Recent news from Google on its partnership with BBVA and seven other banks and Facebook’s launch of F2, shows that these companies are serious about entering financial services. These tech giants announced new bank accounts and payments platforms through Google Pay, Facebook, WhatsApp, and Instagram while also investing in India’s telecom giant, JIO Platforms begs the question: what does the bank of the future look like?
For years many thought-leaders have asked, “Do you want your tech company to also to be your bank?” While it’s an important question, it misses the more significant issues that any new entrant into banking, whether it be a startup or a tech company, must answer: What does the next generation (Millennials and Gen Z) of consumers want from a bank, and do they want a bank at all? The answer to this question is much more complicated, and it’s much easier to start by looking at what they don’t want from their bank, business as usual. They are a complicated generation who won’t accept continuing to do certain things because that’s how they’ve always been done.
To start, we have to look at how banking has evolved to be what it is today.
How Banking Became What it is Today
Over the past 100 years, there have been very few fundamental changes in banking that have impacted the average customer’s experience. The advent of the ATM in 1969 gave people access to their money without needing to wait on a long line to see a teller. In the late ’90s, as the world wide web became the internet, online banking launched made many of the traditional functions of a branch obsolete, simultaneously laying the foundation for a new way to bank. Additionally, as the internet grew, new digital payment platforms launched. They have many things in common with a checking account but are not a bank. The last change in banking is a bit more elusive and complex. To fully tell the story requires a brief explanation of Investment Banking (which is just a cryptic name for Corporate Lending) and a law passed in 1999.
I’m old enough to remember when banks were smaller and local, and the average savings account would earn up to 8%. I still have my original bank book, that the teller would update every time I waited on a long line with my mother to deposit checks. My local bank was a part of the community where I grew up. It sponsored little league teams and local events. This was banking as many people knew it, local and personalized. In the early ’90s, as larger investment banks began to merge many small, local banks were acquired by larger institutions. As these bank’s footprints grew, they needed to find ways to create revenue growth that matched their size, and unfortunately, community-focused banking was one of the first things to disappear.
On November 12, 1999, President Clinton signed the Gramm–Leach–Bliley Act. It allowed a single financial institution to operate a consumer (commercial) bank and an investment bank, which was prohibited since the 1930s. With this restriction lifted, the modern “Megabank,” was born and all of a sudden, banking completely changed very quickly, along with it, the term “Money is Cheap,” came into being. How money became cheap is at the heart of “business as usual,” and many other issues younger generations have with banks. Consumer and Investment banks have always made money by making loans, so now, the larger entities found new ways to lend and make money cheap in the process.
In the years that followed, corporate and consumer debt rapidly expanded. Along with the new legislation in 1999, came a continued reduction in interest rates from the Federal Reserve, making it significantly less expensive for banks to borrow and lend money. Consumers took advantage of loosened restrictions to get credit, while on the corporate side, loans enabled companies to grow exponentially. Across banks, there is very little differentiation in what they offer. One of the only ways consumer and investment banks compete is on price and cost of financing. After the law was signed, the real boon for banks was access to consumer deposits. When combined with lower interest rates, their cost of capital was less expensive than ever before.
“Borrowing from one investment bank or another is essentially the same thing. The difference is how the loans are structured and distributed and how frequent and smart their upsell ideas are. Last time we did a big deal, there were 15 banks on the tombstone, they’re competitors but not really. In the end, it all comes down to relationships.” said a Fortune 500 CFO who asked not to be named.
In the corporate world, loans are behind everything, from large building projects and oil and gas pipelines to mergers and acquisitions. To stay competitive, banks offer corporate loans at reduced interest rates. Rather than absorb the reduction in costs through their fees, they reduced the interest they paid to their consumer banking clients. This reality hasn’t eluded younger generations. They are well aware of the role banks play in many of the things they object to, as banks have been the target of many protests in recent years. So when I say the next generation won’t accept business as usual, the business I’m talking about is business that goes counter to the next generation’s values and what they expect from companies.
If the recent protests and demands for social change have shown anything about younger generations, it’s that they’re not apathetic and won’t stand for things being done a certain way simply because that’s how it’s always been. They judge companies differently than their predecessors. The next generation looks for companies that align their principles with their performance and are equally focused on making an impact on society as they are on their bottom line and, overall, focus on being good corporate citizens.
Banking for the Next Generation: Apps & Super Apps
It’s clear the next generation will not blindly accept earning nominal interest, while the big banks that foreclosed on their parent’s homes make inexpensive loans to the large companies they believe are destroying the planet or have business practices that go counter to their values. A few years ago, startup founders took note, and we saw the rise in fintech, digital banks, and digital payments platforms. They launched with the promise of a new approach to financial services and planned to design features with user’s every day lives in mind. digital banks promised reduced fees for overdraft, no minimum balance requirements, and free visits to the ATM, all with the goal of being the bank for the next generation.
As these new platforms became more widely adopted, financially, millennials began to take a different path than their parent’s generation. On average, outside of student debt, younger millennials have rejected credit cards and instead use their debit card for purchases, and rather than write checks they use P2P apps like Venmo. Many have also given up on the traditional interest-bearing savings account. Instead, they look for opportunities to earn rewards on their spending through cashback, discounts, and other non-traditional rewards.
Digital banks were meant to fill the banking void in their individual financial universe, yet the reality is that most of the digital banks haven’t delivered on their original promise, and in nearly all cases, the products and services they offer are the same found at a traditional bank.
Outside of the U.S., in China with WeChat and Korea with Kakao, super apps have created an entirely new commerce sector that changed the way buyers and sellers connect, and how products are purchased. WeChat began as a messaging app but grew into a 360 platform containing micro-apps for shopping, travel, ride-hailing, food delivery, entertainment, communication, messaging, and much more. The platform’s 1.17 billion users make 1 billion transactions per day across 1 million mini-apps. At its core, WeChat is an operating system that represents an entirely new digital experience and provides users an alternative to traditional financial services.
Although not announced, building a super app in India seems to be part of what Google, Facebook, and others are trying to accomplish with their investment in JIO Platforms. Going back to the original question, it isn’t about whether or not the next generation will accept tech companies as their bank. Instead, the question is, can the tech companies create a platform that changes how the next generation spends their money?
India is a large, untapped market with massive potential. With anti-corruption measures designed to make the economy cashless, the government is, in some ways paving the way for a super app in India. While WeChat and Kakao are locally owned, the investors in JIO Platforms are global companies with the core elements -an operating system, app store, payments platform, social network, and messenger- needed to create a super app with global potential. If they find a model that works in one market, they can localize and repeat it in other markets, just like Google and Facebook did with their main products. So why would this be any different? If these companies are able to prove the super app model, then they will have in-effect delivered on the promise the digital banks initially made and finally create a solution that brings together financial services, spending, social media, and has the potential to be a part of their day-to-day lives.
The View from Digital Banks
Some digital banks see the potential for challengers on the horizon and have created a banking model that can stand on its own against a global super app. N26, one of the largest in the world, sees the need to simplify financial services and delivers alternative ways for individuals to benefit from their spending. The company has continued to stay the course and offer different services than its competitors.
“We are already seeing change taking place in the industry today, driven largely by new and innovative players offering customers simpler, more flexible ways to manage their money anytime, and anywhere. More players will enter the market, and more traditional banks will invest in accelerating their digitization efforts. Not all will succeed, especially as the industry grows more competitive. Those with a strong product and sound business model will have an edge, but in the end, customers will benefit from greater transparency, lower costs and more innovative products overall.” says Alex Weber, Chief Growth Officer of N26
While Weber makes a good point, the company’s product is only one of a small group of digital banks that seems to be delivering on the core ideas of personalization. Others in the U.S. have essentially doubled down on building a branchless version of a traditional bank.
With a few exceptions like getting paid two days early or having automatic discounts on certain products, these digital banks haven’t innovated, found a way to be the consumer’s only bank, or fully delivered on their promise to bring real change.
Now we’re seeing serious moves into banking coming from Google. The company’s investment in JIO Platforms brings with it the potential for a super app that combines Google’s network, operating system, and an app store with Facebook’s social networking and messaging platforms. So what will begin with JIO Platforms in India, could evolve into something that the cohort of digital banks are not equipped to compete against and ultimately take away their opportunity to be the banks of the next generation. There are already 2.5 billion active Android phones globally, it already has a massive audience of potential users and an incredible amount of data to uncover what they truly want.
Overall, Facebook and Google’s recent announcements show the company’s intent to build on the strong foundation each has in place and bring payments closer to its user’s day-to-day activities.
Where do we go From Here?
To get ahead of this potential competition, digital banks must go back to their original pitch decks to find inspiration and come up with ways to deliver on their original promises.
If they lack the internal capacity to create new banking that will attract younger audiences, they should perhaps explore partnerships. Outside of their cohort, several new companies have created new ways for individuals to provide individualized offers, engage personal networks, and earn rewards for their spending.
“The digital banks and traditional banks that will win are those that find a way to blend social networking, messaging, commerce, and banking. This is how they can connect to their user’s everyday lives. Bank accounts aren’t as important as payments. Companies like Meemo, Nate, and Spurse have capitalized on this idea and raised significant funding to support their growth.” Says Stephen Milbank, Co-Founder, Head of Global Strategic Partnerships for Button, a company that is focused on building a better way to do business on mobile.
Currently, digital banks and payments are separate, yet they share an audience and goals, and both operate in the same grey area. From a user experience standpoint, many can’t see the difference. They can add funds to a P2P account in the same way they load a digital bank’s checking account.
Payments platforms are also leading the charge when it comes to partnerships and alternative rewards. Paypal is rewarding customers for setting up direct deposit, while Venmo and Cash App offer automatic cashback on specific purchases, instant deposit to a checking account, and the ability to transfer money to other members seamlessly. Digital payments platforms seem to understand the reality that many digital banks do not.
The future of consumer banking isn’t about banking, it’s focused on how people pay.
With COVID making many aspects of our lives turn digital, now is the moment for the digital banks to truly innovate and demonstrate their worth. Very few challenge the practices of large banks. Yet, with much of the blame falling to big banks for the challenges in the first round of PPP loans, and an acceleration in foreclosures, perhaps this is the time for digital banks to start making a demonstration of their values and challenging big banks in the court of public opinion. The pandemic has also accelerated many of the issues facing retail brands who need to find new distribution channels to make up for a significant decline in traffic in their stores, this should be the basis for a new set of partnerships and exclusive offers.
Since a savings account no longer provides the same appeal for long-term savings as it did when I was growing up, the next generation needs to look elsewhere to bolster their savings. Many companies are innovating in the rewards space –Bumped, and Bits of Stock provide cashback in the form of fractional shares of stock, Evoshare offers it as contributions to a retirement account and Pei providing Bitcoin, a partnership with this type of companies, provides a level of incentive that would make a bank very attractive to any generation. In the end, regardless of what happens with JIO Platforms and its big tech stakeholders, the looming question for the future of banking is one that’s fundamental to design.
We can build anything, so what do we build?
With Millennials and Gen Z set to become the largest segment of consumers in the U.S. by 2024, now is the time for new entrants to solidify their presence and engage customers without the baggage of traditional banks. If done correctly, they can build new relationships based on a new way to bank that will last a lifetime.