Community bank and credit union executives have decisions to make in an evolving financial services industry where technology has changed the user experience. The shift in consumer preferences toward online and mobile banking is growing, and fintech competitors are disrupting traditional retail banking.
Consumer preferences have enabled fintech companies gain market share in meeting the needs of consumers who demand to be engaged on their own terms. The rise of the smartphone has changed how consumers interact with their financial services providers. It is now expected that consumers manage their financial needs as easily and immediate as posting to Facebook, or shopping on eBay. Consumers expect to have the ability to apply for a loan, monitor their deposit accounts, and execute investment trades from their phones. Fintech companies are able to directly engage consumers by offering traditional financial services, such as deposit and lending products, payments, investing, and wealth management services.
Even though community banks and credit unions have historically been the preferred provider for financial transactions, fintechs have gained industry share while traditional delivery channels have diminished.
Community banks and credit unions should be aware of the following three areas where fintechs are posing imminent threats: customer acquisition and retention, erosion of traditional revenue sources, and diminished brand power.
Fintechs weaken the relationships between financial institutions and their customers/members. It is already possible for people to manage their finances with minimal interaction with their banks and credit unions. Crowd source funding, peer-to-peer lending, and advisory services driven by artificial intelligence have undermined traditional financial institutions’ dominant positions. By reducing friction in the delivery of products and services, fintechs greatly improve the customer experience. For example, online lending consumers can borrow money without direct interaction with their financial institution. Simply put, fintech is luring away customers by promising a simpler way to manage money.
Traditional revenue streams are coming under threat. Payments revenue is being challenged by applications such as Venmo, Square, and Paypal. Interchange fees and income derived from ATM transactions are also at risk, and loan revenue is being lost to unlikely sources such as Amazon, who offers loans to small and medium-sized companies.
Banks and credit unions are finding it increasingly difficult to differentiate themselves as consumers routinely compare financial products online (from multiple providers). Fintech companies use technology and data-mining to bring lenders and borrowers together to allow the easy raising of money without financial institutions. Consider how disruptive that is for traditional banking business models if lenders and borrowers no longer need banks to mediate.
The question that must be addressed is, “how can community banks and credit unions mitigate these threats?” The answer is they will have to make a choice:
Ignoring the threat of fintech is not an option, and will only result in the loss of profitable customers/members.
Financial institutions that choose option one, to directly compete with fintech firms, can do so using the wealth of customer/member data they possess. They should use analytics, and embrace artificial intelligence to understand the needs of the marketplace, and proactively recommend personalized solutions.
Financial institutions that choose option two, to collaborate with fintech firms, can leverage their strengths by using their brand names, customer data, risk management expertise, capital, and regulatory knowledge to entice fintech partnerships. In turn, banks and credit unions can benefit from fintech’s core competencies of innovation, speed to market, and data-mining to improve customer/member retention and acquire new relationships.