Evolve or die, they say.
This is an extreme claim, a bit simplistic in some ways, but the principle holds true in financial services, especially banking.
For, after all, most basic banking services – the mainstays that have been around for decades, if not centuries – are targeted by digitally savvy newbies who promise all kinds of benefits, including speed, convenience, and depending on the size. where you look, lower fees and higher rates.
Just a few examples: Goldman is going into consumer banking, LendingClub has bought a (digital) bank, and many FinTechs offer elements of the banking experience, while Big Tech of course offers small business lending and other products. . .
The moat is narrowing, in other words, but it goes both ways. For the same technological advancements and access to data that power these younger, small businesses, can give traditional financial institutions (FIs) the power to compete in new markets, with new products and services that capture the mindshare and the consumers’ share of wallet.
We are of course talking about open banking, which allows, with data authorized by consumers, to design these offers on the fly, putting new options in front of the end user in context, at the right time, for the right price.
All of this points to what one might compare to existential change for the banks themselves. In a report last year, “What is a bank? We noted that 36.8% of consumers qualify banks as institutions that store money securely, while 34.9% characterize them as institutions for savings and deposit remuneration, and 27, 1% characterize them as institutions that grant loans and make investments.
Read here: The many responses to “What is a bank?” “
Pretty solid definitions.
But by joining these silos, banks miss out on other sources of income that are not necessarily linked to these well-defined activities. By exploiting new levels of connectivity, banks can carve out new lines of business that are not connected to traditional sectors … but can intersect with them.
Case in point: buy now, pay later, commonly known as BNPL.
Affirms and Afterpays of the world, among others, have created a leading momentum by offering a loan option that is not tied to traditional lines of credit (as they would be in a bank) or cards. The conventional wisdom is that these installment loans would take over at least some of the bank card lines. Part of the problem is the infrastructure needed to put this phased funding in place.
But now comes the news that Mastercard is moving, decisively into the BNPL space, announcing on Tuesday (September 28) that it is giving the necessary connectivity to banks (and others) to bring their own BNPL plans to users – through 78 million traders. As detailed in this space, the first deployments will be in the United States, Australia and the United Kingdom and will see the BNPL functionality integrated directly into the payment network on multiple rails. Studies have shown that sales can increase by up to 45% while leading to a 35% drop in shopping cart abandonment.
Read: Mastercard Payments Bring New Instant, Turnkey Network of Lenders and BNPL to 78 Million Merchants
Tackle the threat from the top line
For the banks, BNPL may have represented a major threat from BNPL’s “pureplays”. But the fact that stocks like Affirm are down, at the time of writing, by several percentage points (5% drop to open Tuesday for Affirm, similar declines for others) shows that observers are aware that the rules of the game have been leveled a little for the banks (and the pureplay moats are not as “moat-y” as some might have thought).
For banks, there is another advantage. PYMNTS research has shown that BNPL is particularly attractive to “second chance” consumers who may have lower credit than the original. But data shows that 65% of these second-chance consumers earn more than $ 50,000 a year, with 30% earning more than $ 100,000. The average second chance consumer is 44 years old and has a FICO score of 662, just 38 points below the average “good” credit score. This is promising for banks starting with BNPL offers, separate from their traditional lines of credit, with a view to “integrating” these consumers with other products and services, on a good repayment activity with BNPL loans.
Cross-pollination is good practice for premium couple and recurring income – and given the relatively young age of BNPL consumers, the lifetime value also grows. With connectivity in place thanks to Mastercard’s network effect, banks can indeed evolve.