What is a bank?
As recently as a decade ago, that was a relatively straightforward question that the average school-age child could easily answer. But as of 2020, it is a subject upon which seasoned experts can disagree, in a world where traditional banks and FinTechs are operating in parallel in the market – and, in many cases, are offering similar services for consumers. Some of those FinTechs are trying to become banks, some very intentionally are not – and for others, the jury is still out.
For example, PayPal does many of the same things that traditional banks do – but it isn’t a bank, and has said repeatedly over the years that it has no intention of ever becoming one. LendingClub, on the other hand, started life as a FinTech, but will become a bank after buying one earlier this year. Square also made the jump into officially becoming a bank this week, with the award of an ILC banking license by the FDIC.
All of a sudden, the question of what constitutes a bank is much trickier to answer than it once was, and so PYMNTS decided to ask customers directly. What we learned was interesting. For nearly all of the customers we asked (98 percent), a bank has to provide three primary things: a place to store their money, a means to save their money and an easy path to physically access their money, such as a physical branch and ATM network.
“I think what that answer tells you is that for customers, if it's going to be their primary bank, it must have a holistic solution that can meet every need,” Barry Baird, head of payments capability and delivery at TD Bank, told Karen Webster in a recent On The Agenda conversation, noting that consumers aren’t looking for an either/or when it comes to accessing a suite of digital banking tools alongside a network of physical service offerings.
“I would bet if you asked folks in certain demographics, they would tell you that it's been months, maybe in some cases longer, since they've actually visited one of those locations,” he said. “But the idea of not having access to a physical ATM network or a physical branch network is a non-starter for most.”
That lack of physical access has been a major stumbling block for FinTechs as they’ve tried to move from offering their customers a specific financial service – such as lending, saving or investing – toward becoming their primary financial services relationship. But the FinTechs, Baird noted, are adapting and innovating around that issue. Now, the challenge (and opportunity) for banks is to take what they’ve already built in terms of both physical infrastructure and consumer relationships and expand upon the things consumers say they need in a financial services provider.
The Trust Platform
When it comes to what people value most in primary banking relationships, Baird said, it can be distilled into one word: trust. And in the era of open banking and expanded opportunities to leverage data to improve the financial services user experience, being trusted is more important than ever.
As Baird pointed out, the data is what enables the digital enhancement of financial services – the faster onboarding processes, the better-attuned risk assessment algorithms and more personalized product offerings. But while consumers tend to like all of the services built out of their data, they also like having privacy and the ability to maintain control of how that data is used. By way of analogy, Baird noted, when someone gives a contractor access to their home to remodel the kitchen, they don’t want to find them upstairs going through the bedroom closet.
“I think where a lot of FinTechs have fallen down is on the access question – how much data are they taking and how exactly is it being used?” Baird said. “As a result, there is this lack of trust for consumers about where their data is going and whether they can control it.”
In this environment, banks have the opportunity to scale up their efforts to become the traditionally trusted player in consumers’ lives. They can use that as a starting point to take advantage of some of the data opportunities coming in, while also enabling customers to control that data.
What that means in technical terms, at least for TD Bank, is figuring out how to structure a standardized set of APIs that can share data across platforms, while making sure the customer has control over how it gets shared, how it is used and how much access is granted. That’s how banks maintain what Baird called “the positive trust gap” they enjoy today – and use it to build a more digitally competitive product slate tomorrow.
Banks, of course, can’t simply kick back, congratulate themselves on being so trustworthy and call it a decade. As the PYMNTS data demonstrates, nearly two-thirds reported interest in exploring banking relationships with non-traditional providers like tech players (such as Apple, Google, PayPal and Amazon) – though as of yet, only 7.4 percent are actually using a FinTech as their primary provider. They might not be walking out the door completely, but they are thinking of stepping out – particularly in pursuit of a better service or two elsewhere.
And, Baird noted, that is something the marketplace has seen in recent years: FinTechs stepping in to fill the financial services gaps. He cited Venmo as a terrific example of this – as well as an example of how banks working in concert to be more digitally focused can respond with digital innovations of their own.
“Take Venmo as an example, where we saw a pretty substantial FinTech entrance begin to take some of that money movement market share, especially in the P2P space,” said Baird. “And we saw the banks move pretty aggressively to try to close that gap. I think you're going to see the same thing happening over and over again in the world of data share and open banking, and how we try to migrate strategically toward being more open with information that's being shared back and forth in order to build those better, more predictive customer experiences.”
And there is still much work to be done on that front, Baird pointed out – using data to know a customer more deeply and better serve their needs is a place where “traditional banking needs to get a lot more intuitive.”
Particularly in the last several weeks, as the world has become a very different place due to COVID-19, the stakes have gone up dramatically when it comes to providing personal, intuitive service. Banks have been going “digital-first” for some time, Baird noted, but the needs of the market have changed almost overnight. That poses a challenge – but maybe not a terrible one, as it might get traditional banks moving a little quicker toward their digitally enhanced destination.
“I think we could be moving down that journey more quickly, and sometimes catalysts and events like this can drive even more innovation into the timeline,” said Baird.