By Anurag Chandra, Partner, Fort Ross Ventures

While the U.S. economy has gone through a couple of major downturns already during this still young century, the COVID-19 pandemic has presented unique challenges that few could have predicted even at the beginning of 2020. The effects have been swift and far-reaching, also touching industries where transformation has already been dramatic.

Consumer banking is no exception. According to many sources, mobile banking registrations and overall traffic to mobile banking businesses have increased significantly. Additionally, with social distancing affecting the ways we interact we will likely see permanent behavioral changes with many consumers preferring the conveniences of the “new normal” and unwilling to return to brick and mortar banking.

Two big questions now are what banking will look like after the COVID-19 pandemic is behind us and which companies are best positioned to thrive in a digital-first landscape. There’s no shortage of players, from legacy financial institutions to challenger banks/fintechs startups to the Big Tech companies who are increasingly eyeing the financial services space.

With such a crowded field of players, it’s important to size up the competition in terms of what qualities the eventual winners will need to have. Like a stool stable enough to stand on, success in the next era of consumer banking will require three strong legs.

An outstanding user experience/interface

Customer service is at the very heart of consumer banking. Over the past twenty years, there has been an undeniable shift from the branch and teller model to Internet and mobile app based banking, but it has accelerated due to the pandemic. Unlike grocery or retail shopping, in-person consumer banking, does not entail a better item selection experience. As money continues to become more and more electronic, there is almost no reason to walk into a bank branch.  The pandemic has increased consumers’ expectations for banking options and information to be literally at their fingertips.

The challenge going forward will be to offer everything people have come to expect with minimal interaction but without losing the personal connection with customers.

As digital native companies, fintechs and challenger banks have an inherent edge here. They are leading the charge in using technologies like conversational AI and predictive AI to provide personalized experiences to their customers. Legacy banks have come to things like mobile banking and apps mostly out of necessity and tend to view them as just another channel, rather than the core experience.

Look for fintechs and challenger banks to set the bar in terms of best practices for what the next generation of banking interfaces look like, and for everyone else to have to keep up.

A banking license/national charter typically associated with traditional incumbent/chartered banks

There is a healthy debate among fintech investors regarding the value of pursuing a banking license or charter. Some believe that building a brand and customer acquisition engine is where the value lies and the regulatory rails of incumbents will become a commodity. Others believe that being licensed directly not only reduces costs once a fintech achieves scale, it also provides greater flexibility in product creation. Licensed banks with a history of regulatory compliance can more easily offer new credit products and leverage their direct relationships with customers, particularly if they are digitally savvy.

It’s also worth mentioning that in times of uncertainty, chartered banks provide many consumers a sense of security. They’ve been keeping money secure for over a hundred years and often have the name value to reinforce feelings of goodwill and trust from the public.

An open question is whether the Big Tech companies can establish that same level of trust from the public beyond digital payment platforms. Depositing money with institutions already beseeched with headlines about privacy concerns may be a significant hurdle for consumers of traditional banking services.

In the middle are the fintechs, some of which have found backing from the very banks they’re ultimately competing with to achieve the stability they desire. Others are trying to secure charters of their own, but to date, only Varo has pulled it off among American companies, so this could prove to be a path that is too long and expensive for some to see to the end.

Consumer data at scale

No one has access to a bigger treasure trove of useful consumer data than Big Tech. Banks know exactly how much people save, how much they spend, and what they spend it on. Yet as noted before, many banks have yet to fully embrace digital transformations, so they’re not as skilled as making use of it as Big Tech companies. Plus, Big Tech knows a lot more about each of us that can positively impact stickiness and responsiveness to consumers’ financial needs.

Amazon, Apple, and Google are well positioned with their brands and massive data sets of consumer behavior and spending patterns, but they are in the sight-lines of government regulators over privacy and anti-competitive business practice concerns. If they were going to attack banking, they likely would have done it by now and are demurring from taking on more regulatory obligations.

As for fintechs and challenger banks, they face obstacles when coming of age in the current era. With consumer expectations shifting so that their data is assumed to be private unless they opt in to the contrary, these companies are a bit more at the mercy of whatever regulations may be passed in the post-pandemic landscape.

What it will take to win

No one type of player has the upper hand in shaping the consumer banking future, as all have a strong leg to call their own and varying levels of concern about the others. That said, it will ultimately take a mastery of all three, or at least coming close, to come out ahead in what figures to be a high stakes race.

That doesn’t necessarily mean acknowledging the areas where a company might need help is a bad thing, and it could very well be that partnerships across the three classes of competitors are what ultimately wins the day. The only sure thing is that the future of the industry is going to look very different than it did at the beginning of 2020, and there may still be some surprises left in store before it completely comes into focus.