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BirdsEye View

The continued evolution of the payments and lending business has wide-reaching impact across industries, and particularly in banking.  Disruptors figured out that banks are vulnerable, especially when it comes to a smooth customer experience, and they are attacking us on many fronts.

Money movement is now old news.  Venmo has been firmly established as the premier peer-to-peer payment vehicle, and even Cash (by Square) is making strides in imitating their offering.  The link to Facebook and the ability to use emojis and other social content endeared this tool to many users.  Banks have caught up (sort of) to the functionality, but not to the hipness of the offering.

The next frontier is the merchant end.  Numerous start-ups are targeting transactions that involve a loyalty program, merchant offer, or reward.  Many focus on the revenue from the payments data rather than the payment itself.  I find it ironic that banks have all the data but do not use or monetize it effectively, while so many vendors are looking to capture, categorize, and output the data in a value-added, actionable form.

Banks still have the vast majority of customers on both ends of the payment transaction.  Their distribution networks are invincible.  But those startups beat us time and again on innovation…

Lending disruptors

The lending side is under greater pressure.  New lending models are driven by data and analytics, and those create viable challenges to well-established players.  Banks minimize the importance of these models.  They tell me time and time again that these models have not been proven during hard times; they disagree when I laud the usefulness of Yelp ratings as a source of reliable cash-flow predictions.  While I see the point, I can’t help but notice that banks are working hard to partner with Lending Club (something I support) and OnDeck, both of which went public last year.  These and others like them are growing fast and capturing convenience-based segments which are also growing rapidly.  I fear this bodes further disruption to traditional lenders.

Al Goldstein, CEO of Avant, says that 60% of the borrowing market is not served because the lending activity is concentrated on borrowers with FICO scores of 700+.  Noah Breslow, CEO of OnDeck, says that the company takes a “business first” approach and focuses on business fundamentals rather than relying on the credit score of the small business owner.  He further asserts that OnDeck uses more data than banks when analyzing the credit risk.  The volume of loans now being originated by alternative lenders is not yet alarming, but the trajectory certainly is, especially when the capital support for these start-ups is taken into account.  It implies that these disruptors have enough capital to continue to innovate and build share, offering both convenience and availability to traditional bank customers. 

Distribution disruptors

Much has been said about Apple Pay and Samsung Pay.  Not much has actually happened with those applications, but some lessons have already been learned.  For example, we now know that the Apple decal logo on the point-of-sale terminal is more effective at driving traffic than the NFC (Near Field Communication) logo.  That’s not a good thing for banks – it means that brand matters, and that companies like Apple and Starbucks are exceptionally well-positioned to capture a greater share of the payments revenue from card issuers. 

Also, while the disruption doesn’t appear meaningful yet, Apple at one year now has 1% market share of all transactions.  A merchant was recently quoted saying that Apple Pay customers buy higher ticket items for greater customer satisfaction.  Plus, AMEX is now partnering with Apple Pay to introduce the channel overseas, which should give the card issuer a head start over its non-US competitors.

I believe we will see slow evolution, multiple mobile wallets, and, at the end, the usual hockey-stick adoption curve with 6-12 major players, much like the credit card business.  Frictionless payments MIGHT push bank brands and card networks into the background.  Note Starbucks, which accounts for 21% of all mobile payments (!), and Venmo, which won the p-to-p battle by its connection to Facebook and personal expression capabilities

Incumbent players and technologies are under attack.  A good way to evaluate a relationship is based upon the following criteria, offered by John Heggestuen from Business Insider - 

·                     Frequency

·                     Value

·                     Quality

·                     Convenience

·                     “Is there a better option?”

These criteria do not pan out well when it comes to branches and today’s younger customers.  One enlightening statistic:  71% of millennials say it is important to them to have a banking app.  Even ATMs are at risk, since cash now represents only 20% of consumer payments in the US.  Another interesting datum is that PayPal and Venmo have overtaken checks as a means of paying people back. 

Utimately, the real question is – how will merchants, millennials and mobile interact and what will the chemistry do to traditional banking distribution? Only time will tell, but we can look at how people are paying today to make some educated guesses about what the future holds. Based on the above, banks will need to make adjustments if we want to remain relevant.