My mother writes checks when she receives bills in the mail, while I make automatic payments electronically each month. My daughter, however, is open to taking care of money matters via whatever mobile app comes along.
“For millennials, if you’re not mobile, you don’t matter,” said Andy Brown, CEO and cofounder of Sand Hill East, an advisory and consulting firm serving early-stage companies, during his keynote at the annual NetSuite SuiteWorld event held recently in Las Vegas.
One of the challenges for banks and other financial institutions is that they need to serve digital natives, digital dinosaurs, and all people in between seamlessly—as well as prepare for a rising tide of customers like my daughter.
But since the financial meltdown 10 years ago, financial services companies have had to redeploy much of the money they used to spend on innovation just to keep up with regulations, Brown said. Simultaneously, the introduction of the iPhone (also in 2007) created a massive shift in consumer expectations about customer service.
A rush of fintech startups took advantage of these parallel opportunities. Instead of competing with banks with a multitude of services, these startups “look at areas that are unserved, where customers want to do something that banks won’t help them do,” he said.
Today, fintechs are occupying—and in many case disrupting—every single banking sector, from loans to investments to insurance. Follow the money: Investors pumped more than $24 billion into fintechs in 2016, after investing $46.7 billion money the year before, according to KPMG’s Q4 ’16 Pulse of Fintech Report.
A survey by PwC released last year found that 83% of respondents from traditional financial services firms and 95% from banks think that part of their business could be lost to niche fintech firms.
Established financial service companies are now debating whether to build their own competing services, buy one or more of the fintechs, or “borrow” those services through partnerships, said Eileen Tobias, NetSuite vice president of business strategy.
“Building it can be costly, and there could be delays getting to market,” Tobias said at SuiteWorld. “Buying a startup is a big risk. So what we’re seeing in this industry is a lot of partnerships.”
In 2016, for example, JPMorgan Chase teamed with OnDeck Capital to provide loans to small businesses faster. In March, HSBC announced that it’s partnering with Tradeshift, which manages supply chain invoicing for companies online, enabling it to offer trade financing to more businesses. And in early May, Barclays announced its seventh innovation center, where its internal banking and technology teams work alongside startup partners to create new products and platforms.
Agile Tech for the Win-Win
Among the fintech startups using technology to blaze new paths is Avant, founded in 2013 to provide “near-prime” unsecured consumer loans on its online lending platform. To date, the company has provided about $4 billion in loans to 500,000 customers and has raised more than $600 million in equity.
“Taking out a loan from a bank involves a lot of back and forth,” said Dan Seikel, Avant director of finance, at SuiteWorld. “There’s not much clarity on status, it takes forever. We’ve been able to use technology to streamline that process. We can underwrite customers very quickly, and get cash to them as soon as the next business day.”
Avant’s machine learning technology looks at consumers’ FICO scores and hundreds of other variables to assess the credit worthiness of a loan applicant. “Banks might look at four or five variables, and they’ll use FICO as their main source of underwriting,” he said.
Within a year of its launch, Avant started a UK subsidiary and found that running the business on QuickBooks and consolidating multiple currencies on Excel wasn’t going to scale. Avant switched to the NetSuite OneWorld software suite, which it uses to consolidate financials, calculate other comprehensive income (OCI), do segment reporting on its now multiple subsidiaries, and compile financial statements quickly.
“There’s so much built into NetSuite. We know we’ve just scratched the surface, and we’re excited to use more of the functionality as we continue to grow,” Seikel said.
And grow it has. Avant no longer focuses just on direct loans; it now allows institutional investors to purchase its loans. Among its partnerships, the company signed a deal with Regions Bank, which will use Avant's online platform to offer unsecured loans to consumers through the Regions website. If the customer doesn’t fit Regions’ guidelines, Avant may provide the loan itself.
Regions are able to serve more customers faster, and Avant’s business grows as well. It’s the kind of flexible approach banks will need to serve millennials, the demographic of consumers roughly between the ages of 18 and 35.
According to The Millennial Disruption Index, a three-year study that included a survey of 10,000 millennials, one in three people in this age group is open to switching banks in the next 90 days, while 53% don’t think their bank offers anything different from other banks—and one-third think they won’t need a bank at all at some point in the future.
All the more reason that digitally native fintechs and established banks alike need to stay on their toes.
Margaret Harrist is director of content strategy and implementation at Oracle.
