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‘Death By A Thousand FinTech Cuts’ Is A Risk Big Banks Cannot Ignore Forever

It will be a big week for bank earnings data as JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup, Wells Fargo, Morgan Stanley and U.S. Bancorp will all be releasing their Q2 earnings reports. And, according to reports, expectations are high for a bottom-line bounce. While this time last year, banks were putting away billions of dollars to prepare for an expected tidal wave of defaults, the picture one year later is looking much brighter. Banks are starting to release those cash reserves put away to hedge against defaults, causing earnings to be on the upswing. According to analysts at Keefe, Bruyette & Woods, banks are on track to report Q2 profits that are 40 percent higher than a year ago.

As much as everything may appear to be blossoming at big banks right now, with the leading lenders expected to take a victory lap of sorts after having survived a very difficult year, looks can be deceiving. No matter how triumphant this week’s reporting is, big banks have a big problem in the form of encroaching FinTechs looking to cut into their massive consumer bases with specialized services and new efficiencies targeted at the underserved consumer, a group that is much larger than many realize.

“There are now more than two dozen pureplay non-banks in the U.S., and scores more that are — or will likely soon be — embedding banking services into their savings, investment, credit and P2P platforms,” PYMNTS’ Karen Webster wrote in a recent column.

Those neobanks, she noted, are developing an array of offerings far beyond the “Digital Banking 1.0” basics of a free online checking account and a prepaid card to transact with and are instead beefing up their offerings by adding things like P2P payments, credit building, bill payment capabilities, buy now, pay later (BNPL) and financial wellness as part of their mobile experience.

An experience, she noted, that runs the risk of peeling off bank customers over time with purpose-built mobile services designed around the needs of a particular cohort of consumers, “who have traded a product-first focus for an experience-based, outcomes-driven value proposition.”

(Not) Feeling The Pressure 

When we think about unbanked and underbanked consumers, i2c CEO Amir Wain noted in a recent conversation with Karen Webster, we tend to think too narrowly on the subject and over- and under-estimate their numbers.  Totally unbanked consumers are increasingly a rarity in the United States as only 6 percent of the U.S. population is fully unbanked, representing about 8 million Americans.

But underserved consumers, he said, are a much wider tranche of banking consumers than most imagine. We tend to picture the underserved as the bottom tranche of banking consumers — lower income, younger, thin-credit or no credit and very much at the beginning of their financial journeys. Customers, he noted, that banks were more or less happy to let FinTechs steal from them, because they are nearly impossible to profitably serve.

But underserved, he said, can also apply to the middle and low-level affluent consumers who make up an awful lot of mainstream banks business — who also don’t get much in the way of special service from their banking relationships.

“These people who have a regular direct deposit will be important clients for FinTechs in the future, and I think that’s where FinTechs are doing a great job in picking up that customer segment,” he said. “And this is where you will see more and more fights between the banks and the FinTechs because while banks aren’t doing anything special for them, they are still a large chunk of the bank’s revenue.”

Death By A Thousand FinTech Cuts 

On top of that customer-facing apathy is the inverse reality that FinTechs are working around the clock to build exactly those kinds of features.

For example, Credit Sesame’s “secret sauce,” so to speak, is focusing on helping consumers build better credit, a credit building feature it just expanded to its debit product. At the same time, LendingClub’s bank is focused on helping consumer attain financial wellness and do things like break out of the paycheck-to-paycheck cycle. Green Dot has turned its focus to building better banking services specifically for gig workers.

Will any of these purpose-built solutions single-handedly take down a Chase such that big bank executives should be awake at night?

That’s a tricky question. The first part is a firm no — it is highly doubtful that any individual neobank will be the David that slays the Goliaths. But they don’t really have to be when collectively each and every FinTech and neobank is siphoning off those middle-tranche banking customers by offering them the special services they need via a better mobile interface they want to use.

As Wain noted, those middle-tranche customers represent a lot of revenue — and if too many start bleeding off, that loss will really hurt.

Which means as banks announce their earnings this week, one interesting, offbeat thing to listen for will be what, if any, plan they have to start punching back against their purpose-built competitors. Because as Webster and Wain both noted, the competition has arrived, it’s serious and it’s not going anywhere anytime soon.

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