The Future of Banking: More Competition Means More Disruption

These days it seems like everybody wants to get into banking one way or another, from Google with its Plex project to Walgreens with its 9,000+ store presence. Experts probe why this is happening and if, and how soon, it will begin to hurt traditional players.

One couldn’t blame financial institution executives if they felt like nerds who suddenly found they are “cool.” All sorts of companies want to get into banking in some way.

Some go about it through co-branding or white labeling or making use of a banking as a service relationship. Others might attempt to acquire or originate a bank charter. Or the means could be through an ecosystem play, like Google Plex. Or it might be through a fintech or banking partnership, or some combination.

Drug store giant Walgreens, for example, is launching both a credit card relationship with Synchrony and a debit card relationship with MetaBank. Both moves are part of a phased plan for getting into the banking business via partnerships and expanding those efforts into digital banking accounts. Both programs will tie into the loyalty program Walgreens revamped in late 2020. The intent is to offer banking products digitally as well as through the company’s roughly 9,000 U.S. pharmacy locations.

H&R Block, which in 2015 actually sold a savings bank it owned, wants back in. Initially it has linked its Emerald Card to Apple Pay and Google Pay, to make it digitally active for cardholders. But through a series of future steps, in partnership with MetaBank, the company hopes to provide affordable banking services to millions of underbanked consumers who use its services. While in recent years Block’s financial services have centered on tax refunds, the intent now is to broaden this to a year-round relationship.

Meanwhile, Walmart is building a fintech with partner Ribbit Capital. The retail giant has a patchwork of financial services partnerships and has tried to enter banking directly over the years. The new proposed operation, currently called “Hazel by Walmart,” is the subject of an April 2021 trademark filing with the U.S. Patent Office. In a kitchen-sink list of potential services it could offer, the retailer indicates plans to offer not only many payments services but also financial counseling and planning, a financial portal, and much more.

What Drives Banking/Commerce Evolution (and Why Now)?

Multiple causes are at work here, but a key one is technology.

“Industries tend to get disrupted when incumbents are heavily reliant on technology and the technology they use is outdated,” says Alyson Clarke, Principal Analyst at Forrester, in an interview with The Financial Brand. She says another factor is that retailers and other nonfinancial firms tend to have more brand appeal than most financial institutions, so as barriers have eroded, new combinations and offerings have centered on those companies.

Digital is Table Stakes:

The attempt to build financial combinations with nonbank players underscores that there’s nothing special about simply being digital anymore. As digitization became standard, it ceased to be a differentiating factor.

Broader trends are also at work. “This stuff is cyclical and the space has never been hotter, so I am not surprised in the slightest that Walgreens and H&R Block is entering it, ” says Scarlett Sieber, Managing Director and Chief Strategy and Innovation Officer at CCG Catalyst Consulting. “We are seeing this move — and it is more pervasive in Europe — of every company becoming a fintech company. I’m not sure every company should be a fintech company.” She says it depends on whether they have a unique value proposition for customers, and if adding banking services benefits them when integrated in a way that is a natural fit to their lives.

Sieber points to the growing movement to create “super apps,” which she sees as a rebundling of existing services. “But not every company or app can be a super app.”

Ron Shevlin, Director of Research at Cornerstone Advisors, suggests that no players are showing all of their cards at any time. He points to Amazon as a company that will test financial services in a limited way, maintaining a corporate poker face, and then bring in a partner or partners to handle a particular activity once the company believes there is potential.

Shevlin says an important wrinkle to notice is that being a consumer’s primary financial account is not in the sights of many newer players. They don’t care. This is important to remember in trying to compete with them.

What to Watch:

Ultimately something bank and credit union executives don’t always understand, amid calls for a “level playing field,” says Alyson Clarke, is that many new entrants aren’t playing the same game that financial institutions are. It just looks that way.

It’s Not Simply More Competition for Traditional Players

Companies already established in other businesses aren’t looking to become banks necessarily, according to Richard Walker, Principal at Deloitte Consulting.

“For them, it’s more a matter of creating another level of stickiness,” says Walker. By attaching banking to a company’s payment streams, reward programs and other efforts, brands can cement in customer relationships, says Walker. It’s akin to the idea of cross-selling in banking — the greater the number of connections, the more likely a consumer will stay with their bank or credit union.

For a handful of financial institutions that have embraced banking-as-a-service, providing access to payment rails and deposit insurance for nonbank companies is a lucrative line of business. Others, however, view it as a competitive threat.

And they’d be right. The mistake many financial executives are making is thinking that the flurry of interest in financial services by nonbanks is a fad that will burn itself out over time, says Deloitte’s Walker. He believes it is a lasting transition to a very different banking business.

A Ticklish Truth:

“Many in the industry aren’t ready to accept that banking will become a function behind the face of other brands, through embedded services and other techniques. “

There is appeal for nonfinancial companies to join payment with product either for the sake of convenience or because it can improve the profitability of an overall operation, notes Walker. And Clarke points out that as a huge ecommerce and traditional retailer, payments is a critical component for Walmart and there is an impetus to exercise more control and even to derive more profit from it. The attitude is, “Anyone could do this to us, so why don’t we do it?”

No traditional institution can ignore what’s going on if it has a dog in the retail banking fight.

“The consumer banking segment is limited and we know that attaining consumer loyalty can be challenging. The more the market gets saturated, the less attractive it will be as you can only cut so many slices from a cake.”

— Scarlett Sieber, CCG Catalyst Consulting

Sieber maintains that, for now, the saturation point hasn’t been reached yet.

Alyson Clarke believes banking is becoming more and more crowded and now demands that the financial industry must reflect on the future. “Success is going to be reliant on rethinking things and not just doing the same old stuff,” Clarke explains.

Both Walker and Clarke see tie ins to reward programs as a key element for the future. People like them and tend not to let their connection to preferred rewards programs lapse.

Are Branches an Important Part of Newcomers’ Forays into Banking?

The efforts by newcomers with substantial physical networks introduces a new dimension into the ongoing debate about bank branches. Backers of increased digitization, especially in the wake of Covid’s impact on digital adoption, see stores as irrelevant, while others see value in physical locations and in the built-in audiences they imply.

A good one to focus on is Walgreens, which has 9,000 locations across the country. Both Shevlin and Clarke see this as a play to bring physical banking service to “branch deserts” around the country. The term describes areas where no branch locations remain, in the wake of mergers and other closures.

That said, experts interviewed disagree on the importance of the physical network.

Clarke is a big believer in a continuing role for branches, in part because she thinks digital can only go so far.

“People say in surveys that they want digital service end-to-end,” says Clarke, “but that’s really because they see it as an alternative to poor service they’ve had from humans.” The reality is that many people want to be able to talk to a human about some issues and to resolve problems. “That’s why the human element will never go away,” says Clarke.

For Shevlin, the value of Walgreens locations lies not in their simple ubiquity but in the foot traffic they generate. How much of that will turn into financial services business remains to be seen.

Health and Wealth Play?

Whether the older consumer who tends to use pharmacies more is the best audience to court through this channel, and whether banking through those “branches” will result in much beyond basic accounts remains to be seen.

Branch expert Jon Voorhees, Director of Business Development and Director of Distribution Strategy at TerraStrat, scoffs at the supposed potential of Walgreens’ physical channel.

“It’s a stupid idea,” says Voorhees, who spent years in branch siting at Bank of America —”much like the idea of having the U.S. Postal Service offer banking services. My guess is Walgreens will target the most basic products, savings and credit cards, but you have to ask who would want to bank there.” He sees the appeal as a habitual one for retail — “I have good retail space, how might I use it differently — but doesn’t see the promise.

Voorhees has written for The Financial Brand on how the promise of supermarket branches failed to materialize and he sees any bet on pharmacy physicality as much more of the same disappointment. Supermarkets have much more traffic than pharmacies, he says, and even when ATMs are sited in drug stores they rarely do over 1,000 transactions monthly because they aren’t convenient to the general user, according to Voorhees.

The sleeper in retailing involvement in banking is Rakuten, sometimes called the Amazon of Japan, according to Alyson Clarke. Rakuten is again pursuing a Utah industrial banking charter and federal deposit insurance. Should it succeed this time, she thinks it could be among the real winners in this wave.

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