The tectonic fault of the FinTech revolution is drifting but its epicentre is in Seattle, not Silicon Valley! Amazon is tiptoeing into banking businesses and partners with Wells Fargo to provide student loans to Prime Student customers.
We have largely discussed about the transformation of financial services on a global scale, and highlighted some of the differences between the Asian rise of FinTech (especially mainland China, which is dominated by TECH giants such as Alibaba), and the US/EU model for innovation, where VC backed FinTechs are fiercely chasing the banking elephant. The game is now changing!
Established TECH players might well disrupt banking more than any FinTech we have seen so far, for a simple reason: building a pipeline is always expensive and it seems very much so in retail financial services. Margins are getting tighter due to zero or negative interest rate environments, while brands and customers’ trust have been eroded by the Global Financial Crisis. Yet, getting into banking might be tricky for TECH companies too, as the industry is highly regulated.
The recent announcement that Amazon has partnered with Wells Fargo to offer interest-rate discounts on student loans to Prime student members is an example of a WIN WIN situation: FIN players start to act as “back office” functions (not yet, more and more so), and exploit TECH players with recognised brand and established digital penetration as a new client facing mechanism.
– The FIN saves on distribution costs, and potentially reaches out to new customers, massively, at lower prices.
– The TECH adds a captive offer to acquire even more customers, up-sells on existing services and – as in #AmazonLoan – creates a further stickiness … students might walk away from Prime accounts more easily than from loan commitments … sadly said!
– Clients can get same services (access or refinance existing loans) at a lower prices.
However, is it gold all that glitters?
Student loans are or should be a highly debated topic in today’s politics, as US/EU children feature diminishing expectations compared to their parents (as noted in the 1990s by Nobel laureate Paul Krugman “The Age of Diminished Expectations“). Student loans have a considerable impact on the personal balance sheet of many young individuals over their life time. Hansi Mehrotra recently provided a controversial analysis in her recent LinkedIn post “Is a college education worth it?“. It is worth reading. In a recent interview on WSJ, CEO of Pay-Pal Dan Schulman said “The biggest barrier to full financial participation is not a lack of Wi-Fi—it’s a basic lack of knowledge about digital services. As we increase access to banking services, we need to increase financial literacy, as well.”
I do believe that the real good news in terms of long-term innovation would be to grant access, for a convenient price, to proper financial advice and help individuals to understand short term benefits and long-term consequences of saving, investing and borrowing.
Revolution would be to change FIN by means of TECH.
Given the impeding student loans crisis in the US, I also found thought breaking the monographic work of Michael Falk, published by CFA Research Institute “Let’s All Learn How To Fish… To Sustain Long-Term Economic Growth“: schools should provide student loans … (I here add) instead of banks or TECH companies. This way, schools would be incentivised to gear their education offer towards those students and sectors in the economy which would grant the best match to generate real and rewarding jobs … as those who invest in personal education will have to pay back with future cashflows.
Back to our FinTech world
I have a good mentoring rule: I always invite FinTech entrepreneurs to consider that having a pipeline is more important having a product.
Granting a cheaper though marginal rate of 50 basis points is still good news, especially for banks needing to grow at times their cost/income is significantly under stress. Changing an expensive pipeline (bank branches) with a cheaper pipeline (digital channel) without changing the principles of personal finance is vital for banks (maybe less so for customers).
Let’s imagine further … once the Amazon pipeline for financial services is established (a few years or month from now), how long would it take Amazon to jump the fence and compete with banks, instead of partner with them? Could this be the same rational that brought BlackRock to acquire FutureAdvisor, build the pipeline first (advisors and their clients) then skip the queue and up-sell own products?
A proverb says:
If you can’t beat them, join them.
But don’t forget:
Friendship does not last for good.
If you want to read more about the topic, find on Amazon my new book “FinTech Innovation: from Robo-Advisors to Goal Based Investing and Gamification“.
This article first appeared on LinkedIn Pulse