After the crisis, a new generation puts its trust in tech over traditional banks

September 14, 2018

  • Fintech has made some of the biggest inroads in areas big banks have shunned since the financial crisis.

  • Lack of trust in established companies made space for start-ups that are often leaner, thanks to use of technology.

  • Money has followed the fintech fascination — the amount of venture capital funding in fintech hit $7.5 billion, and cryptocurrency fundraising has brought in $12 billion this year alone.

  • "The younger generation will gravitate toward brands that provide the best user experience, the best value, and ultimately, can help them reach their financial goals," says JMP Securities' Devin Ryan.

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Fintech may be one of the few industries looking back fondly at what happened to Wall Street after 2008.


The chaos and disruption of the credit crisis instilled lack of trust in existing banks and brought on new regulations and the rise of technologies that would allow scrappy Silicon Valley start-ups to reshape consumer finance.


These new financial technology companies have made serious competitive inroads in areas banks have backed away from, and billions of dollars in venture capital money has followed.


A key reason fintech companies have flourished, analysts say, is a lingering distrust in banks.


Ten years ago the first wave of the millennial generation was settling into early adulthood just as the economy dipped into the Great Recession. Memories of foreclosed homes and savings lost in a Wall Street-fueled crisis continue to influence where they put their money.


"What that underscored for people is that banks can't be trusted, and your money is only as safe as the government allows you to believe," said Fundstrat founder and managing partner Tom Lee, who worked at J.P. Morgan in 2008. "That's why millennials today have so little trust in banks, because of what their parents went through."


More than half the world's population is under 30 right now, according to the World Economic Forum, and 10 years after the crisis, they're still wary of banks. Last year, 45.3 percent of respondents to WEF's Global Shapers Survey said they "disagree" with the statement that they trust banks to be fair and honest. Only 28 percent of the more than 30,000 millennials surveyed said they agree.


The skepticism isn't reserved for young people. Shareholders and regulators still want to see that the banks are in check, and questions of solvency and compliance come up consistently on bank earnings conference calls.


"Every quarter, every year for a decade banks have to earn back the trust that was lost from the financial crisis," said Mike Mayo, Wells Fargo's head of U.S. large-cap bank research, who worked at Deutsche Bank when Lehman Brothers went under. "The financial crisis was terrible for the industry's reputation of trust."


Challenger banks

The choices for where consumers can put their money look drastically different after 2008. One increasingly popular option is with a tech company.


"Neo banks," or digital banks that operate without any branches, aren't saddled by traditional banking technology infrastructure and are often leaner as a result.


Chris Britt, the CEO of what he described as a "challenger bank" called Chime, said the new sector is being boosted by fundamental distrust and young peoples' openness to tech.


"In the old days you would trust your bank because it had a great-looking edifice in front, with pillars that made you feel like your money is safe and secure," said Britt, a former senior product leader at Visa and SVP at the prepaid-card giant Green Dot. "Companies like us are a direct result of what happened in 2008, which exposed and resulted in distrust among so many consumers for traditional institutions."


Source: Chime 


Chime offers spending and savings accounts, with a debit card, and a mobile app and doesn't charge fees. It says it's adding 150,000 new bank accounts per month. It doesn't actually hold the money on behalf of clients — its consumer deposits are held at FDIC-insured banking partner Bancorp. PayPal similarly keeps its customers' funds at a bank, a common practice for fintech companies that exempts them from most Dodd-Frank regulations.


Chime and others are betting on social media as a new, cheaper way of selling these new pseudo-bank products.


"The way we build our brand and our trust is building awesome experiences for