On first blush, banking may not seem to have much in common with Uber, but the speed with which the scrappy ride-sharing startup stole market share from taxis provides insight into the fallout financial institutions can expect from fintechs intrusion into a similar legacy industry banking.
In ten years, Uber has grown from a one-office shop in San Francisco to operations in 570 cities worldwide. Despite a loss of $3 billion last year, it boasts a valuation of $70 billion and 2016 revenues of nearly $6 billion.
Uber is a disruptor in the truest sense of the term?a firm that upset the taxi industry by completely reimagining the personal transportation business model. They completely shook up the status quo with creative ways to lower costs, add convenience and speed up service.
Uber achieved market dominance by marrying technology with the basic need for short trips in passenger vehicles. And millions of consumers love it. Paired with a mobile phone, they found it easy to call for a ride, monitor its arrival and pay the fare. Uber even provided a feedback loop for building confidence in their drivers. They researched consumer sentiment toward cabs, tapped into a milieu of discontent, and made ride-hailing as simple as a few taps on a phone.
Ubers rapid takeover of the taxi industry bears an uncanny resemblance to events occurring in banking. The regulated nature of the taxi business is comparable to banking (note: there are similarities, but by no means are the two industries identical). Trying to bust into the taxi business isnt easy, and prices for a standardized commodity are narrowly defined, both by regulatory bodies and by the marketplace. Taxi medallions?like bank charters?can be used to protect the industrys traditional players. As a result, taxi companies rarely needed to keep up with competition by innovating. (Sound familiar?)
Then along comes Uber, offering better, more convenient services,?a truly innovative model. In response, taxi operators in some markets called upon friendly politicians to impose stiffer regulations on the upstarts to curtail Ubers growth. But all it takes is for consumers to get a glimpse of what a better, cheaper solution looks like, and it becomes incredibly difficult – if not impossible – to hold back the waters of progress.
But the regulatory barriers that once protected banks are eroding. The Office of the Comptroller of the Currency recently proposed giving special purpose national bank charters to fintechs. Traditional financial institutions can expect these barriers to continue falling particularly as long as fintechs continue to provide superior, consumer-friendly alternatives. Ultimately, neither politicians nor consumers have much patience for squelching innovations that make peoples lives easier.
Community banks and credit unions are particularly vulnerable. They dont enjoy the same economies of scale that megabanks have with their huge customer bases, expansive branch networks and slick, customized mobile banking tools. And – as most in the banking industry concede – regulations disproportionately burden smaller institutions.
According to the Federal Reserve, compliance costs at banks with less than $100 million in assets represents more than 8% of noninterest expense. The same compliance costs at banks with assets between $1 billion and $10 billion are less than 3% of noninterest expense.
Not surprisingly, the number of community banks (those with less than $10 billion in assets) shrank 14% between the passage of Dodd-Frank in 2010 and late 2014. Meanwhile, the volume of banking regulations grew 18% between 1997 and 2008. Coincidence?
Ubers success in grabbing market share from a legacy industry should motivate bankers to rethink their response to fintechs, and their approach toward regulations. Doubling down on their current strategy is not a prescription for the future. Regulations which once offered traditional institutions protection have become a crushing weight for smaller banking providers trying to compete against nimble nonbank competitors.
But perhaps, theres no greater barrier than a culture resistant to any bold changes.