Delusions Of UnBanking

In a TechCringe (cuz that’s what most articles on that site make me do) titled Startups And The Un-Banking Of America, a VC writes:

“While critical to our economy, banks are generally inefficient, have high fixed costs and don’t exactly elicit happy thoughts from the average consumer. It’s for these reasons, among others, that the biggest opportunities in the financial world revolve around the disintermediation of these banks and core financial services.”

My take: The same could be said of dentists, yet the world of dentistry doesn’t seem to garner even .001% of the disruptive-related attention that banks do.

There are some assertions in the TC article that make me wonder if VC really means “very confused” instead of “venture capitalist.” Let’s look at some of these statements, and my take on them.

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VC: “It’s not hard to imagine that a majority of the people in the U.S. could be “banking” with startups, in one form or another, in the next three to five years.”

My take: For this sentence to be true, we need to make one of a couple of edits:

1) If you’re tripping on some groovy LSD, it’s not hard to imagine that a majority of the people in the U.S. could be “banking” with startups, in one form or another, in the next three to five years.

or…

2) It’s not hard to imagine that a majority of the people in the U.S. could be “banking” with startups, in one form or another, in the next three to five years, if you consider firms like Bank of America and Wells Fargo to be “startups” (since they’ve only been around for ~150 of the millions of years that life has existed on this planet).

I guess that, strictly speaking, it’s not hard to imagine that a majority of Americans could be banking with startups in three to five years, but it’s complete delusion to think that a majority of Americans will be banking with startups in that time frame.

After five years of being in business, Simple (according to its own accidentally leaked email) has just a little more than 33k active customers. That’s about one-tenth of one percent of the number of customers that Bank of America has. I don’t care how evil and bad you think that bank is–no where close to any meaningful number of people will be leaving the bank any time soon.

And, in fact, when consumers have left their banks in the past few years, it’s a lot more likely that they will leave to go other established banks and credit unions.

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VC: “The credit crisis showed the tech industry that one of the biggest areas of opportunity for startups was in re-imagining consumer lending. People were looking to alternative forms of lending for answers and thanks to the problems above, interest in solutions like peer-to-peer lending were on the rise. Not surprisingly, a cohort of companies emerged to take advantage of these trends, beginning with Prosper, which was soon followed by Lending Club and a litany of others. At the core of this emerging market was the desire to take banks out of the equation and connect investors directly with those in need of capital. In other words, disintermediation.”

My take: Nothing like re-writing history to suit your own purposes. Prosper was founded in 2005, Lending Club in 2006–well before the credit crisis. These firms did not “emerge to take advantage of these trends” caused by the credit crisis.

People did, indeed, look to alternative forms of lending for credit, however. Not because of some interest in startups looking to disintermediate (or disrupt) traditional banks, but because they needed money.The statement “at the core of this emerging market was the desire to take banks out of the equation” may be true from the startups’ perspective, but it’s not true of consumers.

And, in fact, Lending Club has evolved to become anything but a P2P marketplace. Today, the majority of funds provided to the marketplace come from institutional investors. Bottom line: There is little evidence to suggest that the traditional banking system is being disintermediated in providing credit to consumers.

p.s. Citing Lending Club’s cumulative lending numbers–which so many P2P lending proponents do to apparently demonstrate the “growing” trend–is quantipulative. Why don’t we show Wells Fargo’s cumulative lending over the past five years and see how it compares?

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VC: “The growing mobility of the average consumer has allowed businesses to spring up and grow by assuming roles traditionally reserved for banks. Check is one of these businesses trying to do an “end-around” on banks by giving consumers the ability to aggregate and manage all of their critical banking information and bills in one place — on their smartphones. Rather than consumers being forced to go to their banks’ websites, their utility company’s website and so on, it put all of these services in one place.”

My take: I have done the sizing/forecasting of consumers’ bill pay behaviors–twice, first in 2010 and again in late 2013. I can tell you that, while third-party sites (like Check) have achieved some gains in bill pay volume over the past few years, the percentage of consumers’ monthly bills that are paid through these sites are miniscule.

What kind of delusion fuels a statement like “rather than consumers being forced to go to their banks’ websites, their utility company’s website and so on, it put all of these services in one place”? What do you think bank sites do? (Answer: They put bill pay capabilities in one place).
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Banks used to think that their bill pay sites were superior to biller sites because consumers didn’t have to “hunt all over the Internet” to pay their bills. I really have had bankers tell me that over the years. It still stands as one of the stupidest things I’ve ever heard a banker say.

Not only is it perfectly convenient for consumers to get an email from their biller, click a link, and pay the bill, but the real trend in consumer bill pay isn’t a move to third-party sites (i.e. disintermediation), it’s the shift to direct debit. You wacky Gen Yers are happy to set up your monthly bills to be paid automatically every month!

The other reality in the bill pay space is that the success of Check (in particular) has come more from its work to simplify and improve the billing process for billers than for consumers.

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The TC article goes on to talk about the “disintermediation of the second tier” and the potential impact of Bitcoin. I’m not qualified to comment on these areas (although you might argue I wasn’t qualified to comment on the topics I did discuss), so maybe whatever the VC said about these things are right. I don’t know.

But I do know–or at least, I’m willing to assert and bet–that that un-banking of America (as is relates to debit, credit, and bill pay) is nowhere in the making. Especially not in the next three to five years.

Big thanks go out to @sytaylor for bringing the TC article to my attention.

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