In 2013, an FDIC survey revealed 20 percent of American households were underbanked.
Whether they knew the exact frequency or not, dozens of entrepreneurs were already at work in 2013 leveraging their command of technology and applying it to some of their own experiences before, during and after the recession to create financial solutions which met the needs of those unbanked.
Through it all, traditional banks were slow to react. But now they realize those disruptive fintech companies actually have some staying power and they want in. Several banks have invested in both Lending Club and Prosper. Goldman Sachs is entering the consumer loan sector. In a recent letter to shareholders, Jamie Dimon acknowledged the staying power of the innovation coming from Silicon Valley and said the establishment better be prepared.
But are they too late? The new players have several years of a head start on the banks in these new spaces, which is a long time in fintech. They also do not come with the baggage traditional banks have, with their links to the recession and their distant approach to customer service.
And yes, they also do not have the regulatory responsibilities.
Eugene Danilkis is the CEO of Mambu, a company which has spent the last six years developing solutions to help financial services companies reach the underbanked around the world. Seeing a gap between the expensive, slow and rigid technology employed by the banks, and people and companies poorly served by those technologies, Mambu has worked to develop technology nimble enough to adapt to changing market factors.
“Many people in the United States do not feel comfortable going to banks,” Mr. Danilkis said. “They are complex and intimidating. You feel the lack of respect.”
At the end of the day, banking is about trust, Mr. Danilkis said, and if the bank is not set up to serve you, there is little point in even attempting to forge such a relationship. Or you run into some financial difficulties, accumulate the overdraft fees, get into trouble and look for a way out.
To be successful, a new entrant has to market across multiple channels, Mr. Danilkis said. One American client takes its services into the community in an attempt to reach pockets of women who they know are underserved. Another does something similar with people wanting to start a business.
Such companies take those extra steps and begin to develop an actual relationship with clients. They also make the process easier by automating the process of account creation and document transfer, taking advantage of people’s desire to avoid what is now the unnecessary step of physically going to a branch to complete the most mundane steps.
“We use technology to make things as flexible as possible,” Mr. Danilkis. “The traditional bank is not set up to do that like a small bank is. Those new organizations are designed to be nimble.”
The reason it is now feasible for smaller entities to compete is because of technology. In those smaller players technology can set up the end to end process.
Start by automating aspects of the application process that are less crucial to a quality user experience, such as basic personal information and other data that has to be completed with every application. Those features tend to cost less to introduce, Mr. Danilkis said.
That is not the case in big banks, Mr. Danilkis said. He said the introduction of one piece of technology will do nothing to help efficiency. Even if it could there is not much of a business case when it takes them millions of dollars to develop a technology and millions more to become sustainable.
As long as the upstarts do not erode a bank’s core revenue streams, it is cheaper to just let them be from a banking perspective. Once that begins to change, banks can always buy in, Mr. Danilkis said.
If a specific innovation is not working, a bank has to be flexible enough to be able to quickly pivot, a skill the larger players are not exactly known for.
Adopt enough of these changes and follow through and what you will have is customers being empowered, Mr. Danilkis said. And when those customers choose to establish a relationship with you, they are doing so because they like how you operate, not because they do not have a choice. Online credit unions are one sector taking good advantage of this environment, he added.
The immediate future could see a pivot back to increased focus on customer service, Mr. Danilkis said. Both traditional banks and newer players will still look to automation, but they are beginning to recognize that perhaps they have swung too far in the other direction, that perhaps they have to reincorporate that human elements, which will help build trust with the client base.
“Look for an improved customer relationship to creep back into the business model,” Mr. Danilkis said.