2015 was a breakthrough year for financial technology, or fintech. Over $23 billion in venture capital flowed into companies applying new technology to every aspect of banking services, more than twice as much as in the previous year. Google searches on the term “fintech” skyrocketed, reflecting this rising interest.
So far most of the buzz has been about disrupting banks on the consumer side. We’re seeing new branchless mobile banks such as Simple and Moven, as well as a host of startups tackling traditional bank services such as lending and raising money (Kabbage, Kickstarter), and payments things (Venmo, Square, ApplePay).
The same kind of disruption is also happening in business banking. Change comes slowly to the B2B world, but it does come. For example, banks used to have a lock on providing payroll services, until new specialized technology providers came along and provided better service at a lower cost. This kind of disruption in commercial banking will happen, and the impact will be even bigger, because the B2B market is even bigger. For example, the market for consumer payments is valued at about $3 trillion; the B2B market is about $38 trillion.
Like consumer fintech, B2B fintech is about making financial services more accessible, convenient, and easier to use. It’s about transparency, and putting more control in the hands of users. It’s about offering services to previously unaddressed markets, or taking functions done by banks, and doing them better. But there are fundamental differences between consumer banking and commercial banking, so the disruption is going to unfold differently.
First let it be said—the only truly revolutionary concept in fintech today is distributed ledger technology, also known as the blockchain. Right now, fintechs use existing banking rails, card networks, and financial infrastructure to deliver their services.
Distributed ledgers could be used to create an entirely new set of global, instantaneous rails. Cross-border B2B payments could be the first large scale use case for this technology, because it’s a huge market with huge problems.
Banks have done next to nothing to address the massive costs and inefficiencies in moving money from country to country at scale. Cross-border payments, unbelievably, have to be initiated one by one, filling out the same antiquated web form for each and every payment you want to make. It's a world of hidden fees, poor services, and terrible customer experiences—in other words, prime fintech territory.
For a long time, people stayed away from the opportunity because it was just too hard to crack. A distributed ledger solution is still probably three to five years away, but now there are lots of companies jumping in offering far better solutions than what banks have. You can already see the early part of a fight for the customer shaping up.
This is high margin business for the big banks. A distributed ledger would drive prices down significantly. Banks have been galvanized by the fear of losing cross-border payments to distributed ledger technology and have gotten on board to embrace it through things like the R3 Consortium and Citibank’s CitiCoin initiative. They’re trying to stay in the game by disrupting themselves. This the most amplified example of what fintech is doing in the B2B banking world. But it’s far from the only example.
Domestic supplier payments are certainly at the tip of the spear. Unlike consumer payments, which seem to be all about the wow factor—the latest being Google’s experiment to let you pay by phone without even taking the phone out of your pocket—B2B payments are all about efficiency, visibility, control, and service.
There’s a huge amount of complexity but all banks currently provide is the pipe for moving the money. And, as my banker friends note, it’s a dumb pipe at that, with next to no visibility or control for buyers and suppliers.
Banks haven’t innovated in this area in decades. They’ve never stepped up to all the services required to prepare payments to go through the pipe, or the services needed on the back end to reconcile payments and do all the follow up on payment errors to make sure that the correct payment gets to the payee. It’s an obvious opportunity for those who can provide a better solution.
Changes are also afoot in B2B lending. fintechs such as Fundbox, BlueVine, Behalf, Nav, and CreditHQ are moving into credit for working capital and accounts receivable factoring, which are very traditional banking roles. And, with Regulation A coming into play, even venture funding may be up for grabs.
Payments and lending go to the heart of what banks do for businesses. Banks will have to compete hard to hang on to these services. Where they can’t match fintechs on technology and service, they’ll have to partner with them or lower their prices. Most likely, we’ll see both, and that will be very good for business customers.
What we won’t see is businesses giving up their banking relationships any time soon, even though the scope of those relationships may be diminished.
On the consumer side, it has become clear that retail banks are dying. They continue to be relevant for people that grew up with a bank and want to do their banking at a window with a live person behind it. But for the younger generation who are used to doing everything on their phone, it’s not a good experience to wait in a bank line. When you can bank on your mobile phone, there’s no reason to go to the bank. A 2014 study found that over 70 percent of millennials would rather go to the dentist than listen to a banker. Branch banking is slowly dying all over the country and unlikely to revive.
However, commercial banking is not branch-based. It’s relationship-based. Corporations have much larger amounts of money flowing through them. They have higher deposit requirements. They have risk and compliance issues, and they have public boards to report to. They have more to safeguard and they need banks to secure and safeguard those funds so the relationship as trusted depository will continue. Even with distributed ledger technology, the role as the holder of funds is going to always be there for the bank.
The relationship can easily be untethered from the branch though. In fact, for the most part it already is. Corporate customers visit a headquarters. Or their banker calls on them at their office, or they have dinner and lunch and golf outings. Commercial customers will barely notice the death of retail banking.
Businesses are much slower to change than consumers are. Size, volume and the sheer complexity of processes make change more difficult. But change will come. Just as in the consumer space, banks will struggle to adapt and figure out where they can add value for businesses. Those that embrace the consumerization of business payments and find new ways to add value have a much better chance of hanging on to their customers than those that don’t.