-sharing with third-party apps, with JPMorgan's agreement with Finicity being a recent example. Others argue that while startups compete head-to-head with banks, some outrightly resist taking on bank-type services when it's not in their interest. "A lot of fintech companies are staunchly resisting the urge to become banks -- they don’t offer products that banks offer and instead focus on APIs or fancy graphical user interfaces, or offer consultancy-type services to banking clients," said Chris Khan, project lead at R3, a bank consortium working on distributed ledger technology. Still, Khan suggests many large fintech companies are branding themselves as consumer-focused startups, railing against negative perceptions of big finance brands that bleed customers on fees. "Venmo seems like it's a cool, hip thing, but it’s PayPal with a different user experience [adding friends]," he said. The big brands are also aiming to jump on the cute startup train, with large corporates developing smaller spinoffs to appeal to millennials, like Goldman Sachs' online lender Marcus. "Marcus sounds like a cute hipster bar; it’s less scary," he said. "[The thinking is] if banks can have spinoff companies, they stand a chance of capturing market share." But some startups are seeking to grow their reach by offering financial service hubs for customers through partnerships with incumbent banks, thereby keeping their customer-focused image and working with bigger players when necessary. "In a lot of ways, we aren't that different from a bank, but we don’t take deposits," said Tim Hong, chief marketing officer at personal finance startup MoneyLion. "From our standpoint, we go where the customer tells us -- we work with banks when it's in our interest to partner with them and when it serves customers' needs." Hong wouldn't say whether MoneyLion would move toward taking deposits, but Clarity Money, a personal finance platform that also partners with banks, said it had no intent in moving to the deposit-taking business. "We are not and will never become a bank; it's not the nature of our business," said Colin Kennedy, chief revenue officer for Clarity Money. "Banks are very dependent on fees and proprietary products." Even if startups act like banks, for them, the road to growth is through partnerships. Gilbert said this is the result of a consensus that neither banks nor startups will supplant one another. "In 2017, there's a grudging respect between fintechs and bankers," he said. "Both understand what either is about; neither one is going to disrupt the other, but find ways to work together and rebuild financial services." The blurring of the lines between banks and fintech startups is causing a rethinking of the definition of a bank. Brian Knight, a senior research fellow at the Mercatus Center at George Mason University, said that to regulators, banks are deposit-taking institutions, but a bank doesn't necessarily need to be defined by that. "When we say bank-like, it's not necessarily getting a [bank] charter," said Knight. "When we talk about bank-like, it's about offering a bundle of financial services." As a result, for some customers, the bank of the future may actually be the fintech startup that they deal with most often. "You could look at it as a social construct," said Khan. "They aren't banks in the traditional sense, but they are banks because they let you store money. It boils down to the construct of what people feel is a bank."