In his annual letter to shareholders, JP Morgan Chase CEO and stereotypical master of the universe Jamie Dimon seemed uncharacteristically concerned. Hundreds of startups with lots of brains and money were hard at work on alternatives to traditional banking, he wrote: "Silicon Valley is coming."
And he's not the only one paying attention. From peer-to-peer lending to mobile payments, new tech-intensive ways of managing your money are booming. These startups sell themselves aggressively as improvements on the hidebound world of old-school banks and brokerages. And though most of these alternatives are untested, Wall Street is starting to worry.
That's because these so-called "fintech" upstarts are calling attention to the many shortcomings of the gatekeepers who have traditionally controlled lending, paying, and investing. When these incumbents were the only option, they could rest easy assuming annoyed consumers had no other options. Now they do, and a nervous Wall Street, Dimon included, is realizing it has to play along in order to fight back. Amid fears of a growing threat to their market share, Wall Street is now playing catch-up. Banks are launching competitive products (or slapdash imitations, depending on where you sit) to startups' innovations. They're financing partnerships. And in some cases, they're just trying to acquire away threats to their businesses.
The conflict is simple: banks have historically determined who could borrow money and at what rate. They controlled what the transaction fees for payments should be, and how people should (and could) invest their money. But a swell of new startups flush with funding have swooped in to challenge stodgy practices, offering faster and cheaper alternatives with help from big data, cloud computing, and the internet’s power of connectivity.
Lending Club and OnDeck Capital, for example, have become hugely successful at facilitating loans online in direct competition to banks. Square and Stripe have scooped up business for payments processing typically dominated by merchant banks and middlemen. And Robinhood, a free mobile stock trading platform, is hoping to steal customers from companies like eTrade, TD Ameritrade, and Charles Schwab. In a March research report from Goldman Sachs, the company estimated seven percent of banks' annual profits could be at risk from non-banking entities in the next five years.
In response, traditional brokers are beginning to launch their own competitors. In early March, Charles Schwab released a free automated portfolio advisor service to compete with similar automated investment algorithms developed by successful startups such as Betterment and Wealthfront. Banks will need to “work hard to make our services as seamless and competitive as theirs,” Dimon wrote of the new startups. Like Charles Schwab, Experian launched a new credit-tracking app last week to better compete with Credit Karma's mobile-friendly access to your credit score .
Banks are also partnering with seeming competitors. Lending startups “are very good at reducing the ‘pain points’ in that they can make loans in minutes, which might take banks weeks,” Dimon said in his letter. Financial institutions are hoping the fastest way to compete with new lenders may be to partner (or fund) these startups themselves.
The venture arms of banks have been pouring money into the fintech sector. Last week, an online peer-to-peer lending startup, Prosper, announced a $165 million round of financing led by a team of banks, including JP Morgan Asset Management and SunTrust Banks. And Prosper is not alone. Many banks, such as HSBC and Santander, are starting in-house venture funds to invest millions in fintech startups.
Other financial giants have launched startup accelerators in the hope of finding the next big thing in-house. Barclays has partnered with Techstars to run a fintech accelerator this summer in New York. And Wells Fargo started a semiannual accelerator last year, providing direct equity to the startups that are accepted and directly acknowledging that "successful companies may become vendors for the bank."
Sometimes, when banks can’t fight it, they can always acquire it. Spanish banking group BBVA acquired the online bank Simple for $117 million last year in the hope of expanding its digital reach. Analysts suspect more acquisitions will come as startups continue to encroach on the territory of big banks.
As Wall Street giants scramble to catch up, the battle will only intensify. Because if banks don't move to address industry changes, it'll be a slow, but assured "death by a thousand cuts," argues one fintech startup president. Not only do digital trading, lending, and paying startups pose a threat, but Google and Apple have moved into fintech, too. Tech companies may only be starting to chip away at the multi-billion-dollar financial services industry. But in a sector where money trumps all, any loss of market share is a cut too far.
