Some are app-based solutions, such as those from PayPal’s (PYPL) Venmo or Square’s (SQ) Cash App, that may be used to digitally pay back a friend for picking up dinner, while others allow users to scan and pay bills through a linked bank account or credit card. Like other industries that are being upended by technology and the smartphone, the way we bank is being revolutionized and technology companies that aren’t encumbered by a bank’s legacy business model are leading the way.
When internet companies first emerged, new business models were birthed to take advantage of this new technology, focusing on user growth with little thought to cost structure. Later, after the dot com bubble burst had just about finished bursting, we wrote in 2001: “It may not seem that way, but behind the scenes in Corporate America, there are tens of thousands of technology professionals, business analysts, and consultants trying to figure out how their company can use the internet.”
FinTech David meets Banking Goliaths
Up until a couple of years ago, most banks that offered online banking included account management, bill paying, and a few other basic services, including the ability to switch from paper to electronic statements. With banking apps on the smartphone, the ability to deposit checks was added for those who wanted to avoid either the line at the bank or the ATM. The smartphone also enabled other financial apps that would let users check their portfolio with Fidelity, TD Ameritrade, or other brokerages.
However, the creative destruction engine that is the smartphone also gave rise to new technology companies such as PayPal, Venmo, Chime, Acorns, Betterment, SoFi, Square, Cash App, Stripe, and Plaid that bring the kind of speed and flexibility Gen Z and Millennial customers simply can’t do without, Gen X types appreciate, and Boomers view as a novelty.
Initially, the bulk of this flexibility was tied to moving money around. Up until 2017, the only way for a customer with a traditional retail bank in the U.S. to send money to a friend was to write them a check (which takes a few days to clear), walk to the ATM and withdraw cash, or even initiating a wire (which featured fees on both sides and would a few days to process). Today, very few people would find any of this acceptable.
First FinTech Steps
For over two decades, PayPal has been at the forefront of the digital payments space and was, by some accounts, one of the drivers of the success of eBay (EBAY). Prior to the launch of what was then called “Confinity,” eBay users were mailing each other checks and money orders. What PayPal did that was so revolutionary was it connected all the “walled gardens” that are retail banking institutions. Clients of Bank of America (BAC) could now electronically send money to clients of Chase Bank (JPM), for example, simply by using the website or cellphone app.
The Banking Empires Strike Back
Services like PayPal, Venmo, and Cash App require an existing traditional bank account and essentially utilize the same ACH network that powers direct deposit services and check clearing. In 2017 the service previously known as clearXchange was relaunched as Zelle. If you’re a traditional bank user, particularly with Bank of America or Wells Fargo (WFC), you have likely seen a button on the app to Send/Receive money through a transaction that references either your email address or mobile phone number.
Zelle is owned by Early Warning Services, a private financial services company that is owned by Bank of America, Capital One (COF), JPMorgan Chase, PNC Bank (PNC), US Bancorp (USB), and Wells Fargo. Clearly, they recognized what PayPal was doing and wanted to build a moat around their business, as they looked to build a weapon against the rising tide of upstart person-to-person (P2P) finance companies.
An important point to consider is that banks have a number of risk management and regulatory hurdles to consider that make them less nimble and customer-responsive than many of the more disruptive players mentioned above. One of the hurdles with Zelle is daily and monthly transfer amount limits, which can vary from bank to bank, as well as only being able to associate one banking institution with a given email address or mobile number.
On the payments side of things, companies like Square, Stripe, and Plaid are providing easier to manage alternatives to existing payments companies like Visa (V), Mastercard (MC) and American Express (AXP).
They are also starting to layer on additional services targeting traditional retail banking customers, as evidenced by an eagle-eyed developer who recently noticed inactive code in a recent Square app update, clearly referencing savings and checking accounts. Square Financial Services, a subsidiary of Square, was approved for a U.S. banking charter earlier this year, but we’ll have to wait before we know exactly what comes next.
Meanwhile, JPMorgan Chase recently closed its Chase Pay method, opting to incorporate “the most popular features directly into the Chase mobile app and chase.com.” Interestingly, as it wound down that service, JPMorgan Chase leaned heavily on PayPal as well as Apple Pay, Google Pay, Samsung Pay, and other digital wallets.
Companies like Robinhood, Acorns, Betterment, and SoFi are also doing double duty, offering customers a place to not only save money but also to invest it as well. In fact, it was the popularity of these apps that essentially forced traditional brokerages to offer fractional share trading in 2020.
Meanwhile, we are also seeing digital banking platforms focus on the underbanked, with one example being Greenwood Financial, a neobank that is focusing on Black and Latino customers who have historically been denied access to credit and other financial services at much higher rates than white customers. A neobank is an entirely online-only financial institution that typically partners with a traditional bank, so deposits are FDIC-insured, unlike services like PayPal or Cash App.
Whether it is traditional banking, payment structures, or investing, there are still some gaps between what is being offered (and regulated) and what consumers want. Some would see that as a set of pain points, while others would see that as an opportunity. We suspect the lines between companies like Square and PayPal will continue to blur with those of companies like Bank of America, JPMorgan Chase, and others. The difference will be one of consumer experience and user interface on the front end while technology and artificial intelligence drives turnaround time and costs lower.
How far are these two different types of financial companies likely to overlap? Hard to say, but could Square potentially partner with Robinhood the way Bank of America did with Merrill Lynch to become a FinTech one-stop shop player? Could traditional banks potentially acquire one or more FinTech companies and bring their capabilities in-house?
The answers to those questions are the same – maybe. A more definitive answer is likely to be had in the coming years. From our thematic perspective that focuses on structural changes that alter playing fields, we see much more change coming in the world of finance.