Banks vs. Fintech? No Contest, Banks Win

By Rene Lacerte for Huffington Post,

The meteoric rise of fintech firms in recent years coupled with the surge of interest by already-established technology companies in the consumer payments space are nothing short of remarkable.

The media headlines charting fintech’s progress in just the past year might even have you think that the end of traditional bank models is here. But that assessment is dead wrong.

What is often overlooked is how much fintech’s advancement relies on the established financial services industry. Participation and cooperation from financial institutions have helped ensure the success of payments innovations such asApple Pay. When an online lender announces a partnership with a big bank, no one writes the startup’s obit. Quite the opposite.

These relationships underscore the future of financial services. Yes, technology advancements and Silicon Valley startups are driving much of the industry’s change. But banks are – and will remain – squarely at the center of the financial universe for quite some time.

And nonbank fintech firms still have a lot of ground to make up in relation to banks in a number of significant areas. One in particular is customer awareness. For all of the attention fintech has garnered, it still has a long way to go before it breaks through in winning over key customer segments, such as business banking customers.

Here are four reasons why nonbank fintech firms still face big challenges in competing with banks:

Banks have been around (and so have their customers)

Banks have been the backbone of modern economies since their inception and will continue to be so well into the future. They are far too ingrained with their customers to be removed within any foreseeable time frame. Likewise, business partners and customers have been using the services offered by banks since well before the technology boom. There is a history and trust that exists between banks and their customers that fintech is still years away from rivaling.

Banks have the deeper pockets

The Lending Club, the alternative lender IPO success story, has a market capitalization of about $5 billion. That’s not bad, but compare it with the $280 billion market cap for Wells Fargo, the largest for any U.S. bank. And whereas only a handful of alternative online lenders have much name recognition, the financial wherewithal of a bank like Wells really becomes crystal clear when you consider that there are more than 6,000 banks in the country. Banks are massive. And having such a large market cap is a signal of security to customers. On the other hand, smaller cap companies are more susceptible to turbulence and market volatility – things business customers would rather avoid.

Banks’ sales force and customer service infrastructure are huge

Banks not only employ thousands of individuals but they maintain robust sales and development programs. Fintech has made strides in improving the efficiency and ease of use for consumer products, but more traditional financial institutions have the physical sales force that is best equipped to help customers recognize and navigate technological and structural changes.

Consider the overwhelming success of banks’ online services. Before online statements, digital check images and other core features of online banking were commonplace, sales teams at banks personally sold the services to mid-market and large corporate clients that ensured its eventual success.

On the other hand, fintech opts for leaner marketing and sales organizational structures, favoring digital solutions over humans. Money management, however, is risky business and customers often need personal confirmation to move forward with change.

Banks have big data – really big data

Although several fintech startups are exploring big data opportunities, banks still have the upper hand in the big data department.

After years of data collection, banks have amassed large incumbent customer bases and data records surrounding customer transactions and behavior. This information is a tremendous asset and banks are the ones holding this asset, not fintech companies. When used in the right way, the data can be leveraged to identify customers ripe for new payment services and to mitigate and underwrite risk in innovative ways.