7 things that will affect next stage of banking's evolution

December 12, 2019 9:00 PM

The competitive threat posed by fintechs is going to get worse for banks over the next few years.

That was the consensus among fintech executives and even a few bankers attending SourceMedia's recent In|Vest West conference in San Francisco.

Though many banks have struck deals with fintechs, those partnerships appear increasingly under threat, with some firms suggesting they no longer need or want to deal with what they see as slow traditional players despite their entrenched advantages.

And while banks have stepped up their digital offerings and improved their mobile customer experience, it's not clear they can buy their way out of their problems, and many see them as continuing to fall further behind.

Following is a look at some of the technological challenges facing bankers.

Tougher challenges for incumbents

The pendulum in fintech-bank relationships could begin swinging back toward a more pugilistic tone.

Representing the new drive among digital-first firms to expand banking products, Wealthfront CEO Andy Rachleff threw down a challenge to big banks — when it comes to technology and customers, digital players can manage it far better.

“First and foremost, we can be fairer to our customers,” Rachleff said in an interview with American Banker Editor at Large Penny Crosman at SourceMedia's In|Vest West conference. “Everyone hates their cable guy and everyone hates their banks.”

Betterment CEO Jon Stein went further, arguing that banks' products "hurt America."

Wealthfront is planning to expand from its base in robo advice into mortgages, having already begun offering high-interest cash accounts earlier this year. The robo-adviser expects to launch a debit card, automated bill pay and direct deposit early next year.

“You no longer need a checking and a savings account. You have just one account,” he added. “There's no reason for two accounts — other than regulatory restrictions.”

Yet there were plenty though who disagreed with Rachleff’s stance.

“Bank of America, Citi, JPMorgan Chase, are powerful brands that will be difficult to disintermediate,” said Tony Berman, vice president of technology products at Pershing. “Wealthfront is growing, but they have a long way to go before becoming a brand like Citi.”

Bloomberg News

More upstart competition for accounts

Wealthfront isn't the only digital-first firm intending to spin out additional banking services.

Stein acknowledged his firm is “shifting resources hard” to the sector and that banking represents one of his firm's biggest opportunities. The digital advice firm recently introduced high-yield cash reserves, which attracted around $1 billion in deposits within a few weeks, according to Stein. The company also offers checking and savings products.

Robinhood also finally unveiled its version of a bank account, an effort that has been stymied amid regulatory challenges. The online brokerage will offer some users a cash management account, which will push money not being used for trading into a separate account with 1.8% interest, Bloomberg News reported.

For fintechs, there's a clear strategy now to capture the customer as early as possible, and checking and savings accounts are the way in, according to Jon Stevenson, head of wealth management and banking at MoneyLion.

“I don’t think customers who are digitally native are going to graduate to a traditional financial services relationship,” Stevenson said.

The client is about to change again

Although banks still may be adjusting to the demands of millennials, one banker had some tough advice for her fellow institutions — it's time to instead focus on emerging Generation Z customers.

“Over the next 10 years, the largest turnover of generations in sheer numbers will occur in our lifetime,” Julia Carreon, managing director of digital and fiduciary operations at Wells Fargo, told the In|Vest West audience. “The silent generation will die. Boomers will exit the workforce. The much infantilized, forever-frozen-in-time millennials will turn 40, and we will witness the rise of Gen Z.”

The rise of e-sports and texting-only services are examples of how this generation — born between 1996 and 2011— is changing even established tech industries and modes of communications, she later explained in a conversation with Crosman.

Gen Z, she noted, controls $45 billion in annual spending. The oldest in the group are nearing 24.

“They're entrepreneurial minded: 72% say they want to own their own business,” Carreon said. “That has significant implications for the kind of products that we would develop.”

Firms will have to spend even more on digital platforms

When the financial advice firm United Capital was acquired by Goldman Sachs for $750 million earlier this year, there was an industry assumption it was bought mainly for its $21 billion in high-net-worth client assets.

But the bank is now investing in United’s FinLife third-party wealth management platform, according to United Capital CEO Joe Duran.

The bank has assigned 200 engineers to transform it in the next year into a financial advice platform, including a robo-adviser, banking, a tech stack for advisers and a variety of tools for clients, he said.

“Banking will be a huge element of what we’re doing,” Duran said at the annual MarketCounsel Summit.

It's just the latest in a line of investments by big banks and custodians into digital platforms and building digital scale aimed at the financial professional.

Charles Schwab's $26 billion deal to acquire TD Ameritrade, for instance, dovetails with the brokerage's efforts to expand its banking offerings and planning platform capabilities.

Schwab will be providing financial planners with “a lot more” banking capabilities, CEO Walt Bettinger said in his keynote talk at the company’s annual Impact conference.

While Schwab already has a bank, the company will be getting into “different types of lending” that planners can offer, possibly including mortgage lending, unsecured loans for clients and loans to advisers’ firms, Bettinger said.

The technology push will get harder

Many technologists at financial services firms are concerned about how to advocate for the high cost of tech investment in the face of potential economic downturn.

“I feel like I always operate in a recession,” Robert Candler, the head of digital client strategy at Bernstein Private Wealth Management, told the audience at InVest|West.

Ron Shevlin, managing director of fintech research at Cornerstone Advisors, estimates U.S. banks have spent $67 billion overall on tech budgets.

Meanwhile, integrating increasingly advanced technology onto existing bank infrastructure is getting tougher.

Kabir Sethi, director of digital wealth management at Merrill Lynch, provided an anecdote to the audience to explain: The project to build a new onboarding system for its digital platform at his firm took more than a year and 130 staff.

No financial services firm can avoid such investment, though, as it will be critical to leaner and more efficient operations, according to a new study from Accenture.

U.S. and Canadian banks could save more than $70 billion through 2025 using technology to automate jobs or assist employees, the firm found, according to Bloomberg News.

As part of tackling costs and investment, banks will have to rethink the resource allocation discussion, said Anton Honikman, chief executive of MyVest, an enterprise wealth management platform provider owned by the insurance giant TIAA.

"It's a real challenge," Honikman said. "They must ask, does our organizational design and structure hold back progress? Firms not only are organized a certain way, but their budgets are allocated in that same way, teams are formed that way, and data structure is ordered to support those fiefdoms."

Private equity will shape new alliances

Core banking and payments giant Fiserv decided to sell the majority stake in its investment services business to private-equity firm Motive Partners.

It was the right decision, said Cheryl Nash, president of investment services at Fiserv, since it gives her firm a relationship with Fiserv and a new ability to seek acquisitions and grow other businesses, thanks to Motive.

“When we look at the acquisitions out there, obviously there's opportunities for us to make a big, big difference," Nash said.

That sort of cash flow into fintech has shown no signs of abatement, according to CB Insights: Corporate cash accounted for a record 329 deals totaling $8 billion this year.

Citigroup and Goldman Sachs were deal leaders, according to CB Insights, with a combined 130 deals together.

Executives expect megadeals, such as Schwab's play for TD Ameritrade, will spawn further acquisitions.

"It’s a great M&A market," Nash said. "There is a lot of PE money out there. It was a good time for us to really start down this next journey."

Expect competition from more than just Google

The industry in recent weeks has seen announcements from big tech: Google, Amazon and Apple all have banking products or relationships now. But is that the end of it?

In the last panel of the In|Vest West conference, a final question was asked: Who else could enter the industry if is moving toward an all-in-one financial digital offering, that brings together checking and savings, lending, wealth management and insurance?

Could such a convergence prompt Walmart to take another attempt at entering financial services, asked Tim Welsh, head of industry consulting firm Nexus Strategy. (The retail giant does offer GoBank, a service powered by GreenDot.)

Potentially, said Personal Capital Chief Product Manager Jim DelFavero. It all depends on how regulators and consumer demand shifts — noting that the current mashup of banking and wealth management taking place is already eroding industry barriers.

(Personal Capital, a digital advice firm, introduced its own high-yield savings account in June.)

Another possibility, said Addepar CEO Eric Poirer, is that foreign tech giants try again at breaking into the broader U.S. consumer banking and investment market.

Ant Financial in China now oversees the world's largest money market fund. A competing fund from Tencent has grown rapidly as well. These are tech firms that have figured out how to offer highly successful financial products at scale, Poirer said.

"It's very possible they compete here one day," he said.