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Fintech Startups Are Stealing 40% of Banking Market Share.

Posted by Laura Mauersberger

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Image source Gerd Leonhard



The role of digital technology fundamentally enables innovation and disruption. Absolutely no industry is shielded from digital transformation.


The taxi industry has been proliferated by Uber, the hospitality industry has been shaken up by Airbnb, Netflix has blown the movie-rental industry out of the water, and the music industry swiftly changed models from CDs to streaming thanks to applications like Spotify and Pandora.

Digital transformation has changed entire industries.

Traditionally, the banking industry is slow to change due to its highly regulated nature, but while banks are neglecting to adapt to changing customer needs, widely backed FinTech startups and 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 refers to the financial intermediaries involved in facilitating the creation of credit across the global financial system whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.

“Shadow banks” lend money but don’t use bank deposits to finance the transactions. They now write 38% of all home loans. Shadow banks also take a gamble on high-risk loans - now originating 75% of all loans to low-income borrowers insured by the Federal Housing Administration (FHA).

Shadow bank lenders’ market share among all residential mortgage lending has grown from 15% in 2007 to 38% in 2015.

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. Think millennials are not interested in investing? That's exactly what banks erroneously think. Yet, Stash has raised a $25 funding and has a viral appeal.

With low costs of acquisitions, and quirky names for their ETFs:

  • “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

Stash appeals in a way and reaches younger audiences that banks could only dream of.

Transforming Enterprise Architecture For Digital Empowerment

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

Banks simply have not realized that social media channels are the medium to focus on.


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 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.

 

No industry  exempt from the rapid changes that digital transformation is bringing. Is your enterprise benefitting from or suffering from digital transformation? Find out how to Transform your Enterprise with Digital Empowerment here.