Banks Get Smart on Fintech

By Kevin Eaton

Prior to the coronavirus pandemic and the stock market hiccups it triggered, fintech firms flush with investor cash were increasingly entering markets traditionally served by banks—and while the new entrants are providing unique services, the sector poses risks, say some venture capitalists.

Take nonbank Chime—which, according to CNBC, is the country’s most valuable consumer-facing fintech firm with a $14.5 billion valuation. By delivering an “essentially glorified debit prepaid card” Chime created a multibillion-dollar business in the last few years in part by targeting millions of younger and less affluent Americans, says Ryan Falvey, co-founder and partner at Financial Venture Studio.

The company’s debit card is provided a white-label basis by Bancorp Bank and Stride Bank, and Chime has no branches or physical locations nor does it charge fees monthly or overdraft. The company relies on interchange for its revenue. Among its unique offerings are features allowing clients to access paychecks up to two days early and accounts to help customers improve their credit.

Like many startups, though, the company has faced challenges that exemplify the challenges facing nonbank fintech firms, says Amy Cheetham, VP at investment firm Costanoa. She pointed to troubles at Galileo—a digital payment processor for Chime—that resulted in a disruptive outage in late 2019.

“So many people ran away from [Galileo] because they were so scared their data would be used in inappropriate ways or used by a competitor,” Cheetham says. “There is a very real concern that some of these fintech players on the B2B side will lose some of their customers as banks get smarter and do a better job of doing banking as a service.”

Big fish in a big pond

It isn’t just startups like Chime piling into financial services.

Walmart now provides certain services, including providing capital to their marketplace sellers in order to compete with other retailers. The nation’s largest retailer partnered with Goldman Sachs to provide approved sellers on its online marketplace access to lines of credit between $10,000 and $75,000, and Walmart says it plans to substantially increase the maximum amount available in the future.

“I think there is a really interesting theme of bigger companies wanting to provide financial services to their consumers and I think this actually provides a really interesting opportunity for a lot of these banks to start meeting customers in other aspects of their lives, with Walmart being a really great example of wanting to offer capital to their marketplace sellers in order to compete with Shopify and some of their big competitors,” says Cheetham.

However, banks retain a key consumer advantage: trust. An ABA/Morning Consult poll showed that only 12% of consumers said they trusted nonbank payment providers (such as Apple Pay, Venmo and Paypal) most to protect their personal data, while 49% of consumers across all age groups said they trusted banks more than any other kind of business.

“I saw the other day that I can get a bank account with T-Mobile or something, but I don’t want to bank with T-Mobile—I just can’t imagine that there will be millions and millions of American that are,” remarks Canapi Ventures partner Walker Forehand. “We’ll see who owns the customer relationships in this world where banking is extended out into other products.”

Companies looking to provide services typically offered by banks also face the hurdle of trust. The ABA/Morning Consult survey found that by a greater than three-to-one margin, U.S. adults prefer their banking services to be delivered by a bank versus a technology company. Just 17% of those surveyed said they would prefer to have banking services provided by a technology company with a financial services division, compared to 56% who said they prefer to receive financial services from a bank.

Bridging the tech gap

Banks can’t rest on their laurels in a fast-moving financial marketplace, though. “Banking has always been a relationship business, but how do you evolve or deepen that relationship when someone doesn’t come into a branch and tell you they’re saving for their kids’ college fund?” asks ABA SVP Rob Morgan.

Banks have long sought out technology partners—whether through acquisitions or vendor relationships—but selecting reliable providers may become increasingly difficult, venture capitalists say. “One thing that banks will have to wrestle with going forward is getting good at buying these solutions and using them effectively,” says Cheetham. “We’ve seen sort of an unbundling of financial services and there are probably hundreds of these companies floating around now that are building things like direct deposit switching and ACH fraud solutions.”

Paying for new technology is also a factor. Finding resources to pay for innovative products is something banks have to figure out. “Every banker knows they need to innovate or invest in technology, but you’ve got to pay for it and particularly if you’re not a top-10 bank, it’s hard to do that,” says Forehand. “Of course it’s easy to say, ‘Yes I want to invest in technology,’ but you’ve got all these other cost pressures right now that are hitting at the same time.

“I think we’ve got to walk and chew gum a little bit—and there are a lot of ways to do that, and none of them are easy.”

Kevin Eaton is an associate editor at the ABA Banking Journal.