As a new decade begins, one of the major unresolved issues of the previous few years continues to haunt banks — when and how Big Tech will jump into financial services in a significant way.
While Facebook has launched its Libra digital currency project and Google has begun partnering with Citigroup on checking accounts, these appear to be just the tip of the iceberg. Banking by 2030 could look very different from today.
Many analysts expect this year to provide further insight into projects Big Tech has undertaken, including possible early leaks from pilot programs if results are positive, as well as the unveiling of new initiatives.
To be sure, it’s not just Big Tech banks have to be worry about. Fintechs are continuing to make significant inroads into the banking system, particularly among younger millennials and Gen Z customers.
Following is a look at how some of these trends may play out over the next year by the American Banker.
1. Tech companies drive deeper into banking
Big tech companies, with their armies of top-notch developers and knack for creating convenient products, raised their profile in financial services in 2019. But that appears to be just the start of their efforts.
Apple launched its Apple Card with Goldman Sachs in August. Facebook announced Facebook Pay, a payment mechanism that works with Messenger, Instagram, WhatsApp and Facebook, in November.
Big tech companies, meanwhile, expanded their small-business lending efforts. Amazon Lending lent an estimated $1.5 billion to sellers in 2017 and $1 billion in 2018. PayPal makes more than $1 billion in working capital loans every quarter (70% of them in neighborhoods where banks have shut down branches, according to the company) and Square Capital has made $5.5 billion worth of loans to 275,000 sellers over the past five years. Stripe launched its own working capital arm, Stripe Capital, in September.
The Square Cash debit card is used by 3.5 million people, the company also launched a debit card for businesses in January. Square also has a Square Cash app for person-to-person payments.
Uber is building a stable of financial services products for drivers and customers in its recently created Uber Money division. It already offers a bank account, debit card and mobile banking app through Green Dot. Uber plans to let drivers automatically save a portion of each trip and create a holistic financial wellness app.
Some tech companies have tipped their hand about their 2020 plans: Google plans to offer checking accounts to consumers through Citigroup and Stanford Federal Credit Union.
Facebook plans to launch a cryptocurrency payment network next year based on a new digital asset, Libra. Though Congress and regulators have slammed this effort, it should not be counted out.
One potential obstacle to the large tech companies is a bill proposed in the House that would curb their financial services aspirations, called the Keep Big Tech Out Of Finance Act. It’s unlikely to pass, at least in the current political environment, but that situation could change quickly depending on circumstances.
And while there’s often a bank (Goldman, Green Dot, Citigroup) behind the scenes of these tech company efforts, the large tech companies are gaining powerful scale, hoovering up their data and building relationships and brands.
2. Banks and fintechs prioritize providing customers insights
It’s been a holy grail for some time: the ability to give customers just the right piece of advice in the moment they need it. Banks and fintechs are getting closer, and expected to increase their efforts this year.
In 2019, Huntington Bank rolled out Heads Up, artificial intelligence-based software that gives customers advice on saving, spending and achieving financial goals.
An alert might say that given spending activity and upcoming bill due dates, a customer’s current account balance may not cover their expected activity over the next seven days. Subscription payment alerts tell customers when they are being charged for a subscription or when a free trial may have ended. Other alerts notify customers when they may have been mistakenly double-charged by a merchant or restaurant. The insights are driven by Personetics’ Engage software, which uses predictive analytics to monitor transaction data in real time and identifies user-specific spending habits to provide insights to customers.
Wells Fargo offers similar advice to customers who may be overspending and who have bills coming up, also using Personetics’ software.
Bank of America’s homegrown Erica virtual assistant also alerts customers when they may have been charged more than once for a purchase so they can take immediate action. Erica will then guide them through the process of filing a dispute when necessary.
Not only does personal advice help cement a customer relationship, it can lead to greater sales. According to Boston Consulting Group, “for every $100 billion in assets a bank has, it can achieve as much as $300 million in revenue growth by personalizing its customer interactions.”
3. Banks find additional ways to partner with fintechs
HSBC launched a digital lending platform over the past summer partly built with technology from the fintech Amount.
Such partnerships will multiply as other banks look to enter into the digital lending space in 2020.
There are several online lenders that license their software to banks, including Kabbage and Upstart. Blend, Figure Technologies and Amount, a spinoff of the fintech lender Avant, expect to increase the amount of banks they work with to provide better, and faster, digital lending options to consumers.
Banks such as Banco Popular, TD Bank and Regions Bank are licensing loan origination technology from Amount. Blend is expanding into auto loans, and working with BMO Harris Bank and others to improve the digital experience for home equity loans and deposit account opening products.
At the time of its platform launch, HSBC acknowledged the market has long been dominated by the likes of LendingClub and Social Finance.
“Fintechs were quicker to recognize that consumer lending niche and improve the customer experience with pre-approvals and quicker funding of the loans,” said Marcos Meneguzzi, head of cards and unsecured lending for retail banking and Wealth Management at HSBC USA.
Banks may need the help. A recent Experian study found that digital lenders more than doubled their market share in the past four years, with consumers across the credit spectrum increasingly turning to digital-first providers.
4. But new fights between the two sides will also break out
In the past few years, bank-fintech relationships warmed, thanks largely to tech-sharing partnerships and investment.
But as nonbank fintechs increasingly look to poach traditional banking clients, the language favored by some upstarts is again turning less charitable toward banks.
At an event in San Francisco, Wealthfront CEO Andy Rachleff and Betterment CEO Jon Stein took banks to task for their products and service.
“Everyone hates their cable guy and everyone hates their banks,” Rachleff said. Stein went further, arguing that banks’ products “hurt America.”
Both Wealthfront and Betterment now offer high-interest cash accounts in combination with an automated investment account. Wealthfront additionally plans to begin offering mortgages this year.
The industry should expect such tougher rhetoric as competition for savers and borrowers becomes fierce.
According to a survey of more than 1,000 U.S. banking customers by Statista, over half of respondents said they were either already using a digital-only bank as an alternative or were familiar with the option and probably going to use it.
Top bank executive themselves outlined in their forward-looking strategies how they would rebuff fintech challenges.
One approach is to launch competing products. The U.S. arm of the Madrid-based Banco Santander, for instance, will launch an unsecured consumer loan early this year both online and in its branch network.
Another is a plan to outspend on innovation and tech. Bank of New York Mellon’s interim chief executive, Todd Gibbons, told an audience at a Goldman Sachs conference that the bank’s “intention for 2020 is to continue to spend on technology at a level even faster than we spent in 2019.”
As Tanya Baker, the global head of Goldman Sachs’ tech accelerator, GS Accelerate, told attendees at the MIT Sloan Fintech 2019 conference, “We have scale, we have a trillion-dollar balance sheet, and we have brand.”
5. One big flashpoint? Data
For years, there’s been tension between banks and the fintech apps who need their customer data to function.
A number of recent industry initiatives and partnerships aimed at standardizing data sharing practices seemed to suggest resolutions were near. But this year, a new front of open hostilities between banks and fintechs could emerge over data access.
A recent dispute between PNC Bank, PayPal and the data aggregator Plaid underline the points of contention, after some customers lost access to Venmo, a third-party payments app.
The bank says it discovered attempted fraud connected with data aggregators, and added new safeguards that prevent screen scraping, a method of obtaining customer data by getting permission to log in to their accounts and copy information. The bank also says its customers aren’t clear what access they are actually agreeing to when ask for it using an app.
The aggregator says that PNC has to improve its security. There’s also the scuttlebutt that PNC blocked Venmo access to promote its competing Zelle service, an accusation the bank denies.
Other banks are taking similar stands. JPMorgan Chase plans to block fintechs that screen scrape too. JPMorgan, however, has data-sharing relationships with major aggregators like Plaid.
Experts suggest that ultimately regulators will have to get involved to provide guidance that can settle these arguments.
5. Challenger banks bulk up
A number of challenger banks in the U.S. — including Chime, MoneyLion, N26 and Varo Money — are are well on their way to becoming more complete financial services providers in 2020.
Chime and Varo [CEO Colin Walsh pictured above] each have plans to offer robo advice in 2020, following a trend led by traditional banks in 2019. Additionally, Varo will issue credit cards once it is fully licensed, while also expanding upon its current lending options.
Boosting Chime’s efforts was its $500 million funding round in December, giving it a valuation of $5.8 billion.
Newcomer HMBradley, which launches in Q1 2020 with financial backing of PayPal and Affirm co-founder Max Levchin, has a plan to offer auto, home equity and other types of loans.
“As consumers, this is something that we want: a bank that can actually lend to us,” said Zach Bruhnke, co-founder and CEO of HMBradley. “Ultimately we want a bank that can eventually give us a mortgage, sell us a car and offer us a credit card that we want to use. That’s why we felt like it was important to be able to lend quickly.”
Ultimately, challengers are adding these services for one reason: customer retention.
“When you look at [challenger-bank] strategy, it seems fairly clear their goal is to try to fill in all the unmet needs of their current customer base,” said Alex Johnson, director of solution marketing at FICO.
6. Small bank may begin shifting to alternative core providers
Discontent among small banks about their banking core provider seeded growth opportunities for alternative core fintechs.
Michelle Toll, CEO and president of the $230 million-asset State Bank, told American Banker that smaller institutions were looking for alternatives largely due to the service constraints placed by traditional cores.
“We have to pay a ransom when we’re in bed with a third party because we found that product to be better,” Toll said.
As a result, State Bank and The Provident Bank in Amesbury, Mass., are investing in Neocova, which is offering a core platform that uses artificial intelligence and application programming interfaces to help lenders manage deposit accounts and loan products in real time.
A handful of institutions are now investing in alternative core providers, and that number should be expected to only grow this year.
The alternative core Finxact received $30 million in equity investments from the American Bankers Association, SunTrust Banks (now Truist Financial), Live Oak Bank, Woodforest National Bank, First Data and others.
Other fintechs, including Mambu, Mbanq, Nymbus, and Temenos are carving out a space in the industry as a core provider to challenger banks, de novos, community banks and credit unions.
The phenomenon won’t impact the traditional providers anytime soon though. Fiserv, Fidelity National Information Services and Jack Henry & Associates still control the majority of the core banking market.
7. Gen Z will reshape banking expectations
If financial institutions spent the last decade trying to figure out millennials, 2020 brings a new generational priority: Gen Z customers.
Gen Z now controls $45 billion in annual spending, and the oldest Gen Z customers are nearing 24. The group numbers nearly 60 million in the U.S.
It’s time for financial institutions to shift their marketing and product development focus to this generation, says Julia Carreon, managing director of digital and fiduciary operations at Wells Fargo.
Gen Z members over the next decade will “grow up to be the most demanding consumer the world has ever known,” Carreon said.
Revamping outdated processes and exploring new digital avenues for communicating with customers, including video and virtual reality, are just some areas where banks can start, Carreon said.
Already, a number of fintechs are rolling out new apps and tools with the Gen Z user in mind, specifically built to help them either build credit histories while still in college, or allow for them to earn savings rewards for completing household chores.
What makes Gen Z different from other generations, said Kalpesh Kapadia, CEO of the credit fintech Deserve, is that they are more fiscally conservative. They want to avoid debt and appreciate accounts or services that help them stay financially sound, he added.
“As Gen Z becomes the primary customer base for banks, the use of physical branches will continue to wane,” Kapadia said. “They put mobile banking first and tend to see their banks as transactional versus relational.”
8. The workforce will be adjusted for digital-first
Accenture estimated that more than 50% of tasks performed by loan officers, financial advisers, bank supervisors, loan clerks and tellers could be automated and augmented by 2025.
The research firm estimated that North American banks could save more than $70 billion through 2025 using technology to automate jobs or assist employees.
In 2019, Bloomberg News reported more than 50 lenders around the world had announced plans to cut a combined 77,780 jobs, the most since 2015, according to filings by the companies and labor unions.
Such reductions and expected efficiency gains through technology though pose a question: Can banks be thoughtful about digital change and blunt its impact on the workforce instead?
OceanFirst Financial in Toms River, N.J., retrained its employees for digital banking roles, covering every facet of the bank’s digital capabilities, including biometric identification, personal finance management, online account opening and video banking.
Despite closing 34% of its branches, it has been able to keep 94% of the customers who banked at those locations. In fact, all its online banking services have seen activity increases. Mobile deposits, for example, rose 81% in 2019.
Christopher Maher, OceanFirst’s president and chief executive, credits the strategy’s success to converting and retraining bank employees for a digital-first reality.
For the unenthusiastic, Maher said the message was simple: “‘This is simply a requirement of being at OceanFirst. We want you to be here, and we’ll spend the time and energy to train you, but it will not be acceptable for you to continue at the bank without gaining these skills.’”