Fintech and traditional banks have a strange relationship. On one hand, fintech is the future with the ability to innovate at lightning speed, providing financial solutions and convenience at a low-cost to its customers. On the other hand, fintech is the new kid on the block so the track record of success has not yet been solidified. Then, you have traditional banks that have been around for many years and have a well-documented road to success. But with that experience comes the risk of becoming antiquated.
To be totally frank, using branches in the way they have been used in the past is not only outdated but a complete waste of money. In fact, the overhead that comes with maintaining physical branches is why we see many financial institutions still charging exuberant fees for services that technology can make free. Who else is going to pay for those beautiful branches?
And what does the data say? According to bankrate.com, one in five Americans have gone an entire year without visiting a bank branch, 26% have reported going to branches on a regular basis, and out of that 26%, more than half of the people earn $75,000 or more per year, leaving those who really can't afford to pay fees with the responsibility to do so in order to pay for the branches that they don't even go into! Yep, makes a lot of sense!
To be fair, exiting the branches is not an easy feat for many banks. Because they take out long-term leases on their physical locations it would cost them too much to just close up shop and go in the direction of the low-cost, mobile-only strategy. Also, because of a banking system that wants to stick to a success strategy that has worked in the past, the speed at which traditional banks can innovate is very slow. It’s this slow speed to innovate that could be the death of traditional banks as we know it.
As it relates to fintech, they aren’t free of obstacles and drawbacks either. First, the cost of customer acquisition for new neobanks can literally put them out of business and most fintech players have not yet found a cost-effective way to acquire customers. Secondly, once they acquire customers and are ready to get into the business of banking, such as lending, they often lack access to capital and more importantly access to the low-cost capital needed to create a profitable business model.
This begs the question: How can traditional banks and fintech succeed? Are they friends or are they foes? The truth of the matter is that when you look at the future of the banking industry there are likely three possible outcomes:
1. The banking industry will be dominated by fintech companies and banks will slowly become obsolete.
2. Banks will acquire fintech companies and those that remain without a profitable business model will slowly die off.
3. Banks and fintech companies will coexist and will engage in partnerships and combine the best of both the traditional banking model and fintech.
I am not a gambler but if I was, my money would be on option 3. Why? Because the negatives of a bank (legacy systems, lack of cutting edge technology/superior user and customer experience/innovative & agile culture etc.) are helped by partnering with a fintech and the negatives of a fintech (costly customer acquisition, liquidity, and low cost funding) are helped by partnering with a bank. Understanding this dynamic is why when we started BankMobile we structured it as a technology company with a bank charter; combining the best of both worlds.
Currently attaining a bank charter is not only costly but difficult to get, so it’s important that both fintechs and traditional banks realize that they need each other in order to survive. Also, if they are truly focused on the customer, then this is not only the best thing to do, but the right thing to do in order to help everyday people save time and money. They will do this by providing them with banking services that will not cost them an arm and a leg, while giving them up to date technology that helps them manage their financial lives better.
So fintechs… traditional banks… I now pronounce you strategic partners! You may now kiss the awkward tension between you goodbye!