New Age of Bank-Technology Partnerships (September 2013)
By Kate Fitzgerald, Emerging Payments Editor
The partnerships banks are forming with financial technology suppliers today look very different than routine client-vendor relationships of past decades, and one of the most interesting aspects of the trend is how both sides are transforming each other.
Banks facing a tsunami of new regulations, data-processing demands and downward revenue pressure while working to satisfy diverse customer-segment needs for new products are beginning to realize they often can’t do it alone.
Enter a new wave of tech entrepreneurs—frequently backed by streams of venture capital money—armed with ideas to disrupt and enhance traditional banking business models. The result is a convergence of banks, credit unions, venture capitalists and entrepreneurs, all supplying fresh thinking that is reshaping the financial services industry.
“Banking is the second-oldest profession in the world, and most bankers have tended to run the business like the only competition was other banks,” says JP Nicols, founder and CEO of Clientific and a partner at Bank Solutions Group. Banks suddenly have a dizzying array of new financial services technologies to choose from, but in the post-recession environment, many are struggling to determine the right path forward, he contends. Problems include the difficulty of prioritizing funding for new technology and integrating new products and other initiatives while coping with tremendous competitive and regulatory challenges.
Banks also are held back by their historic tendency to move slowly and cautiously, while technology companies and startups are used to speedy development and quick results, Nicols says. That dynamic often causes tech innovators to complain of frustratingly long sales cycles and bureaucracy in dealing with banks. But in recent years both sides are coming together more often as they realize what they need from each other.
|“Banking is the second-oldest profession in the world, and most bankers have tended to run the business like the only competition was other banks.”
—JP Nicols, Clientific and
The inaugural FinTech Partnerships conference, being held Dec. 9 and 10 in San Francisco, was created to foster such alliances, and Nicols is among the presenters. Banks (including SunTrust, JPMorgan Chase and Zions Bank) also will participate along with financial services startups (Moven, Green Dot Corp.’s GoBank) and investors (Bain Capital Ventures).
“Five years ago everyone wanted to be the next Mint.com,” Nicols observes, noting that the first wave of personal financial management (PFM) innovators soon discovered how hard it is to build scale directly with consumers. The next batch of innovators is more eager to partner with banks to reach customers, according to Nicols. “It’s not any easier [to build scale with customers], just a different kind of hard.”
Creating more personalized customer connections with minimal friction is at the core of the FinTech revolution, according to Nicols. “So far a lot of the winners in new financial services technology have had innovations around transactions, such as PayPal and Square,” Nicols says. The next wave of bank-tech innovators, such as Moven, GoBank and Simple, are basing their models on what individuals say they want, including customizable tools and features for more personalized relationships, Nicols notes.
Banks and credit unions feel the pressure from these startups, but they still claim the vast majority of financial services customers, an asset they want to leverage more adroitly, Ajay Mookerjee, who served as CEO of credit cards at SunTrust from 2009 until last month, tells Paybefore. Mookerjee also is CEO of India-based Offshore Analytics, and SunTrust formed a partnership with him and his team a few years ago to develop new products at an accelerated pace.
One of the major challenges traditional banks face is embedded processes and legacy structures that make it difficult to quickly analyze data about customer transactions and behavior, Mookerjee says. Using in-house resources and external data-analysis tools, Mookerjee’s team helped speed up the product development and delivery cycle at SunTrust, building a sizable credit card operation from scratch in just about three years. As a result of this and other efforts, SunTrust during the same time period doubled the average number of products per customer account from two to four, Mookerjee says.
While traditional banks are getting better at harnessing third-party experts to enrich their core platforms, they may be at a disadvantage versus startups shaped from the get-go around targeting younger, mobile, tech-savvy adults, Mookerjee believes. “Traditional banks are in a race with newer banks that can start from scratch to develop products without being hobbled by legacy technology,” Mookerjee says, adding that Millennials—consumers now about 18 to 34—are prime targets of these new banks. “Millennials represent banking’s future and this generation is distinctly different from those before it,” he says. “We have to rethink banking from this new perspective, including everything from processing and data analysis to the actual products we design for them.”
|“Traditional banks are in a race with newer banks that can start from scratch to develop products without being hobbled by legacy technology.”
—Ajay Mookerjee, Offshore Analytics
Moven, which markets a smartphone-based money-management service to consumers, is a prime example of a mobile-focused company targeting consumers that want a new type of banking service. The New York City-based startup is in discussions with various partners to roll out its product more broadly in the coming months, Mohamed Khalil, director of product, data and partnerships, tells Paybefore.
Founded by Brett King, author of Bank 2.0 and Bank 3.0, Moven raised more than $4 million in funding from various venture capital sources and individuals and launched this year in a closed beta. Moven customers received a prepaid debit card with a MasterCard PayPass contactless sticker. The card is closely linked to a mobile app designed around research suggesting that consumers want a high degree of personalization and control in their money-management products, Khalil says. Moven analyzes a customer’s typical usage patterns to provide subtle nudges that help control spending. Each time a user makes a purchase, Moven provides a real-time insight via its mobile app about how the transaction fits into the user’s financial life. The Moven app shows customers at a glance how recent purchases stack up, breaking down transactions by category and ticket size, with a color-coded dial indicating whether users are “in the green” by staying below their usual spend or “in the red,” exceeding their typical purchase patterns.
Moven’s business model is based on generating revenue from transactional interchange as well as a very limited set of fees, Khalil says. So far Moven touts the service as free for the first year, and afterward the company plans to set a “low” monthly subscription fee it has not yet disclosed. “People who grasp the power of Moven to improve their financial lives become our best advocates, requesting invitations for others and spreading the word,” Khalil says.
Competitors that come closest to Moven in providing a personalized, mobile-centric approach to money management include GoBank, American Express Co.’s Bluebird and Simple, according to Khalil, but he notes that Moven’s colorful, trademarked app interface is unique and the company has plans to eventually add online bill-payment, remote deposit capture, savings accounts, plus “behavioral finance” tools and gamification to help users achieve their financial goals.
Moven is still in the hunt for additional venture capital and remains in beta mode—but for only a brief period of time—as the pace of financial services innovation increases, Khalil says. “We’re moving pretty fast, and we’ll be moving even faster to try to stay ahead,” he adds.
To register for the FinTech Partnerships conference, Dec. 9-10, in San Francisco, click here. Paybefore readers receive a 10 percent discount by using the code XU2071PBF.