Why is the US banking market the most disrupted globally by digital and fintechs?

Every year, RFi Group surveys 30,000 consumers across 15 markets about retail banking distribution covering; product application, product fulfillment, appetite for fintechs, P2P and neo banks. In December 2016 - for the first time since 2011, when we started running this report - the digital channel overtook branch globally as the most used channel for loan application.

See graph below

Source: RFi Group

Although the channel gap for deposits is getting smaller, it is only in loans that digital is No. 1. When we look at it by market, it becomes even more interesting, especiallywhen we focus on the last three years, since digital banking really started to gain traction. In China it was in 2013, Australia 2014 and in India, 2015 that digital took the lead over branch. In 2016, Canada, HK and Indonesia all became close to the tipping point as well.  The UK was 2012 and Singapore 2012/2013, but it’s the US that’s really interesting: digital has been ahead there since 2011.

Source: RFi Group
So, how else is the US different in this brave new disrupted world? When we look at fintech uptake and usage among consumers, again, the US is a stand out. Only China and India have the same levels of fintech usage. However, in China and India, you have two completely different socio-economic environments, with rapidly emerging young affluent middle classes. In China alone, it is forecast that 250 million people will move from rural poverty to urban middle class by 2020. When we look at the data, we see that young millennials (18-25) and mature millennials (25-35) have significantly higher usage - with young millennials at the very front of the pack. Only in the US are mature millennials ahead of young millennials and then, surprisingly on par with mature millennials, are Gen X. In no other market, developed or developing, does Gen X have such high fintech usage (13% currently), as in the US.

When we look at alternative lending or p2p lending we see the same story. Lending products in traditional banking are typically most popular with mature millennials, whether it’s their first car loan, personal loan, credit card or even mortgage, so we would expect to see this age group also leading the pack with alternative lending. However, in the US this group has literally doubled the take up of any other market globally at 14% and also in the US, the Gen X segment leads usage globally at 8%.

So, what exactly is going on in the US? Why is there such a huge appetite across age groups for digital channels, fintechs and alternative lenders? In my opinion, there are three key reasons;

1.      After the 2008 crisis it is no question that the US was hardest hit of the developed banking markets and while Australia, Singapore and the UK were able to invest in developing the digital channel and proposition, the US banks were busy dealing with huge compliance issues and costs, regulatory issues and repairing balance sheets.

2.      The US banking market is one of the most fragmented globally with over 6000 banks. This means that only a few of the banks have the scale and resources to invest heavily in digital unlike in Australia, Canada, the UK or Singapore where four to five banks dominate each market.

3.      Nowhere was the fallout from the crisis felt more keenly on main street, than in the US. This means there is a lot of latent mistrust and resentment of traditional banks and hence a greater willingness to try new fintechs and alternative lenders in the US – more so than in any other developed banking market.

So, what does this mean for US banking? Will it continue to be more disrupted than other markets and if so, by whom? The answer, I think, is ‘yes’ when compared to developed banking markets, but given their socio-economic environments I think we can expect to see China, India and Indonesia pulling away in the future. On the question of who will be doing the disrupting in the US, while Silicon Valley is home to Apple, Google, Facebook and many others, I think the more realistic threat is coming out of China...

*Please note that all China and India respondents are urban banked consumers in Tier 1 cites

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