The outlook for the branch, the need for a much better digital onboarding experience, the future of relationships between financial institutions, fintechs and big techs are all hot topics in banking. But Jim Marous says making sure your financial institution has a future comes down to one word: Google.
Marous, Co-Publisher of The Financial Brand, CEO of the Digital Banking Report and host of the Banking Transformed Podcast, is one of the leading commentators on digital change in banking. He spent some time in banking and still remembers with pleasure the smell of fresh ink on product brochures. But that’s nostalgia, he admits, and not the present, let alone the future.
“The reality is that you have to realize that in the world we’re living in now, people start shopping for financial accounts on Google,” says Marous during a debate with fellow industry analyst Ron Shevlin, Research Director at Cornerstone Advisors and author of the Forbes “Fintech Snark Tank” blog. If they don’t find your bank or credit union’s offerings through paid or organic search, they will find the likes of Chime or one of the big five banks, says Marous. And after that, any institution that offers a clunky or only partly digital onboarding experience risks losing the prospect after all.
During a pair of debates — sponsored by MX — Marous and Shevlin debated each other (as well as the status quo) concerning the future of banking and fintech.
For his part, Shevlin says people make too much about fintechs’ ability to score huge wins simply by the word of mouth of ecstatic fans.
“You keep hearing how they do alternative marketing and that they don’t do traditional TV or print advertising,” says Shevlin. But he says the really successful fintech players spend buckets of money on marketing.
“Chime spends $50, $60 million a year on TV alone,” says Shevlin. This is a key part of what makes fintechs’ repeated funding rounds so important. Getting off the ground and staying airborne demands hunks of marketing spending.
But Marous believes that even with lots of marketing dollars or great word of mouth, the growing room for fintechs isn’t as wide and as deep as some bank and credit union executives might think.
“I’m going to argue that it’s hard if you’re not really something new and different,” says Marous. “I’m not so sure there are many new and different fintechs out there. There are different flavors of the same themes.”
Déjà Vu Finance:
Part of what brought fintechs to the front in the first place is that traditional banks and credit unions were increasingly seen as providing commodity products and services. That’s now also true of many fintech offerings.
In some ways the pair’s discussion revealed that even fintechs, the wunderkinds of finance for a decade, have their own challenges, including from big techs like Google, Apple, Amazon and more.
Shevlin says that many fintechs, especially those coming from overseas, insist that what they bring to the market is a better customer experience, especially on mobile devices. However, he says he doesn’t see the bank experience lacking, especially not among the largest U.S. banks.
And it is not as if every fintech or challenger bank steps up to the plate and smacks a home run. For every Chime or Dave there are others that have morphed into something else or disappeared.
“I think a lot of those challengers that failed did so because they were not focused on solving the right problems,” says Shevlin.
Data May Be the ‘New Oil’ But Refining It Is Another Matter
The common wisdom is that banks sit on huge amounts of incredibly valuable data that can be turned into customer insights that will yield amazing results. The argument is that banks just don’t know how to extract the value.
Shevlin offers this counterpoint: A good deal of the data isn’t all that valuable in the first place. “Often financial institutions completely delude themselves when they think, ‘Oh, we have so much great data internally.’ They don’t.”
However, even what they do have could be useful. “To a large extent, incumbent institutions just go to market with generic products and services and don’t really bake their data into it,” Shevlin points out.
Marous puts it another way: “It’s not that banks don’t have data or don’t utilize it. They’ve got to move from making great reports to making great experiences. Too often data doesn’t get deployed outside of the IT department.”
Data comes both from without and from within, of course. As an example of a fintech that makes great use of data, Shevlin cites Aspiration. The company offers banking services to consumers who place high value on their money supporting environmentally and socially conscious activities. Part of how it enforces that is a regimented system for scoring companies for their behavior and policies.
Separately, Shevlin says that there is a great deal of hype in the market concerning lending on the basis of “alternative data.” Different people define this different ways, ranging from increasingly accepted measures such as a record of making rent payments on a timely basis to more unusual methods.
“I’m still a little bit amazed that there are people who think they can make lending decisions based on who your social media contacts are,” says Shevlin.
So Why Aren’t the Data Masters Becoming Bankers?
The debaters looked at two masters of data analytics who have had strong interest in financial services: Amazon and Google.
“If Amazon put together a checking account tomorrow and offered me $250 to open one, I’m there. They could open millions of accounts.”
— Jim Marous, The Financial Brand
Marous continues to be impressed by Amazon and its ability to pinpoint products for consumers based on data. He sees Amazon’s revenues as the ultimate funding vehicle for competing with banking institutions.
“If Amazon put together a checking account tomorrow and offered me $250 to open one, I’m there,” says Marous. “They could open millions of accounts.”
He believes banking has found itself to be in a very narrow space, in terms of the activities it can pursue, while Amazon, true to its “A to Z” roots, can get into nearly anything. It has already done more than nibbling in some financial areas. In fact, he says Amazon’s success and size enables it to do things no banking institution could.
Case in point is product returns: To cut costs, Amazon sometimes will replace an item without asking the consumer to return it. Wrong color? Wrong size? Keep it. “We got this,” is Amazon’s attitude, he says. “There’s not a financial institution out there that could say that.”
Between the Lines:
Something that traditional financial institutions often don’t get is that Google, Amazon and others aren’t out to become banks — not in any traditional sense.
Shevlin doesn’t see anything like “Amazon Bank” happening. First, he says, the regulatory burdens of actually being a bank are unappealing. Why go there when you can partner? Amazon has done that, and Google, with its Google Plex partnerships, has as well.
Beyond this, Shevlin made a “picks and shovels” argument. Both Amazon and Google make huge amounts of money serving the cloud computing needs of financial institutions and can reap those profits without being regulated. So why, he asks, would they endanger that?
Speed, Reliability, Security: Which Wins?
Fintechs have long brought unbankerly speed to the table. People have even been willing to pay much higher interest rates on small business loans, for example, in exchange for the speed that online nonbank business lenders began providing.
Shevlin and Marous were asked if speed and reliability trump security today.
Admitting to being snarky, Shevlin says they clearly do. “If you have a security breach, you can always blame it on someone else,” he says. More seriously, he says that consumers have grown so used to hearing about data breaches that that alone wouldn’t turn them off — unless the app or other service already lacked speed and reliability.
Indeed, the issue of trust in fintechs came up in this context.
The Changing Consumer Mindset:
Traditional institutions traded for decades on the idea of trusting one’s primary financial institution. To them, it was almost sacred. But now trust is earned as much because a fintech has provided convenience on a consistent basis.
Marous points out that many apps break up the monolithic banking relationship into smaller parts that do one or two things really well. More recently the movement has been for the narrower fintechs to start broadening their offerings and approaches.
“If these organizations scale to different areas of banking that they’re not currently in I’m going to trust them because they’ve proven their worth,” says Marous.
For his part, Shevlin isn’t sold on trust in fintechs. They do deliver on their promises, he says, but they part ways with traditional institutions in the area of risk management.
“It is built into banks’ culture to be risk averse,” says Shevlin, “but the startups in this space, especially those that go after consumers, have less of that risk aversion.”
How Ready Is Your Institution for Change?
Much of the discussion recounted above reflects very current thinking in financial services practices. The thing of it is, for every traditional institution that has been sweating to innovate, there are many more that haven’t done much to adapt to financial evolution.
“I don’t think there’s a single bank or credit union CEO out there who thinks that he or she and the rest of their management team has a legacy mindset.”
— Ron Shevlin, Cornerstone Advisors
Shevlin is pretty blunt about this: “I don’t think there’s a single bank or credit union CEO out there who thinks that he or she and the rest of their management team has a legacy mindset.” Even when they hear the word, “legacy,” they will tend to think of legacy computer processing.
Replacing old core systems is important, but what concerns Shevlin more is legacy thinking about financial services. Case in point: Having seen the dramatic shift to digital channels during the pandemic, many financial institutions are talking today about getting branches open again as if the last year hadn’t happened.
“People have to start thinking more about how technology can enable those person-to-person interactions that traditionally happened in branches, not necessarily to replace them, but to augment them,” says Shevlin.
Marous says institutions have to hold onto “legacy leaders” experience while introducing new thinking. With their experience, the leaders “have to pull the trigger to make change happen,” he says.
Banking Transformation Demands Definitive Action
The two experts differ markedly in their thinking of how to make change happen.
Marous portrays the typical employee base as full of scared people worried about becoming unemployed because of change. Banks and credit unions must train them for changing conditions and methods and for new roles. They still have a role, he says, because “consumers want a humanized version of digital.”
Such measures, and involving lower-level employees in transformation efforts, will help smooth the shifts. So will partnering up with providers who can help the institution and its people make the transition.
A Critical Post-Covid Question:
Was a key lesson of the pandemic not learned after all? That’s the need for more scenario planning for possible crises.
Shevlin believes that in recent years financial institution strategic planning has deteriorated into a budgeting exercise, with no real planning. Based on what he has seen so far, instead of taking a more serious look at all aspects of the future, post-Covid institutions seem to be focused on budgeting again.
So directors and managers need to focus harder on transformation. Shevlin says employees have a stake and ought to be involved in these discussions in some way, too, but that won’t happen until leadership does its job.
Marous says the employee support will be critical once management and directors decide to get moving. A big catch-up challenge looms and he says institutions must get used to having “five, six or even seven” major transformation projects in motion at once.