A partner at VC firm Canapi Ventures says regional banks can play by helping developing the digital infrastructure.
Blockchain-technology firms may be among the best-known disruptors of traditional banking services, thanks in part to the extreme volatility of the cryptocurrencies the technology supports, like Bitcoin. But fintechs take many forms, and the real disruption is still to come.
- That takeaway surfaced at a recent NeuGroup meeting of bank treasurers that included insights from Jeffrey Reitman, a partner at Canapi Ventures, which invests in early- to growth-stage fintechs along with more than 40 regional-bank limited partners.
- Mr. Reitman said disruption may adversely impact banks but also bolster them, especially first-movers. Payment services may face the most disruption, followed by lending and financial-services infrastructure, he added.
Early days. The explosion of fintechs over the last decade and the pandemic have accelerated the use of digital financial services.
- However, many so-called digital natives—including Gen Zers and some millennials—are just entering the consumer market.
- “We see another 10-, 20-, 30-year tailwind that will ebb and flow,” Mr. Reitman said. “So it’s still early days in financial services disruption.”
Buy now pay later. Payments have seen the most disruption so far, in the B-to-B space but also at the consumer level. Examples cited by Mr. Reitman include Affirm Holdings, which enables online shoppers to pay for purchases over time.
- Big Tech has entered the game, too, with Apple partnering with Goldman Sachs to offer its credit card.
- Lending has also seen disruption, with fintechs entering the mortgage and auto-loan markets, Mr. Reitman said, adding, “Their marketing and transparency has helped drive down the cost of credit.”
Infrastructure and banks. Coinbase enables users to link from the cryptocurrency exchange to bank accounts, prompting ACH transfers automatically to pay for crypto purchases. Fintechs such as Plaid and Stripe are similarly building pieces of the digital economy as well as bridges to traditional financial institutions, Mr. Reitman said.
- The cost of starting fintech companies has dropped and building robust products and experiences is much easier, he added, saying that fintech software is becoming “embedded” across banks’ traditional lending, payments and trading businesses.
- “The banks that move the quickest to partner on these initiatives will be the underpinning of that infrastructure.”
Canapi’s LPs. The venture capital firm chose to raise money from regional and community banks instead of the very largest financial institutions, which have the resources to build proprietary solutions.
- Other banks must prioritize key initiatives and how they drive value, which often leads to “renting” the software that underpins solutions, Mr. Reitman said, adding that makes a lot of sense “when you don’t necessarily have the ability to build customized solutions in-house.”
Crypto’s place? Mr. Reitman noted that banks are inherently built on trust and therefore are not well positioned to take advantage of public blockchains’ “trustless” features. This suggests there may be better solutions to increase the speed of money movement between trusted counterparties.
- Signature Bank’s private blockchain, available only to approved members and controlled centrally, enables payments and settlements in real-time and may offer blockchain benefits, he noted.
- Custody and surveillance may be opportunities for banks in the crypto space. Canapi has yet to invest there, Mr. Reitman said, but banks’ customers will likely look to their banks to hold cryptocurrencies in the future.
- “Custodying assets through partnerships will be important,” he said, as well monitoring transactions. “Crypto is actually more public than most financial transactions, and with the right tooling you can actually have near-perfect information about the connections of different wallets and money movements.”