Why Does a Fintech Darling Need a Bank?

According to a recent American Banker article, WSFS Financial Corporation struck a deal with Zenbanx, a Silicon Valley-based neobank, mobile only player. Zenbanx offers a unique, multi-currency bank account that targets world travelers or those that frequently send money overseas. Its founder is Arkadi Kuhlmann, the former CEO of ING Direct. 

Arkadi was a frequent speaker on the FinTech rubber chicken circuit, being viewed as a visionary industry disruptor. 

I suppose he was. First online bank, the imminently recognizable Orange Account, yadda yadda yadda. Mr. Kuhlmann has basked in the Orange glory. Except the bank never achieved greater than a 0.55% ROA and a 6% ROE. Say what you will about ING Bank USA, but don't say it was very profitable. And it sold in 2012 for around book value. So its brand didn't blow away its buyer, Capital One, either.

But I digress. The point of this post, and I do have one, is that Zenbanx needed a bank to get off of the ground. Should we be surprised? The much lauded Simple sold to a bank (BBVA). Moven account holders use CBW Bank, a small $22 million in asset bank based in Kansas. Fee income driven by interchange fees account for 96% of CBW's revenues. That bank has an 8.90% ROA. You read that right. If Moven driven deposits keep coming in, CBW may have to raise capital to support the balance sheet.

There are others that are part of a bank or rely on them to distribute their wares. See the table from SNL Securities regarding various features of online accounts from FinTech and banks alike.

Why do FinTech firms rush to banks? I have my opinions. Leading among them is deposit insurance. Followed by regulation. With a firm dose of capital. Banks have or are well-schooled in all three. FinTech firms are not and do not. So they seek out relationships with financial institutions, and build a business model that can live on parts of the payment system, ceding other parts to their bank partners.

Banks get a slice of the payment stream, as in CBW's case. And they get the spread from balances being delivered by FinTech "disruptors", like Zenbanx. The risk is that these disruptors become wildly popular, and start to over-take the partner bank's traditional balance sheet, turning it into something it is not and does not wish to be.

That was my first reaction to the announced Zenbanx-WSFS deal. WSFS has fared well since its near failure during the early 90's S&L crisis, and weathered the 2007-08 recession relatively unscathed. And they entered the partnership carefully, keeping regulators fully apprised of the relationship so they hopefully don't run afoul of BSA-AML laws and regulations. The bank has done well as a community bank.

Let's hope after their FinTech partner becomes more mature, WSFS remains a community bank.

~ Jeff 

Disruptive technology will not kill banks

So said John Authers in a recent Financial Times article. And I believe him. Bankers have been killing banks for decades. We do it by dismissing change. We do it by implementing "me too" or business as usual strategies in a changing world. We do it by accepting mediocrity. We do it by relying on the payments system or the difficulty in switching banks to retain customers. We engage in hubris.

We don't need no stinking disruptors to do it for us! 

But wait! There may be something to disruptors pillaging bank customers. I remember the days soon after leaving the military in the 1990's that banks were hesitant to enter investment sales for fear of disintermediation of their deposits. Now the amount of money in US registered investment companies exceeds that in FDIC insured banks. Was Vanguard a disruptor?

The branch is king, and if you don't have one in a market, you will not succeed there. But wait, ING Direct grew to $92 billion in assets until ING Group divested it to Capital One. Do you think your bank customers had an Orange account? Was ING Direct a disruptor?

Simple sold to BBVA, touting 120,000 accounts. Were any of them your potential customers? Lending Club funded $5 billion in loans since its founding in 2007. How many loans did you fund in that time? And Quicken Loans... don't they appear at the top of mortgage and home equity rankings? No worries, I bet they're somebody else's customers.

Everywhere we turn we have disruptors pilfering our business. The other day I was in a strategy discussion formulating the tasks to execute strategy. The cash management specialist wanted to advance the product set so corporate customers could use their own interface with the banking core system instead of using the bank's online banking tool. Aside from the cyber security of it, let's think of the implications from a corporate accounting system that wants to interact directly with the bank's core.

Is that testimony to banks not keeping pace with corporate needs? How long before those corporate accounting system providers strike a deal with some regional or national bank to provide seamless views to corporate customers? No worries, probably not your customers.

We are allowing our potential future customer base to be so narrow as to almost guarantee our extinction. 

I don't want to be the doom and gloom guy. Just trying to jolt my readers into action.

As Auther says, banks still provide access to the payment system. Banks remain centers of communities and the number one source for capital for small business. They remain trusted by customers.

But it won't last forever. And it may not last for long. So let's disrupt ourselves!

~ Jeff