Trivia question—What do the following companies and products all have in common?
- PerkStreet Financial
- PayPal Debit Mastercard
- Suze Orman Approved Prepaid Card
If your answer was “disrupters in the financial industry”, then you are correct. If your answer was “pioneers in online/mobile banking, personal financial management (PFM), and product design”, then you are correct. And finally, if your answer was “partners of Bancorp Bank”, then you are correct.
It’s that last one that I want to focus on. Bancorp bank was founded in 2000 on the premise that it would provide private-label banking services to a variety of front-end service providers. Essentially, Bancorp Bank provides the regulated, FDIC-insured banking back-end that is connected to some of the most disruptive and innovative start-ups in the financial industry—from behemoths like PayPal to newcomers like Simple. For example, when you sign up with Simple and start using their services, all of the behind-the-scenes banking activities (depositing checks, processing payments, and transferring balances) are handled by their banking partner—Bancorp Bank.
By offering private-label banking services, Bancorp Bank is enabling these alternative providers to compete with traditional financial institutions by eliminating one of the biggest barriers to entry in banking—regulatory approval. By not having to worry about acquiring a banking charter and complying with important, but onerous regulations like the Banking Act of 1933, these companies can instead focus on creating exceptional front-end banking products and experiences.
This represents a huge competitive threat to traditional banks. As consumers continue to shift away from branches and towards digital channels (According to Brett King, by 2016 the average U.S consumer will visit a bank branch one time and 80% of Gen Y consumers won’t visit a branch at all), the infrastructure advantage that banks have (at last count, Wells Fargo had over 9,000 branches) will cease to be a competitive advantage. In a future where smartphones and tablets are the dominant channel and most consumers won’t remember the last time they stepped into a branch, alternative providers like Moven (who excel at designing fantastic online and mobile banking experiences) will be in the driver’s seat.
So how should traditional banks respond? Should they fade gracefully into the background, as some people are suggesting?
If you answered “no”, then you are correct…again. Traditional banks absolutely cannot afford to cede control of the customer relationship to these new intermediaries. The direct relationships that banks have with their customers—and the trust, loyalty, and brand equity that those relationships produce—are the only thing preventing their products and services from becoming commoditized.
In order to survive in today’s market, in which the barriers to entry have never been lower, traditional banks need to figure out how to compete with the PerkStreets and PayPals of the world. They need to develop channel and product strategies that meet the expectations of tomorrow’s consumers (which means simple, transparent, and mobile-enabled). And more than anything, they need to do everything they can to hold on to their customer relationships because those relationships are the high ground in the battle for financial industry market share.