Whether you are on the banking side of the fence or over on the credit union side, you will often hear that all the ills of the industry are from those people on the other side. But as we look at the financial industry landscape today and trends going forward, will a large competitor for banking services come from outside these groups?
Consider Facebook. It is estimated that 20% of time Americans spend on their smartphone is on Facebook. The social media juggernaut is now weeks away from regulatory approval it needs to launch an e-payments service in Europe. Facebook has its European headquarters in Ireland and that country’s central bank is pondering approval of Facebook as an electronic money institution. Zuckerberg’s firm is seeking approval for a service that would allow users to store money on Facebook, use the funds to pay for goods and services, and exchange money with others.
Consider how this compares to PayPal, which is owned by eBay. It offers money transfers and merchant services. It should also be a wake-up call to financial institutions. I do know that both PayPal, banks, and CUs have been around much longer but they lack a critical ingredient that can make Facebook a dominant player of the future, the mass eyeballs of people. Many rely on social media sites for events like sports to social gatherings. Imagine the power if you can see an event for your kid’s little league tournament on Facebook and then hit a button to submit your entrance fee to the parent who is organizing the event. Or what if you saw a friend’s birthday announcement on Facebook and used the site to send her some money?
The current age group that is joining Facebook at the fastest rate are those from 35-60. This is also the age with the most earning power. Facebook recognizes this and is seeking ways to have us spend money on things and give the company a cut as we do. Facebook’s power is ubiquity: It is routine to check your page, converse with friends over the messaging service and even text when you are overseas.
In contrast most conventional banks do not offer any particular benefits that make one want to stay with them. Security is now often suspect, with recent hacking. Could Facebook be any less secure? Also, relationship banking with big banks is non-existent as the 12 largest banks in the US hold 69% of all the banking system assets. Clearly, these accounts may be at risk.
Consider if just 10% of Facebook’s would use the bank for banking services. It would be the largest bank in the world in terms of number of clients. A banker may say he is not worried about this threat. But if I can now store and use money to pay for my kids’ little league game through Facebook, that is less money banks will hold.
The payments area, which has been a source of up to ¼ of some traditionally bank revenue, is highly contested. Paypal is the number one online payment method in some countries. New payments methods like Square and Stripe are becoming more popular. Retailers are becoming a popular method to handle payments. It is estimated that 1/3 of Starbucks revenues now come through its own loyalty cards.
Non-banks are beginning to branch into checking and savings. Google introduced a debit card for the Google wallet. T-Mobile started a new checking service with a smartphone app and ATM card. Wal Mart has teamed up with American Express to start a prepaid card that functions like a debit account. They have had over a million customers in the past year.
All these new competitors that have entered into area that has belonged to banks and credit unions present new and interesting challenges for the financial industry. It will be interesting to see how these financials will respond to these challenges and what opportunities they will capitalize on.