Just how scared should banks and credit unions be of fintechs, big techs and others?
It’s far from an idle question. The head of Chase made headlines in mid January when he said the industry ought to be “scared shitless” by fintech. The oft-repeated quote was taken partly out of context, and the nuance is important, as we explain further on. Yet it reflected a broader trend of stirrings or unease among some of the country’s biggest financial institutions.
On one level, asking bankers if they should be scared of the new crop of competitors is like asking if they should fear any rival. Traditional financial institutions have had to worry about “outside” competition for decades. But in recent years the growth — and threat — of fintechs, big techs and other new entrants into the business has raised the pressure significantly.
Adding to that was a definite change of tone: The snarky quotient went up significantly over previous rivals. Fintechs came onto the scene with bravado, boasting of plans to sink the traditional players with their frictionless services and fresh ideas. Not all have succeeded, and many have partnered with banks, or used banking’s own rails in some fashion, but a significant and growing number are having a material impact on retail and business banking.
During an earnings conference call, RBC Capital Markets Analyst Gerard Cassidy asked Fifth Third’s Greg Carmichael, chairman and CEO, “What are the risks that you worry about when you go down the elevator at night?”
Carmichael went straight to his concerns about fintech competition, citing something that bankers have raised about competitors for a long time, but now in a new venue: lack of a level playing field.
“The challenge is watching these fintech players come forth,” said Carmichael. “I am not seeing the regulatory oversight that we’re dealing with, capital expectations and so forth. So that’s a threat that we’re watching. If they get access to the banking system, that can create some stress for us that I’m very concerned about.”
Carmichael said fintechs were already “nipping around the edge of our profit pools and maybe shifting some customer behavior.”
The latter isn’t necessarily bad, he added — it’s where things are headed. And Fifth Third has its own strategies here. For example, the bank has made its share of investments in fintechs and in digital transformation.
“We’ve made significant investments in our digital capabilities to create a digital bank ourselves,” said Carmichael. “All our lending products are available online as are our service capabilities. We’ve made huge investments in our digital capabilities to make sure we’re well positioned to deal with those types of threats.”
Why It Matters:
Just how worried should leaders of traditional banking companies be about fintech, when competition has never been in short supply? Securities analysts have been asking top bankers about their fintech concerns in post-2020 earnings calls and what they’ve heard is a mix. The leaders are quite aware of the threat, some are concerned, but some also have considered what opportunities may lie in fintech. It’s not a two-dimensional affair.
The impetus is out there to see. For example, a study by Cornerstone Advisors and StrategyCorps found that Chime, the digital bank, has reached the mark of 12 million users. While some still argue that users of such accounts don’t treat them as primary relationships, 12 million is on heckuva beachhead, at the least. And that’s just one example from the consumer side.
Brett King, a leading proponent of fintech for over a decade, turned the term into an active verb in a recent tweet: “Don’t ‘Bank’ the Unbanked. Fintech the unbanked.”
Fintech Competition: Don’t Worry, Be Techy
A good deal of a banking leader’s attitude hinges on where they are starting from.
In addressing analysts’ questions about fintech, Richard Fairbank, CEO at Capital One, says his organization has seen the battle from both sides.
“Capital One has chosen to fight back on different turf — the bottom of the tech stack.”
“We were, in a sense, an original fintech three decades ago,” says Fairbank. However, the company is old enough that it has also had to overcome part of the challenge of legacy systems and approaches that other large banks have had to overcome.
“We’ve seen the rise of some very intriguing fintechs,” says Fairbank, “and we watch their strategies with great interest. In many cases they offer very nice digital customer experiences, and in some cases they have created strategies that the banking industry didn’t come up with.”
Fairbank said he was in many ways actually rooting for the fintech’s success. That’s an odd thing for a competitive bank to say, until you consider where he is coming from. It’s kind of a “rising tide lifts all boats” argument he makes.
“Their success is a manifestation of the accelerating change in customer behavior and the opportunity for digital banks,” Fairbank explains. He said Capital One finds the example of the fintechs energizing, and a stimulant to its own digital efforts.
That said, Fairbank pointed out that Capital One has pursued this digital transformation differently than many other banks.
Many institutions “make their biggest investments at the top of the tech stack,” said Fairbank, “meaning the things that are closest to the consumer. They invest in apps, experiences for customers, things that more directly and immediately manifest as improvements. It’s a natural thing to do.”
In contrast, Fairbank said, Capital One has chosen to fight back on different turf — the bottom of the tech stack, as he calls it. “We’re talking down at the level of core systems and addressing vendor products, bringing lots of things in house and bringing a lot of engineering in-house,” said Fairbank.
He added that one move that shocked some observers was the decision to get entirely away from data centers, moving completely into the cloud.
“That put us in a position to drive for opportunities and to act more and more like a tech company,” said Fairbank.
Impact on the Business Side Carries Significant Threat — and Opportunity
The threat from interlopers keeps growing. There’s been little appetite by regulators to give traditional institutions much territorial protection and that’s not likely to change. Fintechs have moved far beyond the consumer banking sphere. Multiple players — Square, Stripe and Intuit — have been creating small-business ecosystems that go to the heart of many commercial banks’ longstanding sweet spot.
But there’s some value in being traditional, bankers point out.
An analyst asked Andrew Cecere, Chairman, President and CEO of U.S. Bancorp, how worried he was about his organization’s merchant acquiring business, rooted in point-of-sale, versus digitally active players like PayPal, Square and Stripe.
Cecere acknowledged the challenge and noted that most of U.S. Bank’s investments made over the last two years had been “on the ecommerce side of the equation.”
But Cecere was also adamant about the importance of being a full-fledged banking institution, not a niche player.
“One of the advantages we have against those payments players is our banking business,” said Cecere. “That’s why we’re so darn focused on weaving together banking and payments, because those [merchant] customers need not just the payments mechanisms. They need small loans. They need deposit advice and acceptance. They need a full array of services.”
“I think that’s where our advantage is,” says Cecere.
Of ‘Dumb Pipes’ And White-Label Competitors Enabled By The Industry
Big techs like Google, Apple and Amazon continue to draw the industry’s attention, as they reveal their financial services strategies bit by bit. While even the largest traditional players seem to struggle with the need to look current, if not cutting edge, the big players seem to peel off their down cards almost at their leisure.
Among the handful of institutions working with Google on its Google Plex accounts, Citigroup remains the largest and the most aggressive would-be partner, although even its outgoing CEO, Michael Corbat, warned that traditional players risked being the “dumb pipes” that big techs and their ilk would plumb to their own purposes.
“I expect it to be very, very tough competition in the next ten years. I expect to win, so help me God.”
— Jamie Dimon, JPMorgan Chase
JPMorgan Chase is not among those institutions. In off-the-cuff remarks made in response to a series of questions on fintech by analysts, Jamie Dimon, Chairman and CEO at the nation’s largest bank, JPMorgan Chase, said “Absolutely, we should be scared shitless about that.”
That’s the quote that made the headlines, yet, as was stated earlier, it was taken somewhat out of context. Dimon was responding specifically to a question regarding the valuations that the stock market puts on the likes of PayPal, Stripe and other fintech or fintech-related stocks versus how “they trounce the valuation of your stock,” in the words of analyst Mike Mayo of Wells Fargo Securities.
A moment later, when the often-pugnacious Mayo expressed skepticism about Chase’s ability to combat such competition, asking “So, how are you going to win?” Dimon said very directly:
“I’m not going to tell you. But we have plenty of resources, a lot of very smart people. We’ve just got to get quicker, better, faster…”
Dimon also told the analysts that he’d acknowledged in his chairman’s letter a few years back that “Silicon Valley is coming.” He said it was up to the likes of Chase to “use our unbelievable strength and client base and capabilities” to counter the threats.
“They are very good competitors,” said Dimon. “They are strong. They are smart. Some effectively ride [the banking industry’s] rails.”
“We need to look at what we can do better,” said Dimon. “I am confident we will be able to compete.”
One concern to Dimon is that various banking institutions have been selling access to the banking and payments system via white-labeling. ” This lets fintech competitors “build every sort of thing on top of it and we have to be prepared for that. I expect it to be very, very tough competition in the next ten years. I expect to win, so help me God.”
Indeed, what really seemed to bother Dimon was that the elements of the banking industry itself have been abetting the rise of fintechs.
What To Watch:
“If fintech companies use a white label [arrangement with a] bank to process their business, they’ve basically a bank,” said Dimon. “The regulators may have a point of view about that one day, but I am less worried about that. I am going to worry about us.”
Should Traditional Financial Institutions Buy Fintech Competitors?
Mergers and acquisitions have increasingly become a trend among banks as well as among newcomers. A key question for major banking institutions with the necessary resources is whether it’s worthwhile to buy new competition, either to absorb new functionality or to reduce the risk of heightened competition.
An analyst asked officials of Synovus if it made sense to consider deploying some of its wealth of cash by acquiring a fintech, especially a payments fintech. Synovus has an unusual history in that the payments giant Total System Services (TSYS) was part of the bank holding company until it was spun off. The analyst asked if that history made a fintech acquisition especially appealing.
Synovus CFO Jamie Gregory acknowledged the history, but said that such potential acquisition targets don’t always make sense in spite of compatibility.
“Often, when you look at the financials and the valuation, it’s challenging to make those work by bringing it into the bank,” said Gregory. “Generally, but not always, their valuation is based on their ability to sell their service to other banks. If you bring it in-house, it makes that difficult. The value to the buyer is a fraction of what the value is of that company when they can sell their services to anyone across the country.”
For Fifth Third’s Carmichael, each potential new digital activity becomes a “buy, partner or build” decision. His company’s choice hinges on multiple factors.
“We like to buy a capability if it’s already there,” says Carmichael, assuming the strategic fit is sound. “It’s the quicker way to get to market.”
If a capability isn’t for sale, then Fifth Third will consider a partnership. Building their own capability is the final option.
“That’s been our mindset over the last decade with respect to how we handle fintechs,” says Carmichael, “and how we address such opportunities.”