Goldman Sachs is getting into the online- and app-based consumer loan business, according to the New York Times. You might be able to get that loan to build your deck or buy that truck online direct from the megabank.
But it’s hardly blazing a new trail. FinTech, as the startup world has dubbed the arrival of disruption to the financial services industry, has been moving along for years. Just like Amazon took the store out of bookstores and Netflix busted Blockbuster, a swarm of firms like SoFi, Lending Club, On Deck, Betterment, Motif Investing and Loyal3 has been trying to undermine the business models of traditional banks by offering some kind of marriage between new technology and financial services.
Larger banks have been slow on the uptake for several reasons.
“They haven’t had huge incentive to come into the market space,” says Mike Cagney, CEO and co-founder of SoFi, a firm that offers algorithm-driven online lending and securitization of high quality loans, and who by his own account wants to make it possible to one day “fire your bank.”
Cagney says large traditional banks have been complacent doing business as usual with baby boomers and have overlooked a major opportunity: underbanked, financial-maturity-delayed millennials.
“It’s a false premise that when someone’s 45 they want to into a branch with bad hours and crappy product and service. That’s not how it works – 70 percent of millennials would rather go to the dentist than go to the bank,” says Cagney.
Another constraint facing traditional banks: the fact that they’re banks. “If you’re classified as a bank, there’s a whole set of regulatory burdens that fall on your shoulders that make it hard to move fast,” says Rita Gunther McGrath, professor of management at the Columbia Business School.
The rules on deposits control how banks do all the other things they do from remittances to mortgages. Startups with nifty ideas on how to offer any one of those services without having to carry deposits don’t have to abide by those rules.
Lastly, banks have been slow to innovate for the same reason that humans have always been slow: inertia.
“It’s true that in more recent times certain types of innovation were allowed to run amok,” McGrath says, but largely in terms of the products offered to consumers, “most are the same as they were 30 years ago.”
Innovation can attract regulatory attention and doesn’t fit comfortably with financial models. “Breathing in and out and doing your job every day is a safer bet,” McGrath says.
Grant Easterbrook, co-founder of Dream Forward Financial, a disruptive startup in the retirement savings space, says innovation at large institutions with a lot of stakeholders is “just hard to do until it becomes blindingly obvious.”
All the same, banks do have some serious advantages: “Millions of accounts to tap into, lots of money to spend that startups don’t have. They just need to get moving on it.”