What Banks Missed

It’s a classic case of a couple of upstarts upending the business of banking.

Increasingly familiar names such as Affirm Holdings, Afterpay Ltd. and Klarna Bank, as well as few household names such as PayPal Holdings, are busy taking credit card business away from banks by offering interest-free, installment loans at the point of sale.

Almost overnight, this type of lending has grown into a national phenomenon, starting with online merchants and then spreading throughout the industry, as Bank Director Managing Editor Kiah Haslett wrote about earlier this year.

C + R Research reports that of 2,005 online consumers, nearly half are making payments on some kind of buy now, pay later loan. More than half say they prefer that type of lending to credit cards, citing ease of payments, flexibility and lower interest rates as their top reasons why they prefer to buy, now pay later.

The amount of money flowing into the space is substantial. In August, Square announced that it would purchase Afterpay for $29 billion. Mastercard is trying to get into the game as well, announcing a deal in September to partner with multiple banks such as Barclays US, Fifth Third Bancorp and Huntington Bancshares to bring buy now, pay later to merchants.

Whatever your skepticism of the phenomenon may be, or your lack of interest in consumer lending, it’s clear that financial technology companies are chipping away at bank business models. This phenomenon begs the question: Why are fintech companies having such success when banks could have taken the opportunity but did not?

Banks have the data. They “know their customer” – both in the regulatory and relationship sense. Yet, they didn’t anticipate consumers’ interest or demand because they already had a product, and that product is called a credit or debit card.

Few companies cannibalize their business models by offering products that directly compete with existing products. But increasingly, I believe they should. Banks that don’t acknowledge the realities of today’s pressures are vulnerable to tomorrow’s innovation.

When we think about the business of banking today, I think about a glass half empty. It doesn’t mean we can’t put a little bit more water into it. But it does require an honest assessment of gaps in your current strategy and an assessment of the team you’d need – not necessarily the team you employ.

As I head into Bank Director’s Audit & Risk Committees Conference in Chicago this Monday through Wednesday, these are some of the themes on my mind. In some ways, having a glass half empty is sometimes the best thing for you.

It gives you the chance to do something positive to change it.