The US financial services market is characterised by its sheer size and diversity. Both characteristics make it of potential interest to fintechs. According to a recent report from SelectUSA, prepared in collaboration with the International Trade Administration’s Industry & Analysis Unit (I&A), ‘financial markets in the United States are the largest and most liquid in the world’. In 2016, according to the report, ‘finance and insurance represented 7.3 percent (or $1.4 trillion) of U.S. gross domestic product.’
So, the sector is large in scale but it also encompasses organisations of many different sizes, at various stages of maturity and technological capability. In fact, there are few financial services markets more diverse than the US. At one end of the spectrum are some of the most technologically advanced commercial banks in the world, avidly embracing the latest innovations from virtual payments to distributed ledgers. At the other are the stubbornly old school institutions using dot matrix printers to do the latest cheque run.
Even across this mix, there is a size issue. Typically, in today’s market, we are seeing larger financial institutions dabbling in the latest innovative technologies while smaller banks making a greater play around a personalised service – taking cheques off customers in person when they enter a branch, as opposed to making them put it through an ATM.
There is clearly great diversity at play in this market and this is mainly due to the sheer scale of it. The US financial services market is so large, it inevitably encompasses a wide range of organisations – all different in their approach to business. There is also an innate conservatism at play in some parts of the US, where we can see an inertia around change and in some cases, an unwillingness to consider embracing new technologies.
Diversity in the US market should be part of the appeal for fintech businesses. On one hand, it is a market focused on driving innovation, keen to engage with the best that fintechs can offer; while on the other, it is a market which offers a huge opportunity to get on board with banks that are either part way along the road to technological enhancement or have just started out. In both cases, it gives fintechs the chance to provide guidance on a journey which ultimately results in the uptake of new technologies including the latest apps, cross-border digital currencies and virtual card payments.
For fintechs, one such opportunity is presented by the prevalence of regional and super-regional banks across the country – yet another example of diversity within this marketplace.
Traditional national and multinational banks have historically been able to dominate the marketplace and stay ahead of challenger or regional banks thanks to their broader commercial banking and treasury-based operations. Today, though, the opposition Tier 1 banks face is becoming ever stronger.
There are numerous regional banks throughout the US, and many aspire to grow into super-regionals, eating away at the established banks’ power base in the process. In striving to achieve their increasingly ambitious goals, many of these challengers have focused on driving the growth of their commercial cards business, a process that over time has also involved integrating their cards operations with their core treasury businesses.
It’s an integration not just of function and structure but also of the approaches banks use to market and sell their products. Regional banks have incorporated card products into their treasury portfolio and in many cases these cards have rapidly become their fastest-growing and most profitable lines. They use them as an entry point to effectively ‘land and expand’ within their key target organisations. It’s a hugely profitable move for many such banks but to make it work is challenging. Increasingly, they are partnering with fintech providers and leveraging technology to turn their vision into reality.
Window of Opportunity
The ambition of the regional and super-regional banks to challenge their larger rivals, therefore presents great opportunities for fintechs to step in and provide the systems and consultancy these banks need to develop more effective commercial card programmes.
That is just one area where they can play a role but regional banks are relatively well advanced in technology compared to the much smaller local banks that work with limited technology and have not yet addressed many of the opportunities that new systems and solutions can potentially bring. That represents just as important an opportunity for the fintechs to introduce these institutions to technology that will benefit them as organisations.
For fintechs, there is no time like the present to start embracing the range of opportunity that the sheer diversity of the US market provides as this variety may erode over time as market consolidation gathers pace.
According to global consulting firm, McKinsey: “From 2000 to 2014, there was a 28 per cent decrease in the number of small banks, while the number of large banks rose 33 per cent. The rise in the number of mergers for small banks indicates that despite a relatively stable economy banks are still turning to inorganic growth to gain scale and operate more efficiently and competitively. This trend is expected to accelerate over the next five years, especially among small to mid-tier players.”
So, with the diversity of the US market likely to diminish over time and the current challenger status of the regional and super-regional banks unlikely to last for ever, now is the time for fintechs to step in and start partnering with US banks as they evolve their technological approach. It is after all an opportunity that may not last forever.