Silicon Valley is eating the crumbs the banks left after lunch

I saw a write-up in The Financial Times the other day on how Silicon Valley is eating the banker’s lunch. The article was written by Tom Braithwaite.

Tom Braithwaite is the companies editor, managing the FT's business coverage. Based in London, he was previously a Lex columnist in San Francisco. Prior roles include US banking editor in New York and reporting positions in Washington, London and Paris.

As I read it, I almost choked on my cappuccino as it was such a weird view for the FT to publish. First, it was saying that banks are going through a Kodak moment and I don’t believe that banks will ever experience a Kodak moment, as banking is regulated far more tightly than photographs. It states that Apple Card is storming the markets, even though it’s just been launched and is run by a bank (Goldman Sachs). And it reckons that Monzo, Revolut and N26 will transform the American consumer space, even though they are yet to arrive from Europe and have nothing to do with Silicon Valley.

I hated the article.

However, before I could write something, good friend Ron Shevlin wrote his view on Forbes. In a drop the microphone take-down, he ripped the article by Tom to pieces and has been kind enough to allow me to reproduce his column here. Enjoy and take note FT, you should be better than this.

Silicon Valley Is Eating The Crumbs From The Banks' Lunch by Ron Shevlin

OBSERVATIONS FROM THE FINTECH SNARK TANK

A recent Financial Times article titled Silicon Valley is eating the banks’ lunch claimed (among other things) that “traditional lenders risk having their Kodak moment.”

The article makes a number of assertions about the impact fintech startups and Big Tech firms are having on the banking industry–and some of the claims are just flat out wrong.

The Apple Card

The Financial Times article states:

Back in 2014, JPMorgan’s Jamie Dimon warned that Silicon Valley was coming to eat the banks’ lunch. The technology companies are now starting to chow down. The clearest example is the just-launched Apple Card, a virtual interface on the iPhone to help keep track of spending and a physical titanium card for fashion victims. The damning thing for traditional banks is not that they can be outgunned by Apple but that—despite all their resources and expertise—they can still be outclassed by a few kids with a nicely designed app.”

My take: It’s a bit early–and misguided–to say that the Apple Card is “chowing down” on traditional banks.

First off, the card soft-launched last week, with Apple sending invites to apply to people who had pre-registered. Second, it’s not even clear that all these people will actually apply and get approved.

According to research conducted by Cornerstone Advisors, almost a quarter of Millennials intend to apply for the new card.

Interest in the card drops off sharply among the older generations, however: just 14% of Gen Xers and 7% of Boomers intend to apply for the card.

If the Millennials who said they’ll apply for the Apple Card actually do (and are approved), Apple will have the second-highest market share among 20-something Millennials behind Capital One, and third-highest market share among 30-something Millennials, tied with American Express behind Capital One and Bank of America.

But Will Apple Attract Good Customers?

Of the consumers who expect to apply for an Apple Card, about one in five don’t currently have any credit cards–the Apple Card would be their first. The majority (54%) of these potential first-time credit cardholders are sub-prime consumers with a self-reported credit score below 680.

In addition, among the expected Apple Card applicants who currently have a credit card, a quarter of them have a credit score below 680. With credit card charge-offs at a seven-year high, this might not be a good time for Apple to issue credit cards to subprime consumers.

The Apple Card Still Has a Rewards Hurdle To Overcome

For all of its innovation in the application and activation processes, the Apple Card still has one big weakness: Inferior rewards.

Generally speaking, successful credit cards address one of three consumer segments: Those looking for rewards, those looking for a low interest rate, or those choosing a card based on an affinity.

It could be argued that the Apple card is an affinity play, appealing to Apple fanboys (and girls). But if that were the case, then Apple’s Barclaycard would be the card of choice for many of them. I haven’t seen any numbers reflecting the uptake of that card. The cynic in me says that means it hasn’t been very successful.

As with other retailers’ card offerings, consumers making Apple purchases are good candidates for the cards. But increasingly, they have other options to finance their purchases, like Apple’s POS financing option through Citizens Bank.

So, if it’s not an affinity card, the new Apple card will compete in the rewards space. Good luck with that. There are a ton of 2% cash back cards already on the market, and a slew that do a whole lot better than that.

Bottom line: It’s way to early to claim that Apple is eating traditional banks’ lunches with its new credit card. Even if it does succeed at stealing market share, let’s not forget that there’s a traditional bank–Goldman Sachs–behind the scenes doing the issuing and risk management work.

The Neobanks

The Financial Times article states:

The damning thing for traditional banks is not that they can be outgunned by Apple but that—despite all their resources and expertise—they can still be outclassed by a few kids with a nicely designed app. N26, a Berlin-based digital bank founded in 2015, has signed up 3.5m clients in 24 countries, launched in the US last month and has attracted a $3.5bn valuation. Revolut, a UK-based fintech founded the same year, has amassed 6m customers and a $1.7bn valuation. Monzo, a UK fintech that started by offering a pre-paid debit card, then a current account, this week moved into short-term loans.”

My take: Congrats to the Euro neobanks–who don’t really qualify as “Silicon Valley” firms–on their valuations. Sustaining those levels may be difficult, however, as they launch their invasions into the United States.

Ten years after the launch of neobanks in the US, just 3% of Millennials have their primary checking account at a digital bank like Simple, Chime, or Moven according to Cornerstone Advisors. And not surprisingly, that percentage drops to 1.5% of Gen Xers, and 0.8% of Baby Boomers.

Just as important, deposits held at seven of the leading neobanks total $1.68 billion, about 0.014% of all deposits held in US banks.

Consumers open accounts at digital banks for three predominant reasons:

Q2 2019 survey of 2,506 US consumers

 CORNERSTONE ADVISORS

• 20-something Millennials predominantly look for better financial management tools than they get with their primary bank.
• 30-something Millennials are nearly equally split between those looking for better debit card rewards, better interest rates, and better financial management tools.
• Gen Xers and Baby Boomers seek better interest rates than they get from their primary bank.

Bottom line: The numbers don’t add up to banks getting their lunch eaten. And it’s not a given that the neobanks–even if they do have nicely designed apps developed by kids–can attract and keep real business (i.e., not just email signups and app downloads) with superior rates, rewards, and tools.

Chase’s Canadian Retreat

The Financial Times article states:

Last week JPMorgan Chase [came] up with something that was genuinely compelling. The largest US bank, which is closing a credit card business in Canada, simply wiped the balances of remaining customers. “It is hardly a sustainable perk—and it shows the largest US bank on the retreat. It also offers another opportunity for the insurgents, fueled with billions in venture capital funding, to take on the lumbering incumbents.”

My take: What Chase did in Canada isn’t “genuinely compelling” and is hardly an example of a “lumbering incumbent” in “retreat.”

Last year the “lumbering” giant launched it’s own digital bank, Finn. But it wasn’t successful. Wanna know why? Because the parent’s firm mobile banking capabilities is one of the best in the business.

It’s also important to note that many of the “insurgents”–with their billions in funding–actually look to the “lumbering incumbents” as potential clients and partners, not enemies.

Bottom line: What Chase did in Canada was a bit surprising–most firms in their situation would just sell the portfolio to someone else. I don’t know why Chase didn’t do that–but it’s hardly an example of a Silicon Valley firm eating the bank’s lunch.

The Financial Times Contradicts Itself?

The Financial Times article states:

There is little particularly revolutionary in most of the challengers’ technology. The embarrassing fact for the entire fintech industry is that it has failed to take significant share of core banking activities despite a decade of a benign credit environment with banks hampered by their recovery efforts after the 2008 crisis. Many of the newcomers are plagued by poor customer service and attract the attention of regulators for weak controls.”

My take: Finally, something I agree with. Despite this admission of fintech weakness, the article still goes on to assert:

But like the analogue film manufacturers who had the ability to switch to digital but failed to invest, the banks seem to be having their Kodak moment.”

This isn’t an accurate assessment of the situation. Wade Coleman, Director of Content Strategy and Thought Leadership at Fiserv, reminded me on Twitter that:

It’s a myth that Kodak didn’t invest in digital. They invested billions in digital photos early on. They just didn’t see how far digital was going to eat into their core film business and got crushed under the weight of that old infrastructure.”

Bottom line: It’s somewhat astounding that after making all these claims about fintech and Big Tech firms eating the banks’ lunch, the Financial Times would state that the insurgents have made little ground–in effect, disproving its own assertions.

Someday, maybe those assertions will become truths. But it’s not happening yet.

Yes, it’s true that Jamie Dimon did warn that Silicon Valley was coming to eat the banks’ lunch.

But, reportedly, he also said that he wasn’t that concerned about any startups because, if they got big enough, he would just buy them.

 

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Ron Shevlin

Ron Shevlin is the Managing Director of Fintech Research at Cornerstone Advisors. Author of the book Smarter Bank, Ron is ranked among the top fintech influencers.