Breaking Banks
Special Episode — Back By Popular Demand: Fintech’s Getting Spicy
Thu Jun 29 2023Financial IndustryInflationEconomic DownturnCustomer NeedsBanking IndustryDigital TransformationAutomationBuy Now Pay LaterNeoBanksCrypto RisksLending ChallengesRegulationTerminologyFuture of FinTechCustomer-Centric Innovation
Description
The episode covers various topics in the financial industry, including the impact of inflation and economic downturn, adapting to customer needs, challenges and innovations in the banking industry, digital transformation and automation in banks, the rise of buy now, pay later and its challenges, challenges faced by NeoBanks and crypto risks, lending challenges and the future of FinTech, regulation, terminology, and the future of FinTech, the need for customer-centric innovation in FinTech, and recommendations and additional resources.
Insights
Inflation and Economic Downturn
Financial institutions may face challenges as money becomes less available and deposits decline. The possibility of a recession looms, leading to potential pullbacks and short-term risk mitigation instead of innovation and investment.
Adapting to Customer Needs
Fintech companies should focus on robust underwriting and collections practices, as well as customer-focused strategies. Understanding customer needs is crucial for financial institutions.
Challenges in the Banking Industry
Banks need to be innovative and adaptable to keep up with technology. Bank-fintech partnerships require rethinking processes and culture within banks.
Digital Transformation and Automation
Digitizing existing broken processes is not enough; a complete redesign and automation are necessary. Transformations in banks and startups require hard work, acceptance of failures, and real value creation.
Rise of Buy Now, Pay Later
Buy now, pay later is becoming popular but can lead to overspending. Balances across multiple platforms can be challenging to manage, impacting cash flow projection.
Challenges Faced by NeoBanks and Crypto Risks
NeoBanks face challenges in obtaining bank charters and underwriting loans. Crypto investments can be risky, especially without safeguards like FDIC insurance.
Challenges in Lending and the Future of FinTech
Lending to lower income, lower credit score, and younger customers is difficult. Startups should focus on profitability and learn from past lessons.
Regulation and the Future of Fintech
Regulators need to provide guidance on terminology in fintech and crypto products. Banks should understand the risks associated with partnering with fintech companies operating in legally gray areas.
Customer-Centric Innovation in FinTech
FinTech needs more innovation in creating new financial products and experiences. Startups should prioritize hitting metrics and focus on customer-centric issues.
Additional Resources
There are still people working on unsolved problems in the fintech space. Alex's newsletter and fintechtakes.com offer valuable insights and analysis.
Chapters
- The Impact of Inflation and Economic Downturn
- Adapting to Customer Needs in the Financial Industry
- Challenges and Innovations in the Banking Industry
- Digital Transformation and Automation in Banks
- The Rise of Buy Now, Pay Later and its Challenges
- Challenges Faced by NeoBanks and Crypto Risks
- Challenges in Lending and the Future of FinTech
- Regulation, Terminology, and the Future of Fintech
- The Need for Customer-Centric Innovation in FinTech
- Recommendations and Additional Resources
Summary
Transcript
The Impact of Inflation and Economic Downturn
00:06 - 07:40
- Inflation is rising, with perceptions potentially worse than the reality
- Financial institutions may be in for a shock as money becomes less freely available and deposits decline
- The decline in the value of retirement accounts will affect cash flow and consumer behavior
- Credit utilization is increasing despite previous efforts to pay down debt
- The possibility of a recession is looming, leading to potential pullbacks and short-term risk mitigation instead of innovation and investment
- Finger pointing may occur regarding credit that was seen as innovative but may not withstand economic downturns
- Many fintechs grew during a period of economic growth and may face challenges in a downturn
Adapting to Customer Needs in the Financial Industry
07:12 - 15:25
- Many fintech companies have not experienced a downturn and may struggle with underwriting and collections in a down market
- It is important for fintech companies to have robust underwriting and collections practices, as well as customer-focused strategies
- Financial institutions should invest in understanding their customers' needs and adapting quickly to meet them
- CEOs of financial institutions spend only 3% of their time with customers, which hinders their ability to truly understand customer needs
- Getting close to the customer experience through methods like reading customer service letters can provide valuable insights that focus groups cannot
- Understanding the full context of why people have their relationship with the bank is crucial, as money is often a stressor for most people
Challenges and Innovations in the Banking Industry
15:04 - 23:02
- Irrationality and stress around money are common among most people
- During the financial crisis, home ownership remained important to people despite plunging home prices
- In 2021, there was a significant decrease in bank M&A activity, but banks with strong balance sheets may see it as an opportunity to consolidate
- Some banks may be forced to sell due to underwriting practices and falling balance sheets
- The fundamentals of bank stocks have been masked by external factors like cheap money and low default rates
- Branch closures and consolidation may not work well for banks lacking a strong virtual channel support system
- Banks need to be constantly innovative and adaptable in order to keep up with the pace of change in technology
- Bank-fintech partnerships are starting points, but they require rethinking processes and culture within banks
- Automating broken processes through digitization is not an effective solution for banks
Digital Transformation and Automation in Banks
22:35 - 30:42
- Banks often want to digitize their existing broken processes, which hinders progress
- Digitizing existing processes is not enough; a complete redesign and automation are necessary
- Technology alone is not a silver bullet; significant organizational change is required
- Transformations in banks and startups require hard work, acceptance of failures, and real value creation
- Scaling in the financial industry involves building compliant infrastructure and emphasizing value creation
- Companies that create real value by solving market problems will thrive in the fintech world
The Rise of Buy Now, Pay Later and its Challenges
30:20 - 37:04
- Buy now, pay later is becoming popular, with PayPal and Apple entering the market
- It is essentially another type of lending, not much different from traditional loans
- The distribution side is where banks differ from platforms like Klarna
- Distribution of buy now, pay later is becoming more pervasive and offers more ways to pay
- Credit cards can be dangerous for consumers, leading to overspending
- Buy now, pay later amplifies this effect by diminishing the pain of payment
- Merchants subsidize buy now, pay later transactions to increase cart values and average order values
- As Apple and banks enter the market, incentives may shift towards caring about customer usage and credit risk
- Banks may have a different outcome compared to platforms due to their different incentives
- Balances across multiple buy now, pay later platforms are not easily known or tracked by consumers
- Cash flow analysis becomes challenging with multiple loans spread out over different due dates and paycheck cycles
- Automatic bill payments add complexity for customers managing multiple due dates without missing payments
- Cash flow projection becomes a bigger nightmare as unpredictability leads to negative balances and reliance on buy now, pay later for necessities
Challenges Faced by NeoBanks and Crypto Risks
36:35 - 43:32
- Cash flow projection is becoming a bigger nightmare, especially with the unpredictability of the current situation
- Buy now pay later options are being used more for necessities like Nashville hot wings
- Buy now pay later companies don't report to bureaus and lack integrations with open banking platforms, making it difficult to manage cash flow
- NeoBanks are experiencing a shift in investor focus from rapid growth to profitability and sustainable business models
- Some NeoBanks are making drastic business decisions, such as dropping small business customers, to prioritize profitability
- The viability of NeoBanking as an interchange-based business model is questionable in a higher rate environment
- NeoBanks face challenges in obtaining bank charters and underwriting loans due to their customer base skewing towards lower income and credit scores
Challenges in Lending and the Future of FinTech
43:03 - 49:50
- Lending is difficult for neobanks due to the challenges of lending to lower income, lower credit score, and younger customers
- Many neobanks have been focused on acquiring young customers without a clear plan for profitability
- FinTech companies that have been around for a while and have learned from past lessons are in a better position to succeed
- Hyper growth can teach the wrong lessons in FinTech
- Crypto as an investment is fine, but when it becomes infrastructure for banking products, it can be risky
- New on-ramps into crypto that resemble bank products but lack safeguards like FDIC insurance can lead to losses for consumers
- Some companies in the crypto space previously dismissed FDIC insurance but now retail investors are realizing the risks involved
- Consumers may have become lazy about seeking FDIC insurance due to conditioning and lax regulation by organizations like CFPB
- As the market shifts away from constant growth, there is a risk of people getting burned by certain financial practices
Regulation, Terminology, and the Future of Fintech
49:37 - 56:07
- Fintech and crypto product developers are combining different financial functions into one product, but customers may be confused by the use of traditional banking terms in these new products
- Regulators like the CFPB need to provide guidance on the use of terminology in fintech and crypto products to prevent consumer harm
- Banks are entering the banking-as-a-service market, but they need to understand the risks associated with partnering with fintech companies that operate in legally gray areas or prioritize growth over compliance
- The CFPB's rule is a warning to banks that they will be held accountable for their actions, even if they partner with intermediaries in the banking-as-a-service space
- Neo banks and new lenders may not be as innovative as they claim, as they often take risks similar to traditional banks but with different marketing strategies
- There is a lack of innovation and risk-taking in new models within the fintech industry
The Need for Customer-Centric Innovation in FinTech
55:38 - 1:02:29
- FinTech has taken its foot off the gas on product innovation and instead relies on VC funding to subsidize growth
- The problem in FinTech is that there is a lack of innovation in creating new financial products and experiences
- Many FinTech founders with novel insights struggle to get attention from VCs because they don't fit into recognized patterns
- Existing players in the market tend to funnel more money into familiar models rather than exploring new problem areas
- There is a need for a market downturn and tightening in the venture world to refocus on customer-centric issues
- Web three companies have been less focused on customers due to the availability of fast growth funding
- As investors become more disciplined, companies will need to prioritize the customer and value exchange
- Successful companies are obsessed with the customer regardless of the macro environment
- Some startups solving long-overdue problems may struggle to raise funds due to not fitting into standard hype models
- Startups should focus on hitting metrics before seeking their next round of funding as vision alone won't be enough anymore
- Despite challenges, there are still people working on unsolved but significant problems, indicating that we are still early in innovation
Recommendations and Additional Resources
1:02:09 - 1:04:53
- There are still people becoming obsessed with unsolved but significant problems in the fintech space
- Money coming out of the ecosystem and a slowdown will give more breathing room to serious problem solvers
- Less serious individuals will move on to other things as this is not a time for tourists in fintech
- Alex's newsletter is highly recommended for reading, especially now that he's writing more frequently
- The website fintechtakes.com offers weekly analysis on various fintech topics
- Upcoming pieces include analysis on the current venture environment and the impact on fintech companies, as well as an in-depth look at credit bureaus
- Follow Alex for pop culture takes related to fintech that you didn't know you needed
- This episode was produced by a US-based production team and received social media support from Carla Navara and Sylvie Johnson