The sentiment speaks volumes to a competitive landscape that has brought financial services definitively into the digital age, where speed to market with new products and services wins eyeballs and share of wallet.
And as Dimon said on the same call, “we have plenty of resources, a lot of very smart people. We’ve just got to get quicker, better, faster,” as he eyes the competition over payments to be particularly brutal over the next decade.
So, banks versus FinTechs may shape up to be the battle of the roaring 2020s. Some observers may think that banks and FinTechs can work together, where tech-nimble upstarts plug the tech holes in traditional FIs’ payments infrastructure via the partnership model. But the argument that banks simply must cede tech and innovation to FinTechs simply doesn’t square with reality. As Jim McCarthy, president of i2c, told Karen Webster, although they’re not necessarily operating as what he called “technologists,” banks have plenty of competitive advantages to deploy.
“I’ve got a lot of friends who are in banking, and they all want to be innovative,” said McCarthy. “There’s not a person that doesn’t want to be on the cutting edge and on the front line, but given the challenges that banks face, they’ve got regulatory and compliance pressure. They’re the ones that are on the hook.”
Generally speaking, he said, the banking industry is built on a foundation of risk mitigation and risk avoidance. Against that backdrop, for traditional financial institutions (FIs) — and even for their processors — there is little room to be innovative when building new, digitally sophisticated user experiences (UXs).
“When you think about where the bank has to spend its time, money and resources, it’s very difficult to come at [innovation] in the ‘de novo’ way that a FinTech will,” said McCarthy.
But that’s not to say that banks are simply sticking to their regulator and compliance knitting (so to speak) and are unaware of the challenges being lobbed their way. The awareness creates tension and conflict even in bankers’ own minds about what to do and how to compete — and speed is the biggest stumbling block, said McCarthy.
And the world has evolved to the point where the paths open to bankers when they view FinTechs, he added, is either-or. Either you go head-to-head, or you partner in what might be seen as a hybrid approach.
McCarthy stated that most FinTechs do not have banking licenses (although a handful of them have made strides to get them). By and large, they’ve avoided “real banking services” for regulatory and compliance reasons, and so banks have had the opportunity to offer “compliance as a service,” where the traditional players get something in return (and don’t have to worry about losing customers). They get to leverage the deposits and the assets from the digital challenger bank to lend to small businesses in their communities, for example.
McCarthy was quick to note that many FinTechs have been able to solve real pain points because they’ve been able to — as small businesses or entrepreneurs — examine the ways in which traditional banking has been done, and the ways in which it can be done better. The Squares and Stripes of the world have never had to view innovation through the traditional profit and loss (P&L) silos, choosing instead to focus on problem solving and building tech stacks, and the processes around it all.
The Real Threat
The real threat may not lie with FinTechs, said McCarthy, but with some of the tech giants — the household names like Google, Apple, Facebook and the like — who have been forming ecosystems with the stickiest of customer relationships and platforms (and, in PayPal’s case, networks), and making determined leaps into commerce and financial services. J.P. Morgan’s Dimon, in fact, name-checked some of those players when he detailed the challenges to come.
There’s a bit of conflicted thought here, said McCarthy. Banks that worry about those tech players are still busy scrambling after them to do deals. The big banks have a large market share when it comes to deposits and checking, but then again, they’re not as omnipresent as Google, said McCarthy, “and they don’t own the ecosystem the way Apple does.” The numbers are simply mind-boggling when it comes to the interactions that people have with Big Tech.
Of the threat Big Tech poses for big banks, he said, “I wouldn’t say it’s existential at this point … but you have to have a strategy for these things, and you probably don’t want to wait for the world to move around you.” One move banks have been making to get bigger and to form ecosystems of their own is data aggregation.
And for banks, too, there’s a proverbial leg up, said McCarthy: embedded finance, where payments are invisible but tightly woven into the consumer experience. Payments has always been in the middle of commerce, and it’s critical.
Thus, the competitive dynamic and the very nature of the conversation shifts a bit when (and if) banks examine their core strengths.
Shift the focus a bit to those core competencies that have built up over decades, and for banks, it’s no longer a matter of capturing all of the pie; it’s about “how do I take what I do really well and expose it as part of a broader ecosystem?”
The argument that FinTechs and platforms will be able to sidestep the rails does not hold water, McCarthy said. Alternative credit providers may opt to ride card rails rather than bank rails, but the basics always win out. He pointed to the recent problems that swamped stock trading platform Robinhood, where a “great front end” UX and “interesting value proposition” paled a bit when the firm had to go out and raise capital amid frenzied trading in GameStop and other holdings.
Banks have the in-hand advantages of safety and security and trust; they’re where consumers keep what’s important to them (namely, their finances). Pushing out tokenized credentials, and turning them on and off, can reduce friction in commerce, said McCarthy, but when consumers become concerned about how their data is being used to navigate an increasingly connected world, the bank becomes an even more trusted partner.
“It’s kind of similar with what Apple’s tried to do with some of its subscription payments, where it’s become very easy for consumers to see the payments and say ‘I didn’t realize I was still paying for that. I want to turn it off,’” said McCarthy. “And so, I think the banks are coming around to that.”
He said there will be a continued upswing in demand for Banking-as-a-Service (BaaS) with demand for BaaS coming out of the FinTech space, too. FinTechs may have sought to package banking services with processing services to make it easier to issue, say, Credit Cards-as-a-Service, and banks are taking a page from that model.
As McCarthy said, banks are mulling: “‘If I’m already outsourcing compliance and some of the risks here, why don’t I take a bigger piece of the profit and get into the processing space?’”