(Forbes) Fintech is consistently growing, and the next decade should be no different. Not every startup threatens small and midsize banks, but community banks and credit unions should stay on top of fintech trends to know when it’s time to act on a new opportunity.
Here are five trends I see shaping fintech into 2020:
1. Big banks return to the innovation game.
Large banks used to be hotbeds of innovation. In 1958 Bank of America introduced the first all-purpose credit card. Barclays built the first ATM in 1967. But for the past ten years, thanks to the Great Recession and an increased focus on compliance, big banks have eschewed change.
Now big banks are getting back into the innovation game. They’re establishing agile teams and labs to develop new ideas. JPMorgan employs 50,000 technologists. Bank of America is the world’s largest blockchain patent holder. Increasingly, even small banks are partnering with fintech startups. This push for innovation hasn’t yet produced major changes in the way big banks do business, but it inevitably will.
What it means for you: As big banks innovate around the customer experience, small and midsize banks will need to meet customers’ evolving expectations.
2. More fintechs cater to millennials.
Millennials (now 23-38 years old) are the largest generation in the workforce. Between student loans and the high cost of living, they’re not buying homes at the rates previous generations did. They’re also less likely to be entrepreneurs than older workers, despite surveys showing they want to start businesses.
Some startups are innovating ways to help millennials achieve those dreams. Flyhomes tweaks the mortgage lending process to allow ordinary buyers to make all-cash offers. Divvy lets home buyers rent to own. Goodly allows employers to contribute to their employees’ student loans. Many startups and digital-first companies also offer small business loans, albeit often at exorbitant rates.
What it means for you: Banks should look for new ways to serve younger customers’ needs, which are markedly different from older generations. Helping millennials finance their goals will yield dividends in customer loyalty and increased revenue.
3. Paychecks are unbundling.
Previously banks could expect to receive 100% of a direct deposit customer’s paycheck. That’s no longer true. Many startups are now “disrupting” the traditional paycheck, intending to make the consumer experience as seamless as possible.
Earnin and PayActiv give customers affordable advances on their payroll. Other apps, like Even, integrate financial planning advice with payroll advances. All these services aim to eliminate the need for high-cost predatory lenders while providing the flexibility customers want.
Today, 72% of customers mostly access their bank accounts online. Only 18% typically go to a bank branch. These digital-first customers love the convenience of moving money from their mobile phones. Paycheck startups give them even more control over how they manage their money, upping the ante on the customer experience.
What it means for you: It’s not a stretch to imagine these startups offering the option to withdraw cash on a prepaid card, bypassing the need for a bank account altogether. Banks should offer similar innovations to their paycheck-deposit customers — before they’re pushed out entirely.
4. Big money flows into fintech.
Venture-capital-backed companies in fintech raised nearly $40 billion in 2018. That’s an increase of 120%, just since 2017. This investment has enabled companies to expand into new areas. For example, Wealthfront now offers savings accounts, loans and real estate advice, while Robinhood is applying for a bank charter to offer deposits and secured credit cards.
Big tech companies are also dipping their toes in financial waters. Amazon lends to small businesses to improve their customer experience and help build businesses’ capacity to sell on their platform. Apple is launching its own credit card to address customer security concerns, bringing its best-in-class customer experience to a financial product. Facebook aims to launch its own currency. The future of the Office of the Comptroller of the Currency’s proposed fintech charter is still in doubt, but even the attempt to create such a charter signals a more permissive regulatory atmosphere. What all these approaches share is a focus on putting customer needs first.
What it means for you: Brands like Apple or Amazon with deep pockets and strong customer relationships could pose a real threat to traditional banks. Banks need to use the big data they already have on bank customers to deliver more of what they want. It’s time for banks to shift from a product-centric to a more customer-centric paradigm.
5. AI growth builds incrementally.
In small business lending, we’ve seen banks embrace AI as a way to streamline the customer application experience and partially automate simple underwriting decisions, freeing up loan officers to spend more time on personal customer service.
AI as a service is now available from Google, Amazon and other companies, allowing developers without data science backgrounds to incorporate AI into their products. Many early AI adopters are in identity and fraud-detection. AI has enormous potential to automate straightforward processes, enabling banks to offer a better, simpler, faster customer experience. I believe AI will continue its incremental growth from these spaces to other areas.
What it means for you: AI is a powerful tool. Look for ways it can support your business, and keep an open mind about new uses of data.
Conclusion
In 2019 into 2020, I expect to see big banks continue innovating, upping customer expectations for smaller banks and credit unions. I see millennial customers as an increasingly valuable segment for small and midsize lending activity and other banking services. Paychecks will unbundle further to help customers manage their cash flow. And technologies, including AI, will automate rote work and free up bankers for high-touch customer service and complex transactions. Will your bank be ready?
