The digital transformation of financial services that began well before the pandemic has only accelerated in recent months.
There’s no shortage of disruptors — particularly neobanks that promise to change everything from checking to lending — but don’t count legacy players out just yet, Dr. Jud Linville, senior advisor at growth equity firm General Atlantic, told Karen Webster.
“While banks may be big, slow, lumbering elephants, when they operate as a herd, they can mow down a horse,” said Linville, a former CEO of global cards and consumer services at Citigroup. “I'm very bullish on big banks’ ability to pivot.”
Legacy players though they might be, traditional banks can still become more agile, he said. Linville added that banks’ infrastructure can support the delivery of sophisticated experiences tied to the massive amounts of information generated by transaction-processing activity. He said that can be tough for newcomers to replicate, while consumer trust certainly matters as well.
Why A Good Engineer Is Worth 100 Consultants
Linville said a few principles stand tried and true when gauging innovation in technology and financial services — and that those took root well before the pandemic hit.
First, Linville said visits to companies on the West Coast at both Citi and General Atlantic have shown him that there’s no shortage of software engineers who’ve built and curated tech stacks that “can run circles around what big banks have built.”
That’s in part due to the fact that when it comes to technology, bigger financial institutions’ (FIs’) mindsets have been dominated by cost reduction and efforts to outsource innovation. But as he told Webster, "a great engineer is worth 100 consultants."
What Banks Should Do Here
Surveying the financial services landscape, Linville noted that the current recession hasn’t sparked a credit crisis yet, but no one knows what will happen when pandemic-related forbearance programs run their course by year’s end. That makes it hard to know if consumers are truly in distress or whether they’re just banking cash because they can kick loan payments down the road.
Either way, Linville said big banks might be well-positioned to ride out the storm. After all, they have a lot of historical consumer data on hand, as well as computer models they can adjust to reflect the current (and rapidly changing) consumer credit realities.
But Linville said America’s current economic woes should serve as a wakeup call for banks, forcing them to become more customer-centric and design more intuitive and sophisticated models of interaction — particularly when it comes to credit.
He said banks have a leg up on FinTech startups that might find their funding pulled back. Using alternative data sources “may sound great on your pitch, but are not really strong signals for underwriting,” Linville said.
Against that backdrop, FinTechs will likely realize they need additional capabilities and skills that might more closely mirror traditional banking, he said, adding that things will become especially challenging as a correction looms.
“I don't know if it's going to be in a year or in three years, [but] in that correction, funding sources are going to dry up,” he said. “Valuations are going to come down, and folks are going to be looking for different kinds of deals.”
What FinTechs And Neobanks Should Do Here
In the meantime, FinTechs and especially challenger banks are wrestling with a high degree of fragmentation as they look to broaden their operating arenas beyond their current business models.
For alt lenders, that might mean launching a credit card. For neobanks, that could involve appealing to certain demographics or worker cohorts such as gig economy workers with direct deposit or advance payment offerings. It’s all about doing enough to become those customers’ primary bank, Linville said.
He added that there are relatively larger opportunities in Latin America and South Asia, where the financial services industry is cash centric and more consumers are more willing to try banking with a technology-driven, mobile-first player.
Don’t Rule Out Collaboration
But to get ready for the headwinds that seem to be developing, collaborative efforts between traditional banks and newcomers could be mutually beneficial.
Linville said that as banks pivot, they can work with FinTechs to form layers of innovation in a constructive way where once the different stakeholders were antagonists.
“They both know they need each other a little bit, and that's good," he said.
Linville added that there’s room for Big Tech players like Apple, Facebook or Google — each of whom is jockeying for a space in payments and wants to go directly to merchants to build their respective marketplaces.
Linville said Big Tech and private-equity firms might make outsized bets on beaten-up companies using classic value-investing metrics that estimate valuations and price in worst-case scenarios. He said he expects these suitors to pull the trigger and buy at attractive price points, likely realizing attractive exits in just a few short years.
But as always, there will be winners and losers. Linville said he expects consumer credit will face headwinds by 2021’s first and second quarter that will prove especially onerous for relatively nascent B2B Software-as-a-Service (SaaS) models.
So, what should industry players do when they find solid companies with great technology and strong partner relationships that are encountering pandemic-fueled headwinds? Linville offered up two words of advice: "Acquire them."
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