Put simply, it's a zero-sum game. If you use sites like PayPal (PYPL) to transfer money to friends and pay bills, you are not logging into your primary bank. And banks are starting to feel the pinch.
Banks also feel the pinch when customers shop for a loan from the comfort of their couch on sites like Lending Club (LC), instead of putting on a suit and heading to their local branch to face what can sometimes be an intimidating conversation with a loan officer. It is a trend that is about to pay off for the online lender, to the detriment of larger banks.
Fintech firms like Lending Club and Action Alerts PLUS portfolio holding PayPal are a hot topic and for good reason: They are taking attention and dollars away from traditional banking models. While established banks can leverage their history and vast stores of client data, fintech firms are aggressively coming after them. The younger upstarts are hungry, agile, and are building their businesses from a blank state, which frees them to innovate with the user experience in mind. The banks may have unlimited access to the consumers' precious data, but fintech firms know how to use it.
Unlike traditional brick-and-mortar banks, fintech firms almost exclusively rely on online platforms to allow customers to process transactions, seek financing and even handle their investments. There are sure to be some losers in the space, but banks will find -- if they haven't already -- that the fintech winners are going to encroach on the banks' market share. The best hope for banks that have been slow to implement client-friendly tech platforms may be to admit defeat and enter into partnerships with some of the more established fintech players.
Lending Club, for example, benefits from a boost in legitimacy through its partnerships with a consortium of community banks, which was announced in February. The partnership means banks will be able to use Lending Club's platform to offer cobranded loans. Borrowers who may have been apprehensive about seeking a loan online can get Lending Club's service offering by walking through the door of a local bank branch. The loans also allow the banks and Lending Club to share customer data, which means both firms can analyze and tailor products to existing and future customers.
"The partnerships are a strategic win-win for both companies," said Tai DiMaio, an analyst with KBW. Lending Club benefits by growing its business through an established institution, DiMaio added, while small banks that lack the scale needed to innovate can use Lending Club's platform to do more business with existing clients, also known as gaining wallet-share.
Despite having a rocky time since its December initial public offering, Lending Club may be ready pop higher, according to analysis from TheStreet's resident chartist, Bruce Kamich. In the chart below, you'll see that since late August, Lending Club's trading volume has been heavier on days when the stock closed up, which is a good sign for bulls, said Kamich.
On the other side of the fintech spectrum, banks have another target in view: payment services. Just last month, JPMorgan Chase (JPM) announced Chase Pay, a new app-based system that is designed to compete with incumbents like PayPal and newer entrants like Apple Pay (AAPL).
Chase Pay could do well in this space as it has access to individual client data as well as merchant client data through its Chase Net credit card processing system. This means that Chase is equipped to tailor offerings to its clients. When the app is fully released next year, existing Chase customers will only need to log into the app to activate it. This differs from other payment sites that require customers to manually enter in their account credentials.
Still, it is not a reason to be bearish on PayPal, which completed its split from online merchant, eBay (EBAY) this summer. PayPal, though a young company when compared to most banks, has nearly 20 years in the online payments space. Since its split from eBay, PayPal's stock has been choppy, but it crossed its 50-day simple moving average in October and could gain confidence above the $38 mark, Kamich said. Kamich also noted, however, that it wouldn't be unexpected for the stock to trade below $35 as it finds its footing.
Despite the potential headwinds, if you look more broadly at PayPal and the payments space, there are reasons to be optimistic about the company in the long term. Unlike other industries, the online payments space fosters cooperation among competitors, according to Jim Cramer and Action Alerts PLUS co-manager Jack Mohr in a recent Alert to subscribers. New entrants only make the pie bigger and spur innovation. For PayPal, this is a plus, as it has a trusted platform that allows it to experiment with other revenue-generating initiatives such as its credit-services business.
Even with the advantage of being a store of data, banks have a lot of catching up to do in order to meet their tech-based peers on service offerings. Fintech start-ups built their products and services based on where they believed the world would be in future generations. Banks, on the other hand, have had to innovate more slowly as they have more at stake if they screw up. You can sympathize with them for that, but you may still look to get your next loan on Lending Club or use PayPal to complete your holiday shopping online.
