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According to the FDIC’s “How American Banks” report, approximately 33 percent of U.S. households used a peer-to-peer (P2P) service to make a payment in 2019. That figure has likely only grown during the coronavirus pandemic, with P2P service providers now dipping their toes into other services such as accepting deposits. In fact, for the non-banked, i.e. people without a traditional banking account, this has been a lifeline, allowing them to deposit government stimulus directly into P2P services like CashApp and Venmo.
Jason Mikula, Managing Director at 312 Global Strategies and this week’s guest on the Fintech Growth Talk, believes that while technological innovations like P2P payment apps have been a driving force in the fintech arena, innovation is only secondary to the benefits consumers receive. In other words, consumers don’t necessarily delineate between an innovative, digital-first challenger banking service and a full-featured app from a traditional bank.
That’s not to say that the nuances between the different innovations in technologies and business models that today’s fintechs pursue aren’t important. They are—but only for the industry. The main goal, though, is to make the service convenient and integrated into the consumer’s life. For instance, banking services providers SoFi and Robinhood both offer products similar to checking accounts, but on the backend, they are more like cash management accounts typically associated with brokerage accounts. Of course, the key part of this equation is that the fintechs maintain partnerships with licensed, regulated deposit banks. To account holders, the accounts operate similarly enough to a checking account; the innovation is more important to banking insiders and regulators.
For fintechs, innovation isn’t always built around providing a totally new service, but rather finding innovative ways to perform bank-like functions. For example, ACH routing has been around for some time and works great for certain transactions, but it’s not very convenient for transferring money to friends, for example. That’s the innovation found in Venmo, CashApp, and other similar types of fintechs that offer what Mikula calls “synthetic banking products.”
For consumers, trust is a key issue when it comes to the banking system. But fintechs have also benefited from that trust, possibly undeservedly, says Mikula. The US financial system—banks and regulators—have spent a lot of time, money, effort, to instill confidence in the financial system by creating the FDIC or other regulatory guardrails that protect consumers. The issue is that many fintechs don’t offer the same levels of protections, are not as strictly regulated, and can even serve as platforms for committing financial crimes. There are real dangers for consumers using less regulated fintech vehicles to manage their money, and they frequently use these apps without fully understanding the risk.
Fintech innovation, argues Mikula, needs to revolve around delivering new ideas to consumers, but also developing new ways to tackle risk and technology obstacles. Mikula believes that fintechs will only succeed in building sustainable businesses if they bring in leaders with relevant compliance and regulatory knowledge.
And therein lies the rub for fintech. In order to innovate, they need to sometimes circumnavigate regulations. But the bigger a fintech gets, the more likely innovation will need to take a back seat to regulation, as they draw greater scrutiny, and potentially stricter regulations. Finding the balance between the two is the prime objective of today’s firms, and those who do will likely be tomorrow’s industry leaders.
Jason Mikula is a 10+ year veteran in the consumer financial services industry. He has held leadership roles in marketing, product management, and customer acquisition at startups like LendUp and Future Finance and was part of the team that built and launched Goldman Sachs’s retail franchise, Marcus. He is currently Managing Director 312 Global Strategies BV. You can find him writing for his newsletter, Fintech Business Weekly, or on Twitter or LinkedIn.
Listen to our full interview with Jason Mikula here.
