In their diatribes about the underbanked, unbanked and financial inclusion, many fintech companies and members of the digerati threaten banks with the risk of losing customers to prepaid cards, P2P lending platforms, money transmitters, and other "neobanks".
In their urge to dish out free, unsolicited advice, these self-appointed Saviors-of-Bankingdom constantly exhort banks into action with slogans like "Innovate or be disrupted", "Disrupt or die", and so on.
I think they're barking up the wrong tree.
Because banks are busy doing something else.
Like staying profitable.
According to Sheila Bair, "Many ... 'under-banked' households once actually had traditional banking accounts". They don't any more because of their inability or unwillingness to pay checking, overdraft protection and other fees charged by banks. The former
FDIC Chair and current Santander Group board member makes this point in her FORTUNE magazine article titled Watch out for those hidden
fees in prepaid debit cards (subscription required) to explain why the volumes of the under- and unbanked segments - 42.9% of the population according to the latest FDIC survey conducted in 2011 - are growing.
In India, the government's push towards expanding formal financial services into the rural hinterland has met with lukewarm success. This is despite the fact that the Indian banking sector is dominated by public sector banks in which the government has majority
ownership. Notwithstanding the social agenda baked into their charters, banks have simply found it unprofitable to operate in smaller towns and villages. Thankfully, the government has realized that what's good for politics is not necessarily good for banks
and, according to news reports, it has recently proposed to pay
commissions to banks for pushing financial inclusion.
I see these as clear signs that the banking industry
- Is not interested in growth for the sake of growth
- Is emphasizing profits over revenues
- Is not averse to shedding existing customers if that helps in bolstering profits, in an apparent nod to the famous Pareto Principle: "If 80% of our profits come from 20% of our customers, why shouldn't we shed the 80% of customers that contributes to only
20% of our profits?" More on this in my earlier blog post Analytics Or Hair Splitting?
Against this backdrop, any threats about banks losing customers are likely to fall on deaf ears.
That said, fintech vendors - or "finsurgents" as @rshevlin would push me to call them since the old phrase has become "too much of a catchall" (https://twitter.com/rshevlin/status/502802047151144960)
- should be worried by these trends since a good portion of their revenues is linked to the activity levels of their banking customers. In pursuit of their growth, it's but natural for fintech marketers to urge banks to grow their portfolios aggressively.
However, this strategy is unlikely to work since banks seem to be following exactly the opposite approach in their pursuit of profits (apart from my general belief that threatening your customer's existence is not a great marketing strategy.)
So, what should fintech companies / finsurgents do?
Maybe they should drink some of their own innovation Kool-Aid to devise new engagement models whereby they don't lose revenues when banks prune their customer base. For starters, given that financial services is the most
profitable sector in FORTUNE 500, profit-sharing is one option worth exploring.
While there could be many others, my urge to dish out free, unsolicited advice ends here!