Disruption on Deck for Retail Financial Services

Disruptive innovators could make life interesting for CUs.

June 9, 2014

Investment in retail financial services innovation has exploded since the financial crisis. The evidence is compelling:

  • Global investment in financial technology has tripled from $930 million in 2008 to nearly $3 billion in 2013, according to Accenture;
  • Of the 1,096 “payments” startups listed in early May on AngelList [], 216 joined this online investment platform for start-up companies in 2014.
  • Large players outside financial services have joined venture capital firms in making significant investments in the field. Google, for instance, recently invested in three lending startups.
In the future “your children may even ask you, ’What was it like to see that old-fashioned building called a bank?’ ”
-Andrew Sorkin, The New York Times

These investments could potentially disrupt the traditional business models banks and credit unions have relied on for years. Andrew Sorkin recently wrote in The New York Times’ DealBook column, “If the last three decades revolutionized the information and telecommunications industries, the next three may upend the basic tenets of finance: currencies, credit and banks, as well as payment and transmission systems.”

Let’s take a closer look at some of these disruptive innovators:

PayPal has a redesigned mobile app and introduced Beacon, a Bluetooth Low Energy device that connects to a customer’s smartphone when they enter a store to enable hands-free payment at the point of sale.

PayPal offers, “Bill Me Later,” which allows customers to defer payments for items purchased via PayPal.

Lending Club, the largest U.S. peer-to-peer lender, facilitated nearly $800 million in personal, unsecured loans in first quarter 2014. Last year, Google led a $125 million investment round in Lending Club.

T-Mobile recently partnered with The Bancorp to offer a prepaid debit card and mobile app, which it markets as a checking account alternative.

The future promises even more potential for disruption as the true impact of new and yet-to-be conceived innovation is felt. For example, Bitcoin’s true impact may have nothing to do with virtual currencies—Bitcoin’s lasting innovation may be its platform, which enables peer-to-peer transactions without relying on a trusted third party or clearinghouse.

Well-financed innovators continue to seek new ways to disrupt retail financial services. Marc Andreesen, founder of Netscape and principal at the venture capital firm Andreesen Horowitz, announced on Twitter in February, “I am dying to fund a disruptive bank.”

This has led to a lively online debate on how best to build such a bank from scratch. Some even argue such a bank already exists (e.g., Atom in the U.K. or FIDOR Bank in Germany).

One vision of the future was presented by Brad Leimer, head of digital banking for Mechanics Bank in Richmond, Calif., last year in American Banker. “We are moving away from a banking relationship defined by the goal of being a customer’s primary financial institution to one where we focus on becoming their primary financial application.”

Several banks appear to be well on their way to implementing Leimer’s vision. Crédit Agricole in France launched its CAStore, an online banking app store that captures new ideas for apps from customers and provides third-party developers with the technology to create the apps.

BBVA of Spain and Capital One appear to be developing app stores of their own. USAA may have already succeeded in becoming its tech-savvy members’ primary financial app by combining banking, insurance, and investment functionality into a single app.

Myriad industries have been disrupted in recent years by new technologies and business models (e.g., e-commerce, digital music, digital photography, e-books, etc.). Retail financial services may be nearing its own moment of disruption.

JOHN LASS is senior vice president, strategy & business development, and STEVE HEUSUK is senior manager, strategy & business development, for CUNA Mutual Group.