As if banks needed something else to worry about beyond flatlining profits, increasingly onerous regulation and being challenged by upstart fintech firms.
As you survey what technology firms like Google, Facebook, and Amazon are doing, it becomes clear they’re all moving steadily into financial services. This isn’t an overnight move, but slowly and surely, these firms are developing, testing, and rolling out offerings in payments and lending.
Tradestreaming caught up with Caribou Honig, partner at early stage fintech investment firm, QED Investors, to learn a bit more about what’s behind this new competition and where he believes incumbent tech firms are headed next in financial services.
Where is the new competition coming from for financial incumbents?
I think about three categories of competition for financial incumbents.
The first group are the innovation efforts from the incumbents themselves — firms like Capital One and BBVA that have declared digital transformation a priority.
Second are the fintechs –companies in which QED and our fellow VCs invest, like Greensky and Remitly and Blooom to name a few. The fintechs certainly get the most buzz, but it takes many years before they reach the scale to have an impact on incumbents’ bottom line.
I believe the most impactful competition will come from the Tech Titans, e.g. Google, Alibaba, Amazon, Facebook, Tencent, Apple and the like.
Who’s working on what?
That’s a really big question and I can only dream of having a complete answer. We know that payment and money transfer are front and center. Google had a bit of a false start with Google Compare, particularly as the firm targeted the insurance vertical, but it at least has a foothold in financial services with Android Pay.
We’ve also seen some of the titans enter lending to various degrees — for example, Amazon lending to merchants on its platform and of course, the launch of Tencent’s WeBank.
Why would these firms want to get into finance??
These companies need to pursue large markets where their combination of tech capability and existing assets can be transformative. Working backwards from that, financial services is one such market. It’s plenty big whether measured by the incumbents’ market cap, revenue, or profit pool.
In many cases, finance has gone through initial waves of transformation. Think about the move from judgmental underwriting to algorithmic underwriting 25 years ago, or the impact of the web on customer origination and servicing. But another wave is underway enabled by the smartphone and machine learning techniques.
If you’re a company with the technical chops to lead that wave, and a franchise of avid consumers topping a billion, financial services looks very attractive.
Are these new competitors better suited to serve today’s financial customers?
These new competitors do bring some distinct capabilities to the table. I like to say that the hallmarks of a tech-driven transformation are reduced friction, greater transparency, and ultimately, deflation for the benefit of customers.
The Titans entering this space are expert at optimizing the customer experience, or at least the digital customer experience, perhaps not so much the live human to human customer experience. These firms bring data to the table that can prevent fraud, prefill an application, and underwrite people who lack traditional credit scores.
They have the benefit of not being anchored by legacy systems, where the incumbents often find themselves hamstrung maintaining multiple legacy systems when they’ve grown by acquisition. Perhaps most importantly, tech giants have the mindset of starting with “what’s possible?” rather than “we haven’t done it that way before”.
How should incumbents prepare for these new competitors?
It starts by recognizing that something big is happening. Yes, the entrepreneurs and challengers in this space are probably overestimating the amount of change to come in the short term. But most incumbents are underestimating the amount of change we will see over ten years.
While there’s no silver bullet, I’d suggest collaboration with the fintech startups is the best way for an incumbent to prepare for these new competitors. Don’t be distracted by how a VC-backed startup might attack your business. Think about how a VC-backed startup — like 5th 3rd Bank’s recent investment in Greensky, or Chase’s partnership with OnDeck — might be key to counter the threat coming from Tech Titans.
Hear more from Caribou Honig at our upcoming Tradestreaming Money 2016 Conference on November 14 in New York City.