We usually think of banks as our leading source of financial services, but what if they faced new competitors. Would you be willing to get a mortgage from Google or Amazon, Apple or Facebook?
Don’t laugh, it could happen — and perhaps sooner than anyone expects. It may be that banks are about to become the latest business sector to face “disruption,” new competition from a variety of non-traditional players such as online giants Google and Amazon as well as a newly-emerging host of “nonbanks.”
A new study by Accenture, a global management consulting firm, shows that large numbers of us are ready to “bank with such technology players such as Google, Amazon and Apple if the companies offered such services. Among consumers age 18 to 34, 40 percent said they would consider banking with Google, 37 percent would consider banking with Amazon, and 34 percent would consider banking with Apple.”
While it may seem unlikely that credible competitors can emerge and transform the mammoth and hidebound banking industry, there’s a lot of evidence that not only could it happen but that it’s already begun. After all, privacy is dead and a number of online sites already have more financial information about us than any credit bureau. Like Santa, they know whose been naughty or nice, who pays their bills and who doesn’t. How hard would it be for them to enter the mortgage business given their cash on hand and the gigabytes of information they now hold?
“Already,” says the Accenture study — entitled “The Digital Disruption in Banking” — “the industry is seeing convergence from established players outside the financial sector. Costco Wholesale, for example, offers financial services products including mortgages, investments, and business banking in the U.S. through a third-party lender. Similarly, The Home Depot offers home improvement financing up to $40,000, also through a third-party lender. In the 'Banking 2020' point of view, Accenture estimates that 35 percent of banking revenues will be at risk by 2020 due to disruption in the financial sector.”
With mortgages, for example, we can already see the emergence and importance of “nonbanks,” lenders who make loans but do not have branches or ATMs. The idea is not that new competitors will replace today’s banking behemoths, but that they will bring new competition to mortgage origination and servicing — competition that will help hold down mortgage rates.
As another example, look at mortgage comparison platforms. Since 1998 LendingTree has received some 30 million mortgage inquires — all done online.
New Competition for Traditional Banks
“What is likely to evolve is a more even distribution of the $9.8 trillion U.S. loan-servicing market," says Christopher Whalen, executive vice president with the Carrington Holding Company, a leading nonbank. “Whereas today Wells Fargo and JPMorgan Chase account for about a third of the total servicing footprint, in the future a greater number of both commercial banks and nonbanks will be involved in the business. This will be better for consumers and for the financial services industry, because the operational risks and rewards of loan servicing will be spread across a greater capital base.”
Accenture points out that "a potentially ominous sign for banks is that nearly half of customers would likely bank with a company they currently do business with but that does not currently offer banking services. The number surpasses 70 percent for those ages 18 to 34. This includes financial players such as PayPal, Inc., and Square, Inc. Trusted brands outside the financial sector like Apple, Google and Amazon, are also a factor. Both groups have rates of potential interest from customers exceeding 25 percent.”
New Opportunities For Nonbanks
Part of the issue facing traditional lenders is that America’s banks are not well-liked. Back in 1980, according to Gallup, about 60 percent of us had great confidence in our banks, a figure which slid to 21 percent in 2012. You have to figure that a lot of people would prefer to deal with a financial source they trust, a value which for many people opens the door to new competitors.
Consumers interact with major online players daily and expect high levels of service. Amazon, as one example, seeks buyer feedback and publishes seller reviews for all to see. New players will bring innovation to the marketplace, just as they have done with travel, health and cars.
Rather than the traditional business model, consumers increasingly want something different from banks. As Accenture explains, “customers want a bank that’s nimble and proactive, one that can be a part of their daily lives. The idea of ‘convenience’ in banking is undergoing a shift away from branch locations and toward digital products and services that mesh with consumers’ ‘smart’ mobile-empowered lives. Also, banks that cling to the status quo risk being viewed over time more like utilities that conduct financial transactions.”
On The Other Hand
While newcomers may do well against stodgy traditionalists in the financial field, it won’t be a cakewalk because there are barriers to overcome.
Information leaks do little to reinforce a sense of electronic insecurity. Identity theft and a host of viruses, worms, bots and Trojan horses are huge problems because if someone can remotely demolish a nuclear production plant in Iran there’s little reason to believe that financial accounts cannot be cracked and compromised by hackers thousands of miles away.
“Recent incidents such as Target’s security breach, the Heartbleed bug, and eBay’s systems hack have called attention to how much consumers trust the businesses they patronize to keep their personal information safe,” says Gallup. “That trust currently appears to be hard to come by. Just 21 percent of Americans have 'a lot of trust' in the businesses or companies they regularly interact with to keep their personal information secure.”
What about you? Would you consider a mortgage from a nonbank or a recognized name from the electronic era such as Google, Apple, Facebook or Amazon? Or would you rather stick with a traditional bank with big vaults, marble floors and ATMs?
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