Banking Innovation: Startup & Big Bank Synergy
Banks run into a bit of a conundrum when it comes to innovating. Essentially, the problem is that the institution of banking has one rule: avoid risk. This is a big hurdle when considering innovation, which is fraught with risk-taking.
Innovation can even be a little scary when it comes to banks, as we don’t want a bunch of committees innovating with our money. So, do we even need banks to be innovative or do we just need them to be the dusty treasure boxes that they are, keeping our money safe and lending with strict risk-management regulations?
The problem is, while we might not need banks to be innovative, we do need them to lend money to innovators so our economy can move forward. Innovators are entrepreneurs and small businesses, many of whom either have bad credit, or no credit history at all. This means that they’re risky, and most likely won’t make the lender’s cut. Because of this, ironically, we need banks to be innovative in the way they assess risk.
Simon Taylor, the VP of Entrepreneurial Partnerships at Barclays, thinks the biggest problem is false certainty and likens it to “trying to predict the weather in 1 year’s time without any data, just a lot of people who’ve experienced different kinds of weather before.”
Essentially, banks are run by a series of committees and specialists. When assessing the merits of an upgrade or a change, the decision must be scrutinized by various committees and hundreds of people – all with different opinions.
As Taylor also mentions, the argument sometimes boils down to difference between specialists who may know the minuscule details but not the big picture, and the managers, who see the big picture but might not know enough about the details to make confident decisions.
Because of the discordant nature of banking decision-making, you end up with slow development times, which is one of the biggest obstacles to innovation. Thus far, banks have been sitting pretty in the knowledge that there really are not a lot of other options for storing your money or getting small business loans. Plus, with the decline of small community banks, and the continuing rise of big banks, competition has been all but nonexistent.
Today, this is not the case, and banks should be worried. With new “FinTech” (short for Financial Technology) companies on the rise that don’t have the same obstacles as banks do, consumers are starting to pay attention, some even asking whether banks are necessary at all. For example, peer-to-peer lending companies like Lending Club and Prosper, or crowdfunding companies like Kickstarter are becoming more viable and more popular options for small business funding. Small businesses experience a lower barrier to entry with these alternative lending companies who use innovative methods of determining risk and quick turnaround times for handing over the cash. Even with the higher interest rates that alternative lending models charge, many small businesses have still elected to go the nontraditional route, and these startups are thriving.
Our company, Bento, is another upstart that is a complement to traditional banking, layering on elegant, intuitive technology on an expense management platform that connects to your traditional business banking account.
Though banking may never be obsolete, we may see a day when the stodgy edifice of traditional banking is replaced by a more progressive, flexible model. Until then, innovative startups will work on top of the existing banking infrastructure to deliver new products that businesses desire.