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Most trusted by consumers in the US: banks, FinTechs or Facebook?

Consumer trust underpins all good brands. Since the 2008 recession, it is what banks have been working hard to mend. It’s what new FinTechs are aspiring to gain. It’s what established giants, like Facebook, are working hard to preserve.

In the US, most consumers have tried out FinTech services. A demand for better digital journeys has, for example, resulted in a crowding market of alternative payment services. In the process, the boundaries between banks and third party providers are becoming increasingly blurred. Banks need to not only consider their customers’ loyalty not only to them but also to non-bank brands. This raises the question: If your favourite brand opened a bank, would you switch?

A preference for FinTechs?

A recent Salesforce report found that 83% of millennials, 79% of Generation X and 62% of Baby Boomers have used payment services provided by financial technology companies. As perhaps anticipated, the majority of millennials (55%) prefer to use FinTech firms over banks for payment activities such as peer-to-peer transfers, bill payments and loans. The statistics for Generation X and Baby Boomers were expectedly lower, at 38% and 21%. The main reasons for this preference were attributed to ‘convenience’ and ‘ease of use’ by all three segments of respondents.

Something we have written about previously is that payments in the US are not as straightforward as in Europe, especially not peer-to-peer transactions. Sending money to someone with a checking account within the same bank might be easy, but if they bank elsewhere there might be fees involved, there’s often a longer transaction time, and it could be difficult, sometimes impossible, to set them up as a recurring payee.

As a result, many have turned to third party companies such as Venmo, Square and PayPal when they want to make payments. With no fees and (often) quicker process times, nearly a quarter of US adults with a smartphone (45.8 million) used a P2P payment app at least once a month in 2016.

The importance of trust

Some assume another reason for millennials’ preference for FinTechs: a trust advantage over incumbent banks, pointing to a history of distrust between customers and banks. While it’s fair to say that consumer trust in banks has taken a dive in the past decade, there is more to this than meets the eye.

Will customers turn to FinTech providers if banks are failing to offer cheap (or free) and efficient processes? Yes, just look the growth in the usage of P2P payment apps. But, what we’re seeing is not necessarily a movement away from banks. This is an industry, historically dominated by a few big players, facing the pressure of increasing competition. This pressure, coming from both within and outside of banking, is forcing incumbents to innovate faster and keep up the pace with digital developments.

Again in the P2P payment space, we are expecting the bank-backed payment app, Zelle, to launch this year. How well it will be able to compete for the loyal following of current P2P payment apps remains to be seen.

In a different scenario, we are expecting to see banks actually capitalising on consumer trust in FinTech firms through partnerships or even acquisitions. These relationships are already being formed in the world of challenger banks. BBVA and Simple offer a prime example of a, so far, successful acquisition.

Director of Research and Analysis at Mapa Research, Ceri Stanaway, comments: ‘Trust is something that must be earned – it’s not granted by default. True, consumer trust in big banks has taken a knock over recent years. But FinTechs are, as yet, largely untested by the challenges that have faced banks. While they haven’t yet lost customer trust, equally they have not yet had much of a chance to earn it. And for many banking customers – particularly less digitally-confident groups – it may remain a case of ‘better the devil you know’ for some time to come. In the UK, even convincing customers to switch between bank accounts is a challenge – with less than 5% of bank account holders switching their current account each year. In the US, switching is more common (around 10% annually) yet even here FinTechs will need to demonstrate to these customers that they can offer a better, more convenient – and at least equally secure – alternative to banks to convince some to make a wholesale switch.’

Brands becoming banks

Certainly, consumer trust will play a significant part as new players enter a crowding banking market. Providers with enough capital and strong customer relationships could look for an opportunity to join in the competition. In fact, this is something that has been happening for a while now with banks starting life as food retailers, such as Sweden’s ICA Banken, or as car manufacturers, such as USA’s Ally Bank.

In a global survey, Accenture found that many people would switch to Google, Facebook or Amazon for banking services (31%), insurance services (29%) and financial advisory services (38%) if they were offered. Interestingly, they had similar statistics for switching to a supermarket or retailer; 31% for banking services and 30% for insurance services.

The impact of PSDII

Although it might be a while before Facebook launches a bank in the US, it might not be too far off in Europe, thanks to the new European legislation about to come into effect, the second payments service directive (PSDII).

It is no secret that Facebook has been looking to move in to financial services as part of its strategy: in 2014 it hired ex-PayPal president, David Marcus, as Head of Facebook Messenger. Rumblings about a ‘Facebook bank’ have since been fuelled by newly acquired licenses for e-money and payments services in Ireland. Facebook has offered in-app payments in the US since 2015, so this is an expansion of the service. The implications of their European licenses, however, are bigger when PSDII is taken into account.

Due to be implemented in early 2018, this legislation will force banks to share their APIs with third parties and allow them to initiate payments and extract account information. This means that Facebook could gain direct access to bank accounts. Consequently, they will have the opportunity to become an Accounts Information Service Provider. The social platform would be able to show its users an aggregated financial view from more than one banking provider. With this information in one place, the right spending analytics and a great customer experience, the need for individual bank apps could be significantly reduced.

Stanaway comments: ‘Many millennials, in particular, will embrace the exciting and untarnished possibilities offered by FinTechs. But, in the short term at least, others may be more likely to dabble their toes in FinTech waters where it makes certain processes quicker and easier, but leave their primary banking services – and deposits – with traditional banks. This offers a huge opportunity for incumbent banks to take advantage of customer fear of the unknown, and invest in building innovative, customer-focused solutions themselves.’

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