November 03 2019

Drive In Banking

For a few years now, we have witnessed the disintermediation of financial services. Banks came out of the great financial crisis of 2008 scarred by their disregard for their fiduciary duties, which had led to over-extend credit and investment products with little consideration for suitability.

A combination of a tarnished reputation, massive losses, and a need to re-focus on less capital-intensive businesses for traditional banks led way to the emergence of new “banking” players.

Asset management firms rolled out margin loans, savings & checking accounts, and credit cards. Fintech startups filled the vacuum in retail lending with direct-to-consumer lending platforms. New payment and credit card companies mushroomed everywhere, from Chime, to Venmo, to Brex serving both retail consumers and businesses in order to achieve faster and cheaper services.

Now, every company is on the eve of being able to offer financial services to its clients. Uber is the latest to move into offering financial services to their clients, embracing a trend that was probably firstly initiated by large Chinese tech companies, whose Alibaba’s Ant Financial or Tencent’s Wepay are probably cases in point. Soon you’ll see banking platforms helping companies navigating through the complexities of setting up regulated financial services under a white label.

But what makes banking services so sexy after all? Reasons differ, from banking the unbanked firms or individuals for better financial inclusion, to pocketing away a portion of the lucrative transaction fees paid out by credit card companies. The real quest is probably to exploit the vast trove of consumer data, to provide a right-in-time fit-for-purpose financial service.

There will be unattended circumstances in the process. In peer-to-peer lending, payday loans expose borrowers to predatory practices, while lenders soon figured out that 8%+ returns came at a risk to lose their capital. In credit cards, the multiplication of offers would soon lead to an impossible cacophony. In asset management, no-fee robo-advisors realize that money management is after all very human and profitability not an easy win. Lastly, blockchain caresses the dream of a digital money and financial assets but so far bangs against Governments’ regulatory hurdles.

Compliance with regulation will be a key success factor, so that both individuals and businesses don’t lose their shirts in this newly promised flexibility. The drive-in-banking will abide by good old-fashioned rules after all.

360 Advisory – Markets