Banking Industry, Pt. 2

Part
01
of four
Part
01

TAM: Banking Aggregators

The TAM of banking product aggregators is equal to the overall revenue of the loan brokers industry in the United States, which amounted to $14 billion in the year 2019.

The TAM of Banking Aggregators

  • Banking product aggregators usually create personal finance contents and help educate people about broad assortment of subjects concerning personal finance. Companies in this sector include Mint, Bankrate, Betterment, Credit Karma, LendingTree, Wealthfront, and Zenefits.
  • For example, LendingTree helps its customers to locate personal loans, auto loans, small business loans, student loans, credit cards, and home mortgages and refinancing.
  • Thus, banking product aggregators are a part of the loan brokers industry. According to Cornell Law School, a loan broker is an individual or group that focuses on connecting homebuyers to suitable mortgage lenders (not limited to mortgages). They generate the majority of their income "by marking up the costs on the loan the wholesale lender is offering."
  • The total revenue potential available to the market, or the TAM of banking product aggregators, is equal to the total revenue of the loan brokers industry in the United States, which was $14 billion in 2019. From 2014 to 2019, the industry's annual growth was 11.2%.
  • According to IBISWorld Industry, LendingTree held one of the largest market shares. The industry consists of residential, commercial, and industrial mortgages, as well as vehicle loans, home equity loans, brokering and dealing products, etc.



Part
02
of four
Part
02

Banking: Buying and Shopping Habits

Baby boomers constitute a large segment of traditional banking product users, and 84% of them prefer to shop in-store rather than online.

OVERVIEW

  • Baby boomers constitute a large segment of traditional banking product users and are more comfortable using the same, compared to younger generations.
  • While some boomers are adopting new banking methods almost as rapidly as millennials, as a collective whole, their adoption of new methods is much slower and usually reluctant.
  • In the same light, boomers are expected to be a deterrent of the shift away from the physical currency.
  • In terms of gender, boomer men and women express similar levels of preference for branch banking (slightly higher for women). However, for gen x and millennials women, almost two-thirds would visit a branch when applying for a loan compared to half of the men.
  • Women also tend to take fewer risks than men. However, 62% of women pay their bills online, compared to 53% of men. It is, thus, difficult to draw a line between the typical traditional banking products user by gender and subsequently establish their shopping habits.
  • As such, this report provides data for the shopping habits of traditional banking products users by generation (baby boomers).

BOOMERS — WHERE THEY SHOP

ONLINE VS IN-STORE
  • Baby boomers regularly make purchases online. However, they prefer traditional methods of shopping, with 84% of them expressing their preference to shop in-store rather than online.
  • Also, 67% of them stated that if they had an interest in a product that was available online and in a nearby store, they would prefer to visit the local retailer rather than order the item online.

WHAT THEY SHOP

HOUSEHOLD
  • Boomers (59%) would spend extra on "socially compliant, sustainable products."
  • They also constitute almost half of total pet spending (46.8%).
  • Boomers are conscious of their health and are projected to spend 3.4% more than their parents on health-related purchases.
  • About 72% of them check food and beverage labels to ensure that the product is healthy.
  • About 49% of them are interested in functional foods such as probiotics and vitamins, while 20% take ready-to-eat snack foods such as fruits, candy bars, and nuts.
LEISURE
  • Baby boomers planned to take between four to five leisure trips with a budget of over $6,600 on travel alone in 2019.

HOW THEY SHOP

  • Boomers place importance on their interactions with the sales associates of the brands that they patronize and value the brands as such.
  • They are also quite selective of their sources of brand and product recommendations. Only 12% of boomers consider recommendations from family and friends, and even though 82% of them are on social media, it is unlikely to influence their shopping habits.
  • Instead, a brand's reputation and popularity are more likely to pique their interest when making new or unfamiliar product purchases.


Part
03
of four
Part
03

Banking: Regulatory Concerns

Regulatory concerns of banking aggregators include data privacy, dealing with multiple financial regulators, potential halts in innovation, difficulties obtaining a license or de novo charter, and Reg BI and Form CRS. Information regarding these concerns and regulations is provided below.

Data Privacy Protections

Multiple Financial Regulators

  • The US does not have a single financial regulator, and the ones that exist sometimes conflict. An example is the SEC and CFTC being at odds over how to approach cryptocurrencies. Also, state governments add to the confusion by establishing their own rules and regulations for financial services. These issues are compounded if the companies do business internationally.
  • There are different regulators for different financial products, for instance there are over a dozen to stop money laundering and regulating capital markets, banking, money transmission, and more. Any aggregator trying to enter the market has to take into account all the different regulations to avoid any breaches.
  • Definitions of the aggregator may differ depending on different legislation and affect what type of license or charter the platform needs.

Regulators Halt Innovation in Financial Services

  • Consumer Financial Protection Bureau is the only US financial regulator with "the explicit statutory remit to promote innovation in financial services". The norm is for regulators to halt innovation in financial services especially for business models that do not fit pre-defined categories as already defined by law. This generates uncertainty because fintech companies and platforms worry they can become subject to enforcement actions.
  • Regulators often have competing priorities and tend to stop innovation in an attempt to ensure safety and consumer protection, and this greatly affects the number of new platforms that can safely and confidently enter the market without fear of breaching regulations.
  • New marketplaces introduce new business models that causes concerns for regulators and new entrants can face issues when regulators are unable to decide how to regulate them.

Charters and the De Novo Process

  • In 2016, OCC created special purpose charters in an attempt to allow nonbank fintech firms into the national bank regulatory system, however no charters were ever granted as the rules have been tied up in litigation brought by state regulators. De novo charters can be very hard to obtain in the US, but can present "opportunities to ease the regulatory burden of nonbank entities launching financial products across the United States" for innovators.
  • Different state licensing requirements can increase costs that are normally passed on to customers.
  • It is extremely difficult for fintech start-ups to obtain banking licenses in the US.
  • October 2019, a federal district court in New York decided that the regulator issuing charters special bank charters for tech startups did not have the authority to do so. Fintech charters helped streamline the regulatory process for a company to enter the market, but after the ruling would be required to get a national bank charter which takes about 18-24 months.
  • The regulatory burdens to launch new platforms affects not only whether a banking platform can enter the market but also the time it takes to enter the market.

Reg BI and the Form CRS Relationship Summary (“Form CRS”)

  • Reg BI and the Form CRS Relationship Summary (“Form CRS”) is predicted by Deloitte to impact wealth firms' models, processes, infrastructure, and compliance programs, and a push for less-risky investment advisory models is expected this year.
  • In June 2019, the SEC adopted Reg BI under the Securities Exchange Act of 1934 to establish a "best interest" for brokers and associated persons when making recommendations of any securities or investments including recommendations of types of accounts. The Form CRS was also adopted as a new rule requiring broker-dealers and investment advisors to provide a brief relationship summary to investors.
  • Regulators concern about the consequences of nonfinancial risks to "cybersecurity, business resiliency, compliance, operational risk, data governance, and data quality" led to the approval of Reg IB to establish fiduciary responsibility.
  • Platforms that offer investment products are impacted by this rule because they must adhere to data privacy and protection or be held legally accountable for breaches. "If employees do not follow FINRA's code of conduct, that company could be subject to penalty from the SEC".




Part
04
of four
Part
04

Banking: Over- & Under-Served Market Segments

Banking product aggregators provide information to their users on current banking products, often comparing them against each other with the aim of helping the user to make informed financial decisions whilst also offering tailored advice and services through online calculators, tools and personalized tips. Due to existing aggregators' online and smart phone based functionality, those who do not use online and smart phone services are already under-served.

Market Segments

When reviewing market segments in the context of financial products it is important to consider not only life stage (age, life position, career) but also the consumers affluence and motivation. With this in mind we have reviewed current banking product aggregators in relation to how they appeal to the following three market segments:

  • Banking habits: They are not brand loyal and view banks as transactional rather than relational. They prefer to shop around for the best deals using predominately online services and seek digital tools to help them manage and view debt.
  • Financial horizon: With high student debt and financial instability, millennials prefer access to ownership and seek advice and guidance towards large purchases such as homes and weddings.

  • Banking habits: They do carry out online research but prefer to do the transactions in person, which demonstrates brand loyalty.
  • Financial horizon: They have a high strain on their resources, with an average $142,000 in debt due to raising a family, paying off student debt, caring for aging parents, and a mortgage.

  • Financial horizon: Most of the Baby Boomers are burdened by the increasing amounts of student debt of their children, funding retirement, declining pensions and social security in jeopardy, ongoing health care costs, and funeral and estate management.

Over-served market segments

  • The millennial generation is over-served by the existing aggregators, all of which provide a wealth of information on products relevant to millennials. In fact, they are more likely to be drawn to banking product aggregators due to their ability to get objective guidance and advice quickly and easily.
  • Those consumers who are confident using technology, such as websites and smart phone apps, are served by all aggregators reviewed in this research. In fact, 75% of millennials in the US used digital banking in 2018, which is set to rise to 77.6% by 2022.
  • Those who are trusting of open banking services and have less brand loyalty are able to access more detailed and personalized information whereas those who are not comfortable trusting open banking are disadvantaged and unable to access such in-depth information.

Under-served market segments

  • All aggregators are available online, which means that those who are less confident with online services are under-served by the current aggregators. Baby boomers are the most impacted generation in that regard, followed by generation X, who prefer to carry out transactions face to face. In 2019, 37.3% of Americans did not use online banking, with many of these among the older generations.
  • Many of the aggregators require consumers to create an online account and input personal financial data in order to access personalized advice, tools and products. This immediately disadvantages those who are less trusting of open banking, namely generation X and the baby boomers. 23% of generation X and only 12% of those in the baby boomer generation are said to trust open banking.
  • None of the aggregators that have been reviewed in this research offer advice on funeral and estate planning wishes and few offer in depth advice on retirement planning later in life, managing parent's finances and ongoing health costs. 27% of retirees plan to work part-time throughout retirement, with 1 in 5 current retirees already working part-time. Moreover, the current banking product aggregators do not offer relevant and accessible information to the older generations.

Research Strategy

In order to determine which market segments were under or over-represented, we identified the three largest segments that use banking products in the US through researching each group and what their financial habits and horizons were. We then used this information to determine what each market segment's needs were and compared these with the products and services offered by 5 leading US banking product aggregators.


Sources
Sources