August 27, 2017
Absolutely no industry is safe from digital transformation. Uber has proliferated the taxi industry, the hospitality industry has been shaken up by Airbnb, Netflix has disrupted the entertainment sector, and the music industry swiftly changed models from CDs to streaming thanks to applications like Spotify and Pandora.
Traditionally, the banking industry is slow to change due to its highly regulated nature, yet while banks are neglecting to adapt to changing customer needs, visionary FinTech startups and widely supported shadow banks are surfacing to take a large piece of the market share - close to 40%.
WHAT IS A 'SHADOW BANK?'
A shadow banking system, also known as “market-based financiers” are a collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations.
Examples of shadow banks include finance companies, asset-backed commercial paper (ABCP) conduits, structured investment vehicles (SIVs), credit hedge funds, money market mutual funds, securities lenders, limited-purpose finance companies (LPFCs), and the government-sponsored enterprises (GSEs).
These shadow banks are the biggest winners of the financial crises, as their market share among all residential mortgage lending has grown from 15% in 2007 to 38% in 2015. They are currently responsible for writing 53% of all home loans. Shadow banks also take a gamble on high-risk loans - originating 75% of all loans to low-income borrowers insured by the Federal Housing Administration (FHA).
BANKS USE OUTDATED MARKETING PRACTICES
A study by American Banker reports that banks spend their marketing dollars:
45% offline, direct mail channels
27% corporate donations, sponsorships
12% online channels
Leaving the field open for FinTech startups to create B2C friendly platforms and marketing efforts.
ARTIFICIAL INTELLIGENCE CONTINUES TO DISRUPT THE BANKING INDUSTRY.
Forbes Magazine purports that by 2035, AI could double economic growth rates in 20 countries, boost labor productivity by up to 40%. What does this mean for banks? AI technologies can help banks process massive volumes of data, automating financial reports and compliance requirements. This automation can free up time and personnel to tend to the changing needs of the customer.
While traditional banks focus on compliance, hundreds of startups have come to steal a hefty portion of their customers. Artificial intelligence is revolutionizing the way borrowers receive loan offerings from lenders, and banks that refuse to adapt risk falling behind to visionary startups who aren’t afraid to employ the use of trending technology.
STARTUPS TO WATCH:
SoFi began as a student loan-focused marketplace but has since expanded to mortgages. SoFi has raised more than $1.6B in disclosed funding from investors like SoftBank Group and Renren Lianhe Holdings, among many others.
Better Mortgage acts as a direct lender to consumers looking to access mortgage loans. This startup has raised roughly $30M in funding from investors like IA Ventures and Goldman Sachs, among others.
Stash is a hip investment app that is growing at unprecedented rates. Banks erroneously think Millennials are not interested leading startups like Stash to infiltrate the market and bring trading to the younger generations. With a recent $37.5 million funding, Stash is capitalizing off of the traditional bank’s neglect of digital trends.
With low costs of acquisitions, and quirky names for their exchange-traded funds:
“Young Money” - companies such as LinkedIn, Amazon and eBay that benefit from Millennial purchasing power.
“Internet Titans,” - technology companies such as Apple, Microsoft, and Facebook.
"Roll With Buffett" - invest in Buffett's holding company, Berkshire Hathaway
These startups reach younger audiences that traditional banks could only dream of.
No industry is exempt from the rapid changes that digital transformation brings. Is your enterprise benefitting from or suffering from digital transformation? Find out how to Transform your Enterprise with Digital Empowerment here.