F.or years, the United States lagged far behind the rest of the developed world and even some emerging markets when it came to retail innovation. That is eventually changing, first with the development of digital payments using the smartphone and now increasingly with traditional consumer businesses facing competition from technology companies.
Some are app-based solutions, like that of PayPal’s (PYPL) Venmo or Place (SQ) Cash app that can be used to digitally repay a friend for dinner pickup, while other users can scan and pay bills using a linked bank account or credit card. As in other industries where technology and smartphones are on the rise, the way we do banking is revolutionizing the way we do banking and tech companies that are not burdened by the old bank business model are leading the way.
When internet companies first emerged, new business models were developed to take advantage of this new technology. They focused on user growth without thinking about the cost structure. Later, after the dot-com bubble almost ended, we wrote in 2001, “It may not seem that way, but behind the scenes at Corporate America, tens of thousands of tech professionals, business analysts, and consultants are trying to find out how their company can use the Internet . “
FinTech David meets Banking Goliaths
Until a few years ago, most of the banks that offered online banking included account management, bill payment, and a few other basic services, including the ability to switch from paper statements to electronic statements. With banking apps on smartphones, the ability to deposit checks has been added for those who want to avoid either the line at the bank or the ATM. The smartphone also enabled other financial apps that users could use to review their portfolio at Fidelity, TD Ameritrade, or other brokers.
However, new technology companies like PayPal have emerged from the smartphone’s creative destruction engine, Venmo, carillon, acorns, improvement, SoFi, space, Cash App, Stripe and Plaid, which offer the speed and flexibility that Gen Z and Millennial customers simply cannot do without, appreciate Gen X types and boomers as a novelty.
Initially, most of that flexibility was associated with moving money. Until 2017, the only way for a customer at a traditional US retail bank to send money to a friend was to write them a check (which takes a few days to clear), go to the ATM and withdraw cash, or even initiate a wire (which included fees on both sides and would take a few days to complete). Very few people today would find this acceptable.
First FinTech steps
PayPal has been on the Pioneer in digital payments and, according to some reports, was one of the drivers for the success of Ebay (EBAY). Before “Confinity” started, eBay users sent each other checks and money orders. What PayPal did was so revolutionary that it linked all of the “walled gardens” that are retail banking institutions. Customers of Bank of America (BAC) could now electronically send money to customers from Chase Bank (JPM), For example, simply via the website or the mobile phone app.
The banking empires strike back
Services like PayPal, Venmo and Cash App essentially require an existing traditional bank account Use the same ACH network this enables direct deposit services and check cashing. In 2017, the service previously known as clearXchange was restarted as a cell. If you are a traditional bank user, especially with Bank of America or Wells Fargo (WFC)Chances are you’ve seen a button on the app to send / receive money through a transaction that points to either your email address or your cell phone number.
Cell is owned by Early Warning Services, a private financial services company owned by Bank of America. Capital One (MEMORY), JPMorgan Chase, PNC Bank (PNC), US Bancorp (USB)and Wells Fargo. Obviously, they realized what PayPal was doing and wanted to build a moat around their business when they tried to build a weapon against the rising tide of emerging person-to-person (P2P) financial companies.
An important point to consider is that banks face a number of risk management and regulatory hurdles that make them less nimble and customer-centric than many of the more disruptive actors mentioned above. One of the hurdles with Cell are the daily and monthly transfer amount limits, which can vary from bank to bank, as well as the ability to link only one banking institution to a specific email address or mobile phone number.
They are also starting to offer additional services to traditional private customers. as evidenced by an eagle-eyed developer who recently noticed inactive code in a recently released Square app update, reference clearly Savings and current accounts. Square Financial Services, a subsidiary of Square, was approved for a U.S. banking charter earlier this year, but we’ll have to wait until we know exactly what’s next.
In the meantime, JPMorgan Chase recently closed its Chase Pay method and opted for it Take “Most popular features straight to the Chase Mobile App and Chase.com.” Interestingly enough, JPMorgan Chase relied heavily on PayPal as well as Apple Pay, Google Pay, Samsung Pay, and others in discontinuing this service digital wallets.
Companies like Robinhood, Acorns, Betterment, and SoFi also have dual roles, offering customers the ability to not only save money, but invest it too. Indeed it was Popularity of these apps that is essentially enforced traditional brokers offer broken stock trading in 2020.
In the meantime, digital banking platforms are also concentrating on the sub-banks. An example is Greenwood Financial, a Neobank This is focused on black and Latin American customers who have historically been denied access to credit and other financial services at much higher rates than white customers. A neobank is a purely online financial institution that usually works with a traditional bank. Therefore, unlike services like PayPal or Cash App, deposits are FDIC insured.
Whether it is traditional banking, payment structures or investments, there are still some gaps between what is offered (and regulated) and what consumers want. Some would see this as a series of pain points while others would see this as an opportunity. We suspect that the lines between companies like Square and PayPal will continue to blur with those of companies like Bank of America, JPMorgan Chase, and others. The difference is in the customer experience and user interface in the front end, while technology and artificial intelligence reduce turnaround time and costs.
To what extent are these two different types of financial firms likely to overlap? Hard to say, but could Square possibly partner with Robinhood like Bank of America did with Merrill Lynch to become a one-stop-shop fintech player? Could traditional banks possibly acquire one or more FinTech companies and use their skills internally?
The answers to these questions are the same – maybe. A more definitive answer should be available in the coming years. From our thematic perspective, which focuses on structural changes that are changing the playing field, we see a lot more changes in the financial world.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.