Is financial technology (FinTech) the next Uber, PayPal or Airbnb that disrupts traditional business models? FinTech startup companies that use technology to make financial services faster and more efficient are challenging traditional banks for customers—especially millennials.
“The millennial generation transacts everything with a phone, and it will continue to trend that way,” said David M. Hughes, chief operating officer, Community Bancshares of Mississippi, Brandon, a $2.8-billion, multi-bank holding company with 47 branches.
“Apple pay, Android pay and various similar payment processes are designed to be used through the telephone. Customer’s habits are changing. They can interact with a bank without ever going to a bank.”
Critics say banks haven’t realized how different this generation is as evidenced by one survey that showed 70 percent of millennials would rather go to the dentist than inside a bank.
But banks are adapting to the changing customer demands.
“The banks are actively keeping up and adding different channels for how banks can interact with customers in various ways,” Hughes said. “Larger banks like Bank of America can buy FinTech companies or partner with them to acquire services. Community banks are having to partner with third-party providers for those products. That includes person-to-person payments, mobile deposits and personal financial management tools–products out there community banks can purchase and partner with the smaller FinTech companies.”
Hughes said the overriding concern of his bank and every other bank is the security of the financial information. How is it transmitted back and forth to the bank?
“Banks are always very security conscious,” he said. “When we partner with a third party provider, that has to be foremost in the mind. If you are not sure the data secured, you shouldn’t do it.”
Hughes added that it is important for customers to be mindful of the security of their phone and passwords, as well.
John S. Oxford, director of corporate communications and external affairs, Renasant Bank, an $8.4-billion bank based in Tupelo, said a lot of third party FinTech companies are very nimble and not under the same regulations as a bank.
“They can do some things faster than traditional banks,” Oxford said. “The regulatory issues are very important. A couple of months ago Dwolla, a third party payment provider, received the first fine from the Consumer Financial Protection Bureau to a FinTech company for misrepresenting how it was protecting customers’ data. The government is becoming increasingly interested in regulating third-party providers.”
Oxford said the Dwolla fine is small—only $100,000–but it is groundbreaking and shows government regulators are aware they are going to have to step up and keep the playing field level to make sure consumers are protected with all the new technologies that are available.
FinTech services and new technology are major disruptors, especially on the consumer side of banking products, Oxford said.
“You can start with the ability to transfer funds with PayPal and Venmo, which are probably the most popular with millennials,”
Oxford said. “Venmo even integrates with Facebook. They are using social media as a payment platform. Of course, that takes some business away from banks that don’t have a person-to-person payment platform, the ability to pay someone from phone-to-phone. A lot of banks have it already, and most will adopt it probably within the next few years. Most banks will need to have a payment-to-payment service to meet consumer demand.”
Other disruptors are FinTech companies like Mint that have budgeting software that allows consumers to aggregate accounts together, putting things like mortgages, credit card debt, other bills and different income sources all in one spot. It provides a summary once a day that helps people keep track of the big picture.
Other than regulatory and security issues, Oxford sees the rise of cyprocurrencies like Bitcoin as the biggest risk to banks going forward. Bitcoin is not based on the currency of any country, but rather your trust of the block chain.
“If I was Western Union, I would be scared to death of block chain technology that allows Bitcoin to be traded allowing currency transactions all over the world at little or no cost,” Oxford said. “Cryptocurrency is absolutely a game changer for financial transactions. The issue is it is not regulated, so many people are still skeptical. Once people trust it, it could change the transactional nature of banking. It has the ability to make transactions easier for the consumer. A lot of banks are becoming very aware of that.
They are having to hire more computer science type employees, as opposed to traditional tellers and lenders. It is not widely adopted yet, but it has the potentially to be a future disruptor in the industry once it is better understood and regulated properly.”
Will FinTech eventually result in less employment at banks? Oxford doesn’t think so. Rather he expects a shift in the type of jobs in the banking industry from tellers and transactional relationship bankers to more technology and security employees.
“The traditional banking job is going to shift and change,” he predicts. “There may actually be more jobs with innovation in technology. The FinTech revolution is changing the banking industry. It is changing every industry. Traditional businesses like banking and retail must keep up.”
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