The Daunting, If Insurmountable, Long Odds of the Financial Services Startup

By “winning” I mean achieving real, lasting and deep scale, and by that measure there is not a financial services startup that can surmount the existing edifice built by this nation’s largest financial institutions. Not Mint/Intuit. Not PayPal. Not WigetCoWhatever.com. They simply will not beat Bank of America, JPMorgan Chase, MasterCard, American Express — or any number of the entrenched, TBTFs of these United States of America.

The issue is scale and brand. MasterCard had 1.6 billion (with a B) credit cards in circulation at the end of 2009. PayPal has 84 million accounts. Chase.com gets 24 million unique visitors a month. Mint gets 1.4 million. BofA offers a full suite of mobile banking applications, including location-based services. That’s more functionality that UBank, the Bank of Australia’s out-of-the-box “experiential” banking spinoff.

And this is all being done within the wicked confines of a rigid regulatory framework. I don’t envy the compliance guys who had to shoehorn BofA’s mobile apps into regulatory shape. To all those who say traditional FIs don’t innovate, try building a whatever app with the FDIC looking over your shoulder.

But that’s not what really tips the scales against the startup. Inertia does. As one meetup attendee said the other night, “Inertia is the greatest force in FI.” A startup app can radically and obviously move the dial in terms of value and benefit to consumers — PayPal comes to mind — and still only the churn portion of the retail consumer base of this nation’s banks will make the switch to that new enterprise or service. The vast, vast portion of every bank’s deposit base will remain a part of that bank’s deposit base, well, forever. In other words, until they die. No iPhone app is going to change that. This is not just my view; this was the consensus opinion at our meetup.

So if you are an entrepreneur out there, at this point you are thinking: a) I might as well burn my VCs’ cash and flee to Mexico; and 2) I want to rip JJ a new one. Those are both fair conclusions (however unsettling that might be for me personally). But there is another side to this. While an FI startup cannot presume scale, it can presume an exit. After all, $120 million ain’t bad for a few years of work. So what if Citigroup makes that amount of money in four days? As we were discussing here at Bank Innovation, the startup is the spur in the side of the mega banks. Visa and MasterCard are poised to wallop PayPal — because there is a PayPal. Bank of America has such robust mobile apps — because there is an Apple and an mFoundry. And if there’s an exit for those “spurs,” then it will make the effort worth it.

I’m trying to be realistic here. We’re not going to tell you (like, ahem, some other blogs) that any dodateoo startup with a wacky name is going to overtake the FI world and scale to Bank of New York Mellon, because it never will. Or, rather, the odds of that happening are longer than the longest of long odds. I like the startups. Heck, I’ve worked on one or two. But I have no allusions. The big banks win.