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Disrupt the Banks

Why haven't start-ups completely taken over the personal finance industry?
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(Photo: MichaelJayBerlin/Shutterstock)

(Photo: MichaelJayBerlin/Shutterstock)

We can book a hotel, find a date, or communicate with friends across the world using the Internet. But we can’t get a loan or buy a house. We can access social networks, send ephemeral photos, and play games. So why are smartphone banking apps still stuck in the dark ages? For how omnipresent and important banks are, the banking industry is one of the more conservative when it comes to new technology.

This lack of innovation in banks’ user experience is creating a huge amount of inconvenience for customers who are increasingly accustomed to more seamless technological interactions. While the iPhone 5s uses fingerprint scanning to allow users to unlock their phones, credit cards still require a physical card and a pin-number to go with it. Companies like Google, Square, PayPal, and Venmo are competing to make it easier for users to send and receive money online, none of the large banks are making a dent—seemingly because they just haven’t invested much in the problem of how to serve their low-end clients better.

As Kevin Roose points out in New York magazine, banks just aren’t getting disrupted by nimble start-ups the way other businesses are—not that small companies don’t have the motivation to take on these Goliaths. “Undercutting big banks and speeding up processes might not be as sexy as, say, creating the next Snapchat, but it’s low-hanging fruit for techies who want a way in to a lucrative market,” Roose writes.

The best thing Silicon Valley can do for our money infrastructure in the short term is to provide new possibilities on the route to overhauling the entire system.

The fact that finance companies aren’t crumbling in the same way that, say, the giants of the publishing industry are, is, in many respects, a good thing. While investors might bet big on a small start-up and get lucky if it blows up like Instagram or Snapchat, the majority of start-ups still fail, and customers wouldn’t want their bank accounts closing because of a lack of venture capital or a bad CEO. The big banks have size and stability on their side, even when they take undue risks—as the aftermath of the financial crisis showed.

Bureaucracy can be a positive when it comes to dealing with large sums of money, even if it doesn’t promote cut-throat efficiency in product development. Banks are much more closely regulated and have a higher barrier to entry (namely, billions of dollars) than start-ups that work with money, which often work with an outside partner to handle the actual transferring of dollars and cents, ensuring legal compliance. In other words, banks provide the basic infrastructure that allows companies like PayPal to function.

“Today’s megabanks are really just bundles of particular, loosely related services cobbled together by years of acquisitions and market ­consolidation,” Roose writes. “If those bundles can be broken apart, the start-up world’s revolution looks a lot more plausible.” Yet this bundling of services is also part of why banks are useful: They provide an integration of monetary services that would be far less convenient to assemble from disparate start-ups. While the disruptive bank that Roose hopes for will likely grow in the future, start-ups today are actually finding it challenging to disrupt much of anything in financial technology. Credit cards and cash have proven tenaciously efficient.

CAUTIONARY TALES OF FAILED or failing financial technology companies abound, even for the stars of the Silicon Valley firmament. Square, founded by Twitter’s Jack Dorsey, initially made its impact by replacing cash registers for small businesses, charging lower processing fees than large banks with the added bonus of a much slicker machine—a convenient accessory available to connect right to an iPhone. It’s a lesson in disruption: Square made a better product and profited.

But with the launch of the company’s Square Wallet, an all-in-one payments solution hosted on smartphones, that success faltered. The app had “everything going for it,” as Wired noted, but it didn’t take off with users. Square’s didn’t match the universality that big banks had already built up through credit card companies—far fewer establishments took Square than MasterCard. The company is withdrawing the app from app stores in favor of Square Order, which allows users to place orders at cafes and other merchants in advance, pay for them, and pick them up without ever needing to pull out their wallet, physical or digital. Square Cash, another new service, makes it possible to “attach” money to an email the way one might stuff a few bills inside a birthday card envelope.

More so than a wholly new, disruptive bank, Square Cash and Square Order point toward what the near future of financial technology might look like. Rather than trying to recapture the traditional ways we interact with it—building a new wallet—technology is helping designers create new ways of interacting with money that push the boundaries of what money means. This includes everything from Bitcoin, the digital currency that became a commodity, to crowd-sourced fundraising and peer-to-peer lending through services like Kickstarter and Lending Club, enabling the power of pooled money outside of banks.

The mobile wallet is fast becoming an outdated metaphor. Clinkle, a digital payments start-up that once raised $25 million in one of the largest seed rounds ever, is imploding even before its mobile wallet app, which comes complete with a faux-leather digital skin, officially launches. It may be that our real wallets, paper money, and established banks are simply very effective technology for moving money around for most people. Technology is changing niche applications of money but not its most basic: providing a common medium with which to exchange value.

The best thing Silicon Valley can do for our money infrastructure in the short term is to provide new possibilities on the route to overhauling the entire system. Bank loans can co-exist with Square Capital, yet another new service that gives cash advances to small businesses through the Square platform. In fact, Square is doing what start-ups do best: innovating and iterating, experimenting in ways that traditional banks cannot and should not necessarily be able to. Not every industry need be turned over to the start-ups immediately.