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Under the Radar: Bank Executives Not Aware of Key Fintech Startups [Chart]

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Under the Radar: Bank Executives Not Aware of Key Fintech Startups [Chart]

Flying Under The Radar

Bank Executives Not Aware of Key Fintech Startups

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

Mid-afternoon single malt scotch. Summers in the Hamptons. Six-digit bills for yacht maintenance. If you thought bankers live in a bubble, you are correct. Today’s chart is even further evidence: banks are unaware of the very products and services that are vying to pull the rug from under them.

Fintech startups such as Square, The Lending Club, Nutmeg, and Betterment are taking the world by storm, but so far bank executives are unaware of their existence. A survey of 110 bank executives, ranging from directors to C-suite management, found that the majority of respondents do not know key fintech startups that are rapidly changing the banking landscape.

First, the benchmark: 92% of execs knew about Paypal, one of the first real fintech companies to exist. Paypal was started in 1998, IPO’d in 2002, and then was subsequently bought out by Ebay for $1.5 billion. Last year, the company moved $228 billion in 26 currencies across more than 190 nations.

Now, let’s take a look at some of the newcomers:

The Lending Club has a $5 billion market capitalization, after debuting on the NYSE after a widely celebrated IPO in December 2014. It raised $870 million in the IPO, yet only 18% of banking execs know about the company and what it does.

Square was co-founded in 2009 by Jack Dorsey, who was previously involved with starting a little-known company called Twitter. Square is an electronic payments service that was last valued at $6 billion in 2014, when it did its last raise of $150 million. Somehow only 15% of bank execs know about this company.

Nutmeg is the company that bank execs know the most about. About 23% of respondents know of the company. Nutmeg is an online wealth management platform from the UK that last raised $32 million in 2014 at an undisclosed valuation.

Betterment is another online financial adviser that was valued at between $400 million and $500 million in early 2015 with billions of assets under management. Roughly 73% of respondents had never heard of this fintech startup.

This reminds us of the early days of file-sharing and eventually music streaming services on the internet. Music labels, which are almost all but gone of the way of the dinosaur, fought with legal threats, lobbying, legislation, and lawyers rather than by way of innovation.

That may be the only way that the big banks can fight if it becomes too late.

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Banks

Why It’s Time for Banks to Make Bold Late-Cycle Moves

As we enter a late-cycle economy, a staggering 60% of banks are destroying value. Here’s the steps they can take in order to succeed.

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Why It’s Time for Banks to Make Bold Late-Cycle Moves

An economic downturn is approaching on the horizon. Amid low interest rates and a manufacturing slowdown, industries and investors alike are scrambling to prepare as the window of opportunity closes.

Banking is no different. After a decade of expansion, the industry is showing many signs of a late-cycle economy. On top of this, a staggering 60% of banks are destroying value. Today’s infographic from McKinsey & Company explores the steps banks can immediately take to succeed in the next economic cycle.

How is Value Created?

In the banking sector, three main factors contribute to value creation:

  • The location of the bank
  • The scale of its operations
  • The effectiveness of its business model

Given that geographic reach is mostly out of a bank’s control, and scale takes time to build, banks must focus on their business model.

There are three universal business model levers that all banks can immediately act on to change their destiny.

1. Risk Management
Banks can protect returns in an economic downturn by managing risk. For example, new machine-learning models can predict the riskiest customers with 35 percentage points more accuracy than traditional models.

2. Productivity
To radically reduce costs, banks can transfer non-differentiating activities to third-party “utilities”, through outsourcing, carve-outs, or partnerships. This has the potential to increase return on equity by as much as 100 basis points.

3. Revenue Growth
When customers are satisfied, they generate more value for banks—and vice versa. For instance, customers who report low satisfaction with their mortgage experience are almost seven times more likely to refinance with a different bank.

By materially improving decisive points in the customer experience, banks can increase revenue and reduce churn rates within 12-18 months.

The Four Banking Archetypes

Beyond these universal performance levers, a bank should prioritize late-cycle economic decisions based on the archetype it falls under.

  • Market leaders are top-performing financial institutions in attractive markets
  • Resilients are top-performing operators despite challenging market conditions
  • Followers are mid-tier organizations generating returns due to favourable market conditions
  • Challenged banks are poor performers in unattractive markets

Different archetypal levers are available depending on each bank’s unique circumstances.

  1. Ecosystem
    Banks can find new revenue streams across and beyond banking, leveraging customer relationships and white-label partnerships.
  2. Innovation
    Banks can create value by developing new methods, ideas, products and services. To implement this effectively, banks must set goals for the return on innovation as well as the timeframe.
  3. Zero-based budgeting
    By justifying expenses for each new period, banks can drastically reduce costs. This involves starting from a “zero base” rather than prior years’ numbers.

Here’s how banks across the various archetypes can take action:

 
Ecosystems
Innovation
Zero-based Budgeting
Market Leaders
-
Resilients
Followers
-
Challenged
-
-

For example, while market leaders’ large capital base is best used for ecosystem and innovation plays, challenged banks need to radically rethink their business model or merge with similar banks.

Reinvent, Scale, or Perish

As the late-cycle economy slows even further, no banks can afford complacency. In fact, history has shown that 35% of market leaders drop to the bottom half of peers in the next cycle.

Now is the time for banks to take bold action through universal and archetypal levers—or risk being left behind.

For a more detailed breakdown of the actions that banks can take in this market environment, check out the full report by McKinsey & Company.

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The World’s Most Powerful Reserve Currencies

Here are the reserve currencies that the world’s central banks hold onto for a rainy day.

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The World’s Most Powerful Reserve Currencies

When we think of network effects, we’re usually thinking of them in the context of technology and Metcalfe’s Law.

Metcalfe’s Law states that the more users that a network has, the more valuable it is to those users. It’s a powerful idea that is exploited by companies like LinkedIn, Airbnb, or Uber — all companies that provide a more beneficial service as their networks gain more nodes.

But network effects don’t apply just to technology and related fields.

In the financial sector, for example, stock exchanges grow in utility when they have more buyers, sellers, and volume. Likewise, in international finance, a currency can become increasingly entrenched when it’s accepted, used, and trusted all over the world.

What’s a Reserve Currency?

Today’s visualization comes to us from HowMuch.net, and it breaks down foreign reserves held by countries — but what is a reserve currency, anyways?

In essence, reserve currencies (i.e. U.S. dollar, pound sterling, euro, etc.) are held on to by central banks for the following major reasons:

  • To maintain a stable exchange rate for the domestic currency
  • To ensure liquidity in the case of an economic or political crisis
  • To provide confidence to international buyers and foreign investors
  • To fulfill international obligations, such as paying down debt
  • To diversify central bank portfolios, reducing overall risk

Not surprisingly, central banks benefit the most from stockpiling widely-held reserve currencies such as the U.S. dollar or the euro.

Because these currencies are accepted almost everywhere, they provide third-parties with extra confidence and perceived liquidity. This is a network effect that snowballs from the growing use of a particular reserve currency over others.

Reserve Currencies Over Time

Here is how the usage of reserve currencies has evolved over the last 15 years:

Currency composition of official foreign exchange reserves (2004-2019)
🇺🇸 U.S. Dollar 🇪🇺 Euro🇯🇵 Japanese Yen🇬🇧 Pound Sterling 🌐 Other
200465.5%24.7%4.3%3.5%2.0%
200962.1%27.7%2.9%4.3%3.0%
201465.1%21.2%3.5%3.7%6.5%
201961.8%20.2%5.3%4.5%8.2%

Over this timeframe, there have been small ups and downs in most reserve currencies.

Today, the U.S. dollar is the world’s most powerful reserve currency, making up over 61% of foreign reserves. The dollar gets an extensive network effect from its use abroad, and this translates into several advantages for the multi-trillion dollar U.S. economy.

The euro, yen, and pound sterling are the other mainstay reserve currencies, adding up to roughly 30% of foreign reserves.

Finally, the most peculiar data series above is “Other”, which grew from 2.0% to 8.4% of worldwide foreign reserves over the last 15 years. This bucket includes the Canadian dollar, the Australian dollar, the Swiss franc, and the Chinese renminbi.

Accepted Everywhere?

There have been rumblings in the media for decades now about the rise of the Chinese renminbi as a potential new challenger on the reserve currency front.

While there are still big structural problems that will prevent this from happening as fast as some may expect, the currency is still on the rise internationally.

What will the composition of global foreign reserves look like in another 15 years?

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