If it walks like a bank and talks like a bank and looks like a bank–is it a bank?
It’s 2020 and suddenly, it seems as though every fintech company is trying to be a bank–er, almost a bank–anyway, something very similar to a bank.
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Payments, custody, and other personal financial services seems to be the new black, at least in Big Tech; among others, Apple, Uber, Venmo, Square, Facebook, and (most recently) Google are now at the forefront of what seems to be a growing movement toward tech- and fintech-based banking “alternatives.”
But if we look a little bit closer, it quickly becomes clear that Big Tech’s push into personal finance has been slowly building over the last two years, particularly in the United States.
For example, Apple and Goldman Sachs partnered up to launch the Apple Card–which has now facilitated the lending of over $10 billion to users–all the way back in May of 2018; Venmo was launched all the way back in 2009, although it didn’t come close to its current popularity until the latter half of the 2010s. Other companies have been steadily tacking on personal financial services offerings.
However, the trend may not have been truly realized until the advent of Facebook’s Libra, when a tech company with a US$624.7 billion market cap–one of the largest entities in the world–made plans to offer a global financial network that, in many ways, walks and talks and looks like a bank, and may, in fact, be a bank (part of Libra’s stated mission is to “bank the unbanked.”)
While the launch of Libra has been stalled by regulators across the globe, the tech industry’s trend toward offering personal financial services seems to be alive and well. What’s driving this trend forward?
Personal finance presents new revenue opportunities for tech companies
The incentives behind this push toward offering financial services seem to be pretty clear–having access to users’ personal finances has the potential to provide massive new streams of revenue, including highly sensitive (and highly valuable) personal data.
And the simple fact is that many of the companies that are involved in these fintech pseudo-banking initiatives may be in sore need of new streams of revenue. When Apple and Goldman Sachs announced their partnership nearly a year ago, the Wall Street Journal reported that “both companies are seeking new revenue sources as their bread-and-butter businesses struggle.”
Big Tech will push deeper into finance this year — but avoid the ‘headache’ of being a bank https://t.co/oFEsTpE0cx
— CNBC (@CNBC) January 3, 2020
Therefore, even the apps and platforms that may look and act the most like banks are not legally considered to be banks. “For example, even the most discussed Venmo payment systems product, and its digital custodial wallet feature, falls under the new prepaid card rules issued by the Consumer Financial Protection Bureau effective April 1, 2019,” Repasky said.
Regulators who are willing to work in collaboration with the industry could foster innovation
And there’s likely going to be coming down the pipeline that’s likely to have important implications for fintech companies breaking into banking and personal finance.
However, fintech firms and other interested parties currently have an opportunity to give their input on possible regulations: specifically, Repasky pointed to the ‘Information Collection for Innovation Pilot Programs’, which is an initiative by the United States’ Federal Deposit Insurance Corporation (FDIC) to “[request] comments on its efforts to foster FinTech innovations that can benefit consumers in the financial marketplace.”
Repasky explained that “what may be particularly salient here is the FDIC’s important role in protecting the safety and soundness of traditional financial institutions, like banks, and its highly coveted insurance protection for consumers’ deposits at those banks.”
Therefore, Repasky believes that with the right input, the FDIC’s regulations could actually help with innovation rather than hinder it.
“In my opinion, one of the principal impediments to FinTech innovation and adoption in the consumer space is the ability to create trusted and perceived safe custodial and transactional platforms,” he said.
“The FDIC’s interest in working collaboratively in the innovation process may be a step in the direction of conquering this important hurdle.” (And, by the way, February 13th is the deadline for submitting comments to the FDIC.)
“Companies that stake their future on the way things are in the present leave themselves wide open for disruption.”
Of course, there is quite a fine line between taking the necessary legal precautions and falling behind in an innovative sense–therefore, solid strategy is key
Indeed, “the only constant thing is change,” Daniel Simon said. “Companies that stake their future on the way things are in the present leave themselves wide open for disruption.”
Therefore, “be bold, reward courage and think ahead, lest some college dropout steals your market share because you were so attached to your horse-drawn carriage that you couldn’t think of any other way to move people from A to B”–but be safe out there, kids.