OBSERVATIONS FROM THE FINTECH SNARK TANK
It wasn’t that long ago that the banking pundits were predicting that fintech startups would put existing banks out of business. The Wall Street Journal headline Biggest Three Banks Gobble Up $2.4 Trillion in New Deposits Since Crisis squashed that delusion.
The zeitgeist changed, and the new mantra among the disruptionistas is “Big Tech is the biggest threat to banks.” Some recent viewpoints:
“In terms of where real challenges are going to come into this market, it will be around the entry of Big Tech firms. Many won’t actually want to become a bank as such, but they may want to offer products that compete directly with banks, like simple lending products.” –Christopher Woolard, Financial Conduct Authority
“Tech companies are disrupting the banking sector at a time when people still find it hard to trust conventional and reputed banks.”–Cloudcherry
“54% of respondents trust at least one big tech company more than banks in general, and 29% trust at least one tech company more than their own primary bank. [In addition,] 41% would recommend their primary bank to a friend or relative, while 23% would not recommend their primary bank.” –Bain & Company
My take: The Big Tech threat is overstated, and the trust and Net Promoter Score (NPS) numbers are useless.
Big Tech Is The New Battleground
Amazon’s merchant cash advances are often held out as an example of the Big Tech firm stealing business from banks. In 2017, the platform reportedly provided $1 billion in advance. Was this $1 billion that banks could have loaned? Maybe.
But the more important question to ask here is: Why was it only $1 billion? Was it because that was the total demand for cash advances among Amazon merchants? Doubt it. In reality, the real demand could have been five or ten times higher.
It’s more likely that $1 billion was all Amazon was comfortable providing with whatever risk guidelines it has in place. So what should Amazon do about the remaining demand? Ignore it? Not a good idea. A better idea would be to match the demand to the right supplier–which is what Amazon does everyday as a platform.
The same thinking applies to financial products that consumers “already use” like checking accounts.
Amazon doesn’t want to deal with the ill will and service hassles that come with overdrafts. And of consumers who say that they would open an Amazon checking account, about three-quarters of them said they’d keep their existing bank account open.
As a result, Amazon can make a lot more money offering consumers checking accounts from as many banks as it can attract to its platform than it can being a checking account provider itself.
Conclusion: Big Tech isn’t a threat to banks–it’s an opportunity. Big Tech will become a new distribution channel, a new battleground for banks to compete on.
Net Promoter Score and Trust Metrics Are Useless
It’s 2019, people. Technology is capturing your every behavior and activity and perhaps even your thoughts (at least that’s what the AI people claim).
The notion that we have to ask consumers about their referral intentions is so 20th century. And it’s so unreliable to ask about intentions to do anything. How many of us intend to get in shape, stop smoking, etc. at the beginning of the year and fail to follow through
The reality is that actual behavior repudiates the Net Promoter prattle.
In a recent survey, Cornerstone Advisors asked consumers which bank they banked with, how many new products they opened with that bank in the past two years, and how many of their friends and family they referred to the bank in the past year.
Although USAA has the highest NPS in the industry, a slightly higher percentage of Bank of America customers provided referral than USAA members did. An equal percentage of customers of the two institutions added non-deposit products in the past two years. Yet, Bank of America’s NPS is -24. Go figure, eh? Citibank, with a pitiful NPS of -41 saw more than a quarter of its customers add new products, and six in 10 provide referrals.
|NPS||Primary Bank||Added products||Provided referrals|
|-24||Bank of America||37%||69%|
|-1||JP Morgan Chase||21%||47%|
Sources: Cornerstone Advisors survey of 2,436 US consumers, Q4 2018, Temkin Research, Customer Guru
Conclusion: It’s time to dispel the “consumers don’t trust banks” myth, and time to get rid of the NPS metric.
The Real Threat to Banks is the Government
What bankers should be worried about is the government–not fintech and Big Tech firms. Specifically, politicians who have no idea: 1) How the banking system works, and 2) What the difference between a Main Street bank and Wall Street bank is.
It’s more than just potential regulatory changes that threatens banks, however (not that what some of these politicians want to propose won’t be painful).
The problem is that it’s taken the banking industry roughly 10 years to rebuild its standing with consumers (not counting the one west coast bank that seems to do everything in its power to keep its reputation in the tanks).
For 10 years I’ve said that banks wouldn’t be in the clear until a new villain came along (you probably don’t remember that it was banks, on the heels of the financial crisis, who saved British Petroleum from being the most hated villain after the Gulf oil spill).
With the data abuses by Facebook (the British government calls the company “digital gangsters”), and news that Amazon paid no taxes–again–Big Tech is becoming the new villain.
There are players in Washington, however, who could turn the negative focus back on banks. That’s the real threat to banks.