2. Watch Payments Closely
Many non-bank competitors are focused on the payments space, explains BITS president Paul Smocer. For BITS, the technology division of the Financial Services Roundtable, payments is a likely "game-changer," and disintermediation of banks in the payments stream remains a concern, Smocer says. Payments is not as well established as other banking infrastructures, he notes, but it's still questionable whether a non-bank competitor can successfully create a new, widely adopted payments infrastructure.
No matter what payments technology non-bank competitors unleash, however, banks still have a trump card: Their strong and long-standing relationships with their customers, says Smocer. HP's Feldman adds, "Trust is very important, and customers are most comfortable with banks due to security, stability and history. Banks are good at moving money and need to leverage that expertise."
3. Mine Data to Improve Customer Service
Banks have access to a ton of customer data to shape new products and services, notes Feldman. "Because banks have scale with millions of customers, they are able to move trends quickly," he says. "Emerging upstarts take more time to move markets."
Non-bank competitors, however, have a very real opportunity to steal away customers disenfranchised with banks or those customers just looking for a different financial experience. "Players such as Amazon and Google have the ability to bring technology to market quickly and leverage their extensive customer bases," Feldman warns.
TowerGroup's Sturgill argues that banks have lost trust due to customer service issues. One way to repair trust, she suggests, is to improve customer service.
4. Keep it 'Simple'
A payments competitor that should be on banks' radar for its innovative business model is Simple, which promises a full-service banking experience using a smartphone, according to David Albertazzi, senior analyst with Boston-based Aite Group. A quick visit to Simple.com imparts a very easy-to-understand message: Replace your bank. Simple provides the customer interface and mobile technology, and Bancorp Bank, a $3 billion asset bank headquartered in Wilmington, Del., processes and holds the FDIC-insured accounts.
In the physical world, Simple's business model is akin to a one-stop financial products store that gives consumers access to products from many banks, similar to a department store carrying shoes and clothing from many designers. Simple serves as the storefront and provides the consumer service, and Bancorp (and likely other banks as well) supplies the financial products, according to TowerGroup's Sturgill. Not yet launched, Simple is available by invitation only and has a wait list numbering about 200,000, she says.
Movenbank, another new entrant, headquartered in New York and incorporated in Delaware, is a mobile and web-based-only bank. But unlike Simple, it follows the model of direct banks such as ING Direct, explains Sturgill. Movenbank, expected to open its virtual doors late in 2012, is also invitation-only and touts, "We're building a better banking experience, and we want you along for the ride."
5. Get Over Regulations
Of course, non-bank competitors have enjoyed a less-onerous regulatory burden than banks. Banks, meanwhile, must contend with what Martin Cole, president and CEO of Ohio- based Andover Bank ($330 million in assets), called "cost discrimination against banks" in testimony before the U.S. House Financial Institutions and Consumer Credit Subcommittee in April. To make his point, Cole cited the example that banks pay for examinations under the Consumer Financial Protection Bureau (CFPB) while the Federal Reserve pays those fees for non-banks.
Although a definite headwind, regulations can spur bank innovation, believes HP's Feldman. "I don't think regulations will make banks a secondary player," he says. "Banks are good at leveraging the right technology partners to meet regulatory and security challenges." Since regulations cut into profit margins, however, banks will be forced to be creative, he predicts.
BITS is looking at the intersection of regulation and innovation, according to the organization's Smocer, who says BITS tries to educate consumers that although non-bank players may appear attractive, the difference between technology firms and banks is that banks have built-in consumer protections. "Banks have the right controls and risk mitigation in place before they roll out a new channel or product, and we want customers to understand that," he says.
Yes, banks may feel the pressure from non-bank competitors. But these competitors can teach banks a few things about customer service, employing emerging technology and building communities. If you can't beat them, join them.