Forbes launched Bail On Your Bank! How The Fintech Revolution Can Put Thousands In Your Pocket, our latest eBook. In it, Nick Clements lays out the benefits of ditching your bank and putting your money back into your pocket by taking advantage of the Fintech revolution.
Technology has been disrupting entrenched industries for decades. Amazon has made life incredibly difficult for Barnes & Noble, Walmart, Best Buy and every other bricks and mortar retailer. Uber is threatening the monopolies of local taxi authorities. And the list continues.
One industry, consumer banking, has been largely immune from the disruption. However, that is changing. Billions of dollars have been invested into companies that are re-thinking how banking products and services are delivered. The result for consumers is more choice, lower prices and a better experience. For entrenched banks defending comfortable profit margins, the threat is real and immediate.
The new startups have been most effective in consumer lending. Marketplace lenders, led by Lending Club, Prosper and SoFi, have built highly scalable businesses that provide higher returns to investors, lower borrowing costs to consumers and a fully digital experience for both. These businesses are growing exponentially. The average SoFi borrower saves $14,000 when refinancing a student loan. The average Lending Club customer receives an interest rate that is 32% cheaper than their credit card rate. And investors are able to gain fuller exposure to an asset class that used to be restricted. Diversified Lending Club investors have achieved returns between 5.19% to 8.88%.
The same low cost, digital approach has been used for small business lending. By leveraging new data sources and automating much of the underwriting process, online lenders are able to offer loans to businesses that were previously too small for banks.
Venture-backed startups are attacking the money transfer business, a highly lucrative utility service. Businesses like TransferWise are cutting the costs of money transfer by more than 90%. Investment managers now have competition from robo-advisors like Betterment and WealthFront. And even a boring savings account can be opened with a branch-free bank. Whereas the typical bricks and mortar bank has an entry level savings account paying 0.01% interest, internet banks are paying 1% or higher. In one year, a $50,000 savings account would earn $5 of interest at Bank of America, compared to $502.50 at Ally Bank.
Savvy consumers can leverage the new FinTech startups to put thousands of dollars back into their pockets. And the income streams of traditional banks will come under increasing threat as a result.
This revolution is not without risk. Not all marketplace lenders will survive. The new underwriting models have not been tested in a credit cycle, and some will fail. New businesses are able to avoid the regulatory scrutiny of raising FDIC insured deposits because ample investor money is available. However, liquidity can disappear quickly in a crisis.
Some of the new small business lenders are too aggressive with pricing and do not offer enough pricing transparency, which could result in eventual regulatory action and public distrust. The money transfer business requires high levels of anti-money laundering screening, and early infractions could be fatal to a well-intentioned startup. And low fee robo-advisors require dramatic scale to generate profitability.
However, the FinTech revolution has been initiated, and there is no going back. Forward thinking traditional banks have recognized the seismic changes, and are taking action. Goldman Sachs, for example, will be launching a consumer lending business that will resemble many of the best startups. Discover has quietly built one of the best digital personal loan franchises in the country. But the businesses that win in the future will look very different from the high margin consumer businesses that exist today. Consumer banking franchises of the future will have much lower returns. A recent McKinsey study warns that banks could lose up to 60% of retail banking profits to FinTech startups. And I agree.
I have spent most of my career working for large, universal banks. Most recently, I was the Managing Director of Barclaycard’s UK Consumer Credit Card business. I left to create my own startup, MagnifyMoney.com, which helps people compare and choose financial products. During the last few years, I have seen firsthand the dramatic changes being unleashed by technology. In my Forbes eBook, Bail on Your Bank, I explain the revolution that is taking place. More importantly, I explain how you can profit from it.
I have taken my own advice. I bank with an internet-only bank. I invest with a robo-advisor. And when I send money to friends overseas, I use a startup. Once you experience the savings for yourself, you understand that the cost of borrowing, investing and sending money is about to plummet. Consumers, new entrants and banks willing to adjust to a lower margin future will thrive. For those banks that refuse to adapt to the new digital reality, history offers some unfortunate lessons.
This article was written by Nick Clements from Forbes and was legally licensed through the NewsCred publisher network.