Eight Factors Shaping the Post-Crisis Market...WHITE PAPER Eight Factors Shaping the Post-Crisis Market For most in the financial services industry, revisiting the global financial

WHITE PAPER

Eight Factors Shaping the Post-Crisis Market

For most in the financial services industry, revisiting the global financial crisis of 2007–2008

spurs troubling memories considered by many to be the most punishing global economic

event since the Great Depression of the 1930s. Ten years in, this inauspicious anniversary

recalls an era defined in part by economic dread and uncertainty.

Spurred by a crisis in the domestic subprime mortgage market, the crisis expanded into

a full-scale international banking calamity. As the dust settled, specific, identifiable trends

played major roles in how financial institutions (FIs) have managed their overall business

and balanced defensive and strategic investments. More broadly, the crisis shaped the

way consumer expectations look today, contributing to a financial environment where

fintech companies are growing at an extremely accelerated pace.

The specter of major businesses, banks, and investment houses facing uncertain futures,

coupled with wild market swings, created a disquieting sense of doubt both domestically

and globally. Yet, amid blows to investor confidence, new ideas and innovation emerged.


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A perfect storm with less-than-perfect results

In order to understand the state of the financial

services industry today, it’s important to wind

the clock back and take stock of how this singular

incident—and its impact—has done more to

set the stage for today’s financial conditions

than practically any other event.

Consumer faith in the markets, as well as in the

economic system as a whole, was one of the first

casualties of the fallout from the crash. By 2009,

consumer confidence had reached its lowest point

in decades, dropping to an alarming 27 percent.1

With government considering whether the biggest

players in banking and investment were too big to

fail, account-holder trust in the banking system began

to waver as well. In a huge blow to the industry,

consumer trust in banks fell to as low as 22 percent.2

And while it was the biggest banks and investment

houses that started the fire, a halo effect led

consumers to distrust the entire system, leaving

regional and community banks scrambling to

respond. While the crisis had been caused by a

handful of the biggest banks, the fallout was shared

by all financial institutions and financial services

providers, regardless of their role in the crisis.

No part of the financial services ecosystem

was unaffected.

Community and regional financial institutions’ suffering

increased when the US government and regulatory

entities responded forcefully, in what felt to many like

an overcorrection. Compounding the challenges,

compliance requirements doubled or even tripled

overnight: FDIC insurance requirements increased by

more than 200 percent, and financial institutions had

to double their spend on compliance staff.3

In essence, smaller institutions found themselves

shouldering new costs and requirements, just to

remain compliant. And although smaller FIs hadn’t

created, nor could they control, the circumstances

leading up to these expanded regulations, they

found themselves in a defensive position, which

would hamstring their ability to invest in forward-

looking initiatives for a decade.

Then, the Federal Reserve Bank, in an effort to

spur lending, dropped the federal interest rate to

an all-time low of 0.25 percent, affecting the ability

of community and regional FIs to create revenue.4

To illustrate just how impactful these collective

factors were in adjusting the market, consider the

fact that 2,000 bank charters were created between

the years of 1990 and 2008. In contrast, only seven

banks were chartered from 2009–2013.5,6 It was

virtually impossible to start a bank in this unfamiliar,

stricter environment, and frankly, few people even

seemed to have the appetite. In fact, after comparing

their earnings to their lending resources, many

institutions found themselves with a Return on

Assets (ROA) of -.1 percent.7,8 They were

effectively losing money.

In a huge blow to the industry, consumer trust in banks fell to as low as 22%


3© 2018, Q2 Software, Inc. All rights reserved. 3© 2018, Q2 Software, Inc. All rights reserved.

The Flourishing App Economy

FIs knew they needed to re-establish confidence with American consumers. At the

same time, FIs were consumed with adjusting to the financial crisis and working to

slash their tech spend, a reaction to the parade of increasing pressures. The timing

couldn’t be worse: unbeknownst to the world, Steve Jobs and his newest gadget

were about to forever change the way human beings consumed content and

service. While FIs struggled, developer communities were building a touch-

enabled, convenient app economy to meet the ubiquitous, near-instantaneous

consumer demand for mobile experiences.

As the financial markets jerked and stalled, Apple introduced a device that, for

many, symbolized the mobile explosion. Having launched in 2007 with sales of

1.4 million, by 2015 the iPhone was selling in excess of 230 million units annually.9

Similarly, Apple’s market cap increased from $65 billion to $611 billion during

the same time frame.10

The iPhone, and similar products that followed, revolutionized the way people

interacted with their phones, putting digital apps front and center for consumers.

In the six years between 2010 and 2016 alone, the number of mobile app

developers exploded from 54,600 to 8.7 million.11,12 Similarly, mobile data traffic

for the average digital consumer increased to 7.2 billion gigabytes per month as

of 2016.13 What’s more, the number of apps in the Apple App Store mushroomed

from 15,000 in 2008 to 2.3 million by 2017.14 This explosion created a new

battlefield on which every service provider—including FIs—was compelled to

compete. Every industry was finding a way to go mobile. Nobody was exempt.

Mobile data traffic for the average digital consumer increased to

7.2 billion gigabytes per month as of 2016.14



Fintech and FIs: An Unlikely Marriage

While FIs were spending money to remain compliant and simply stay in

business, to say nothing of growing the business, fintech companies were

beginning to skyrocket.

While the traditional financial services market was at its lowest low, capitalistic

investment communities sensed the opportunity to buy in, creating a tidal

wave of innovation. Fintech funding exploded overnight as private equity and

venture capital sought to recreate America’s financial services industry—with

cash. Funds began pouring into fintech organizations, sparking a direct-to-

consumer innovation contest. This fintech arms race was a direct result of the

global financial crisis, and the iPhone provided a key opportunity. Fintech

investment rose from $1 billion in 2008 to $16.6 billion by 2017.15,16

As confidence in traditional FIs fell, consumer expectations around what

mobile could provide grew. For account holders, banking was no longer

centered around a location, it was simply something that they did whenever

and wherever they needed to. Suddenly, people didn’t need the massive safes

or marble countertops a brick-and-mortar branch required to offer financial

services. The required real estate and airtight physical security, some of

banking’s oldest barriers to entry, had evaporated.

Illustrating that shift, the number of fintechs launched increased to 1,128 in

2017—up from just 178 in 2008.17 And consumers were biting: Adoption rates

among digitally active consumers almost doubled from 17 percent in 2015

to 33 percent in 2017.18

Nobody could have predicted the success of the iPhone. Similarly, PayPal

provides another example of a digital financial service that found its service

shattering records as consumers demanded the ability to conduct their financial

transactions from the convenience of their devices. In its early days, no one was

sure what to make of PayPal. Would consumers really trust an internet company

with their finances, or were they too accustomed to moving their money in a

traditional way? The company’s growth showed that consumers were receptive

for change, as the total volume of money moved using PayPal rose from $3.5

billion in 2002 to $451 billion in 2017.19 PayPal’s growth shows that consumers

were willing to trust whomever would provide them the utmost in digital

Fintech investment rose from

$1B in 2008 to

$16.6B by 201716,17



Eight Factors Shaping the Financial Services Landscapes in the Next Three to Five Years1. Fintechs to act as incubators for innovation

Fintech companies will continue to build and

innovate new solutions for consumers. Without

the regulatory oversight of traditional FIs, fintechs

will continue to push what is possible in the digital

realm for financial services.

2. Tech giants to move towards banking

Major players like Amazon, Alphabet, and more

will continue to disrupt the financial services

provider market with new products

and partnerships.

3. Traditional FIs to benefit from their advantages

While fintech has funding, FIs offer regulatory

knowledge, infrastructure, and a 360-degree

consumer advantage that most fintechs do not.

These advantages put banks in a vital position,

if only they can learn to leverage them during

this time of change.

4. Economic relief to profit FIs

Assuming the trends hold, the banking climate

will return to a more friendly state, presumably

with fewer regulatory pressures and better tax

rebates and interest rates benefitting FIs.

convenience—including non-bank entities. Consumer

tolerance of and demand for fintech—a better,

more modern way to move and store their money—

was undeniable.

Also notable, FIs began to warm up to their

competition. In 2008, banks generally had a negative

view or did not know what to think of their fintech

competitors, but by 2017, 91 percent of banks

expressed a desire to collaborate with them.20

This shift in thinking has led to opportunities

for FIs and fintech companies to work together

and provide holistic, 360-degree solutions for

consumers, and this will only increase as new,

unforeseen products and solutions emerge

for account holders and others.

With ten years of data in the rearview mirror, we

can now see how this perfect storm in the market

rocked the financial services market, provided new

opportunities for fintech companies, and set up

an unlikely romance between fintech and FI

competitors. And as a result of these factors, the

global financial services market looks considerably

different today than it has in the past 200 years—

with promises of even more innovation on the

horizon. So, what lies ahead for FIs? Over the

next three to five years, they should keep their

eyes on the following eight factors likely to affect

expectations and play consequential roles in

shaping the financial services landscape:



8. Fintech market to consolidate through

“re-bundling” with banks

Fintechs have succeeded by offering “unbundled”

FI products and services, but account holders

want a comprehensive experience. Fintechs,

especially those who have hit scale, will look to

add to their product portfolio in order to retain

and monetize. Adding more traditional banking

products, or adding their product to a more

holistic bundle, will help them do just that.

This trend favors FIs, who continue to offer the

broadest set of financial products and services

but are looking to deliver more like a fintech

company—digitally.

There is no doubt that the last ten years have brought

tumultuous times. Taking this into account, overall

trends are looking positive for FIs, fintechs, and

account holders alike. Now is an exciting time to be in

the financial services provider space. The industry is in

the thick of unprecedented innovation, presenting an

opportunity for organizations to work collaboratively

and reinvent the financial services market together.

5. Budgets to shift towards the digital channel

It stands to reason that with fewer costs tied to

regulatory and compliance needs, FIs will be able

to free up dollars to invest in digital innovation.

6. Fintechs and tech giants to seek traditional

FI partnerships

Because of their aforementioned infrastructure,

regulatory, and industry knowledge, Fintechs and

major tech companies will look to team up with

FIs. In turn, FIs must begin to shift their mindsets

and business models in order to participate in

and benefit from these partnerships.

7. Unprecedented innovation and unlikely

partnerships will flourish

Revolutionary endeavors will occur as FIs become

primed to consider new models and unexpected

ways to generate deposits and acquire customers.

The age of direct-to-account holder relationships

defining the majority of a bank’s business is likely

coming to a close.


39-31-0818 © 2018, Q2 Software, Inc. All rights reserved.

Sources

1. money.cnn.com/2018/02/27/news/economy/consumer-confidence-17-year-high/index.html

2. news.gallup.com/poll/192719/americans-confidence-banks-languishing-below.aspx

3. www.stlouisfed.org/~/media/Files/PDFs/Banking/CBRC-2014/SESSION3_Peirce_Robinson_Stratmann.pdf

4. www.thebalance.com/fed-funds-rate-history-highs-lows-3306135


6. www.brookings.edu/wp-content/uploads/2016/07/Community_Banks_Baily_Part_III-2.pdf


8. www.brookings.edu/wp-content/uploads/2016/07/Community_Banks_Baily_Part_III-2.pdf

9. www.statista.com/statistics/276306/global-apple-iphone-sales-since-fiscal-year-2007/

10. www.macrotrends.net/stocks/charts/AAPL/market-cap/apple-inc-market-cap-history

11. mashable.com/2010/07/02/ios-android-developer-stats/#k0Jrex7Vk5qZ

12. www.businessofapps.com/mobile-app-developer-statistics-roundup//

13. www.cisco.com/c/en/us/solutions/collateral/service-provider/visual-networking-index-vni/mobile-white-

paper-c11-520862.html

14. www.statista.com/statistics/268251/number-of-apps-in-the-itunes-app-store-since-2008/

15. cdn2.hubspot.net/hub/310641/file-1445626583-pdf/Rise_of_Fintech_in_Finance/Fintech_DEF.pdf

16. www.cbinsights.com/reports/CB-Insights_Fintech-Trends-2018-Briefing.pdf

17. www.statista.com/statistics/268251/number-of-apps-in-the-itunes-app-store-since-2008/

18. www.ey.com/Publication/vwLUAssets/ey-fintech-adoption-index-2017/$FILE/ey-fintech-adoption-

index-2017.pdf

19. www.ey.com/Publication/vwLUAssets/ey-fintech-adoption-index-2017/$FILE/ey-fintech-adoption-

index-2017.pdf

20. www.statista.com/statistics/549945/strategies-of-banks-to-compete-with-fintech/

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Eight Factors Shaping the Post-Crisis Market...WHITE PAPER Eight Factors Shaping the Post-Crisis Market For most in the financial services industry, revisiting the global financial