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Uber: A Cautionary Tale in Banking’s Fintech Battle

What Uber did to the taxi industry offers important lessons about innovation and regulation for traditional banking providers.

Subscribe TodayOn first blush, banking may not seem to have much in common with Uber, but the speed with which the scrappy “ride-sharing” startup stole market share from taxis provides insight into the fallout financial institutions can expect from fintech’s intrusion into a similar legacy industry — banking.

In ten years, Uber has grown from a one-office shop in San Francisco to operations in 570 cities worldwide. Despite a loss of $3 billion last year, it boasts a valuation of $70 billion and 2016 revenues of nearly $6 billion.

Uber is a disruptor in the truest sense of the term — a firm that upset the taxi industry by completely reimagining the personal transportation business model. They completely shook up the status quo with creative ways to lower costs, add convenience and speed up service.

Uber achieved market dominance by marrying technology with the basic need for short trips in passenger vehicles. And millions of consumers love it. Paired with a mobile phone, they found it easy to call for a ride, monitor its arrival and pay the fare. Uber even provided a feedback loop for building confidence in their drivers. They researched consumer sentiment toward cabs, tapped into a milieu of discontent, and made ride-hailing as simple as a few taps on a phone.

Uber’s rapid takeover of the taxi industry bears an uncanny resemblance to events occurring in banking. The regulated nature of the taxi business is comparable to banking (note: there are similarities, but by no means are the two industries “identical”). Trying to bust into the taxi business isn’t easy, and prices for a standardized commodity are narrowly defined, both by regulatory bodies and by the marketplace. Taxi medallions — like bank charters — can be used to protect the industry’s traditional players. As a result, taxi companies rarely needed to keep up with competition by innovating. (Sound familiar?)

Then along comes Uber, offering better, more convenient services — a truly innovative model. In response, taxi operators in some markets called upon friendly politicians to impose stiffer regulations on the upstarts to curtail Uber’s growth. But all it takes is for consumers to get a glimpse of what a better, cheaper solution looks like, and it becomes incredibly difficult — if not impossible — to hold back the waters of progress.

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Hobbled by legacy tech, expensive (if not outmoded) delivery systems, and a mountain of regulations, banking providers don’t have the chops to compete with fintechs, who are busily redefining what it means to be “a bank.” And just like taxi companies, financial institutions don’t have a culture that’s easy to change.

But the regulatory barriers that once protected banks are eroding. The Office of the Comptroller of the Currency recently proposed giving “special purpose national bank charters” to fintechs. Traditional financial institutions can expect these barriers to continue falling… particularly as long as fintechs continue to provide superior, consumer-friendly alternatives. Ultimately, neither politicians nor consumers have much patience for squelching innovations that make people’s lives easier.

Community banks and credit unions are particularly vulnerable. They don’t enjoy the same economies of scale that megabanks have with their huge customer bases, expansive branch networks and slick, customized mobile banking tools. And — as most in the banking industry concede — regulations disproportionately burden smaller institutions.

According to the Federal Reserve, compliance costs at banks with less than $100 million in assets represents more than 8% of noninterest expense. The same compliance costs at banks with assets between $1 billion and $10 billion are less than 3% of noninterest expense.

Not surprisingly, the number of community banks (those with less than $10 billion in assets) shrank 14% between the passage of Dodd-Frank in 2010 and late 2014. Meanwhile, the volume of banking regulations grew 18% between 1997 and 2008. Coincidence?

Uber’s success in grabbing market share from a legacy industry should motivate bankers to rethink their response to fintechs, and their approach toward regulations. Doubling down on their current strategy is not a prescription for the future. Regulations which once offered traditional institutions protection have become a crushing weight for smaller banking providers trying to compete against nimble nonbank competitors.

But perhaps, there’s no greater barrier than a culture resistant to any bold changes.

Kevin TynanKevin Tynan is Senior Vice President for Marketing at Liberty Bank for Savings. You can connect with Kevin on Twitter, LinkedIn or send him and email.

All content © 2017 by The Financial Brand and may not be reproduced by any means without permission.

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  1. You really need to do more research on Uber, the taxi company, and their business model. Have you given any thought whatsoever as to a path to profitability for Uber. You talk about the ‘creative’ ways they’re able to offer the same service at a much lower cost. You fail to mention that Uber subsidizes pretty much every ride they provide, in many cases up to 60%.

    Uber can’t raise fares because the latest studies show that Uber’s predatory pricing has taken people off their feet, off their bikes, and out of buses and subways. Raise the prices to a level of profitability and those people return to those methods of transport. Uber lost between 3 and 4 billion on 20 billion in sales. They are selling a product at a loss meaning the more rides they sell the more money they lose. Uber is nothing more than a scam that will make a few people stinking rich on the backs of many before the investment dollars dry up due to no path to profits.

    Travis himself has said that they cannot make it without driverless cars and that’s pretty much a pipe dream by people that have too much money to play with, especially for Uber who’s so far behind in that field they had to steal Google’s driverless technology to try and catch up.
    So, before you go praising a company for being so innovative and creative and doing such wonderful things for the world, maybe you should learn a little bit about what they really are doing for the world, because it’s not pretty.

    I could go on all night about the negatives of this company but I’ll just mention one of the big ones right now and that’s the congestion they’re causing in every major city they operate. Travis promised to take one million cars off the road in NYC alone and yet the latest studies show they’ve done the opposite by contributing to congestion significantly. I’ll include an article out tonight about the woe’s that Uber is causing in SF including major congestion. They’re pissed there because they thought they were legalizing ‘ride sharing’ but what they got was another 30 or 40 thousand taxis on the road causing all kinds of problems.

  2. Wayne, I don’t think this article necessarily “praises” Uber. It does point out that Uber is innovative, and that their innovations have disrupted an entire industry.

    If you re-read the piece, I believe you’ll see that the general thrust isn’t to “be like Uber.” Banks and credit unions can never afford to innovate at the same kind of capital-hemorrhaging level that VC-backed startups do. But they do need to be more innovative. This article reminds banking providers that they need to be more thoughtful about their approach to both innovation and regulation, and think more seriously about how fintech startups are disrupting the financial industry.

    What that has to do with traffic congestion in San Francisco, I have no clue…

  3. Some good points Jeffry but my point was more about picking the wrong company to use especially when using the words innovative and creative. Taxi apps predate Uber so they didn’t invent that and they use predatory pricing by way of burning through investor cash. Not really very creative in my books. Yes, Uber is disruptive, I’ll give you that.

  4. Financial institutions are next in line. Cryptocurrencies will dominate the world.

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