The “new normal” in banking and fintech is best understood by starting with a look back at what the “old normal” was.
The Old Normal: Fintech Fetishism
The Oxford dictionary defines fetishism as “worship of an inanimate object for its supposed magical powers.”
That’s a good term for how many people have thought—and still think—of fintech.
There’s a misguided notion held by many that fintech startups are somehow more ethical than legacy banks, or that there is a fintech “ethos” that distinguishes fintechs from banks and makes them morally superior.
I’ve seen this many times from a number of people. Rather than calling them out, here are some examples from various publications (my emphasis and italics):
9to5 Mac reported, “Americans paid $113 billion in credit card interest to banks last year, nearly 50% more than five years ago. So adopting the new fintech ethos of zero fees and transparent pricing makes for thinner profit margins.”
Ethical Consumer, a not-for-profit co-operative, claimed that “Monzo is one of the best ethical current accounts” and found “the vast majority of companies in the personal finance sector score badly on ethics.”
FSBT.tech asserted, “Fintech is better than traditional financial companies because challenger banks focus on securing the data of their clients using technology. Traditional banks are slower than challenger banks in adopting cybersecurity measures.”
Dents in The Fintech Armor
This mindsettowards fintech will be irrevocably changed as the result of the Covid-19 crisis. A series of events and occurrences have chipped away at this fintech mindset over the past few months (and year, for that matter):
Robinhood’s technical problems. On three volatile trading days—March 4, March 9, and May 18—Robinhood customers experienced outages preventing them from trading. The company is facing lawsuits over these crashes, and is accused of offering a “$75 goodwill credit” to dupe customers into waiving their legal rights.
Revolut’s executive exodus. Challenger bank Revolut lost eight top employees between March and May 2020. In 2019, the challenger bank was called out for shady hiring practices and a toxic work culture and accused of ad theft, fabricating data, money laundering, cultivating an exploitative workplace culture, and misplacing a £70,000 money transfer.
Monzo’s complaint rate. The UK Financial Conduct Authority released a study of bank customer complaints. Monzo customers registered 4.0 complaints per 1,000 banking/credit card accounts. In comparison, Co-op Bank had 3.3, Lloyds had 3.5, and Cumberland Building Society 0.2.
Fintech lender layoffs. In April, small business lender Kabbage cut off credit to its small-business clients and furloughed a “significant number” of its 500 US-based employees. In addition, Lending Club announced that it was laying off 460 people, roughly 30% of its staff.
“There is a tendency toward excessive optimism involving technology. Because technological successes often produce dramatic and memorable results, such as revolutionizing industries, such events are highly salient. People develop a non-conscious or implicit association between technology and success. This technology effect has at its core overoptimism or overconfidence.”
This excessive optimism is understandable: There’s a strong desire among some people to see the world become a better place, and to see perceived wrongs righted.
This excessive optimism isn’t realistic, however, because it ignores human nature.
The notion that fintechs have a higher “ethos” or ethics than traditional banks is ludicrous. Fintechs were started by humans—and humans are fallible. Even fintech founders can become embroiled in sex scandals or deceive customers.
Fintech Pessimism Versus Fintech Realism
People who aren’t technology optimists—as defined by the study—aren’t necessarily technology pessimists, however.
There’s another dimension at play here—realism (or rationality). Someone can be realistic (rational) or unrealistic (irrational) about the impact of technology.
You can be realistically optimistic about the impact of fintech, or you can be unrealistic about it—like expecting fintechs to hold to a higher moral standard than traditional financial institutions.
The New Normal in Fintech: Fintech Realism
Fintech fetishism was bound (no pun intended) to decline at some point—the Covid crisis simply hastened its demise.
The future—or new normal—in fintech will be an era of fintech, or economic, realism.
There are implications for both banks and fintechs in this new normal.
The New Normal For Banks
For banks, the new normal marks the end of fintech experimentation.
Over the past few years, banks have been obsessed with fintech partnerships. It’s been a way of convincing themselves (and their boards) that they’re innovating and not getting left behind as the industry undergoes a digital transformation.
Too many of these efforts, however, have had little impact on the strategic direction, organizational culture, and bottom line results of the institution. According to Louise Beaumont:
“For banks, partnerships won’t generate the quantum leap they need to move beyond a product-centric mentality to deliver next-generation services. At best, they may gain a workable solution that squats awkwardly in the existing infrastructure. At worst, they’ll fail to deliver any noticeable difference.”
Many so-called partnerships—many of which aren’t partnerships, but just vendor arrangements—are examples of what Jason Henrichs of Fintech Forgelikes to call the “fintech petting zoo.”
The luxury of experimenting with fintech is gone.
Banks will need to accelerate their investments in fintech to achieve both the top line increases and expense reductions needed to maintain margins and profitability.
The New Normal For Fintechs
Back in the late ‘90s, Dot Coms boasted of the number of “eyeballs” their sites got. That didn’t translate into dollars, however, and many failed.
Roll the clock forward to the “old normal” of fintech, and we find challenger banks bragging that they have eight million customers. In the real world—and in the new normal—a customer is someone who pays for products and services.
The neobanks’ “customers” are the equivalent to the Dot Coms’ eyeballs.
For fintechs, in the new normal quality becomes a key success metric.
The new normal for challenger banks will be metrics like: 1) # of funded accounts, and 2) funded accounts % of total downloads. For B2B-focused fintechs, key metrics will be more operational, like improvements in speed, cycle time, and cost.
“The potential of digital financial services in providing secure, low-cost, and contactless financial tools has become even more apparent during the crisis. But there's a catch, the reliance is on the 'convenience' that digital finance provides and not necessarily on the unicorn startups that have driven the rise of fintech.”
Some industry observers interpret this to mean a decline in the number of fintechs, and they point to the reduction in fintech funding in Q1 2020 as proof.
This is an overreaction.
The prospects for fintech startups has never been better—especially for those looking for banks as customers.