NEW YORK (TheStreet) -- Winter is coming for large banks in the U.S. Ever since the Dow Jones closed down 588 points on August 24, regulators and bank executives are preparing for what they believe to be a period of economic uncertainty. The Federal Reserve is threatening to increase rates and a recession could be imminent.
Everyone is talking about what may threaten financial institutions in the future, and in doing so, they are neglecting to see how disruptive technology is such an immediate and pervasive threat for banks. Banks need to take this disruption seriously and realize how start-ups shaking up traditional wealth management, lending and investing are threatening their previously dominant positions in the market.
Jamie Dimon, CEO of JPMorgan (JPM) , identified this threat back in April when he said in a letter to shareholders, "Silicon Valley is coming."
While there has been continued turbulence in the public markets, technology companies are booming; there are now over 8,000 financial technology or "FinTech" companies in the U.S. alone. Why? Americans now expect trust, transparency, and accessibility in the products and services they use. While banks are constantly trying to rebrand themselves to prove they are secure, honest, and accessible, new technology solutions are serving clients in for now what seems like a more streamlined and secure way.
Here are three start-ups disrupting wealth management, small business lending and private investing in the U.S. -- three markets that banks like JPMorgan (JPM) , Capital One (COF) , Barclays (BCS) , Citigroup (C) and others have controlled until now without challenge.
1. Betterment: Wealth Management
With markets in a state of unending flux, clients are showing they want more control and transparency around their wealth. Historically large banks have regulated and siloed financial advisors so that clients require multiple touch points to maintain a diversified portfolio. With low interest rates and the threat of an impending Fed rate raise, wealth managers will have to create new solutions to better mitigate volatility in the markets. For large financial institutions, it's harder than ever to innovate and restructure around new solutions. That's why robo-advisors are growing in the place of traditional wealth advisors. They are taking out the middleman and giving clients a more streamlined, transparent, and affordable solution to managing their wealth.
Betterment is a robo-advisor with over 100,000 customers and $2.5 billion in assets under management. It is automating investing and eliminating third-party gatekeepers at a fraction of the cost of traditional wealth managers. Betterment is becoming a "full-stack" provider, acting as a plan's record-keeper, custodian, third-party administrator, and fiduciary advisor at essentially no added fee to the client. Many argue that automation only goes so far and that a human touch is still valuable. Even then, traditional advisors will have to do more to justify their cost with a slew of new technologies flooding the market.
Why is Betterment winning? It is moving quickly and introducing new products serving both sides of the market. Betterment recently launched an institutional product that enables registered investment advisors to quantify the value of their services and add a wrap fee. Also, it recently introduced the first robo-advisory platform for 401(k) sponsors and participants -- radically disrupting how retirement plans have always worked. In addition to Betterment's main robo-advisory platform, these new technology solutions are redefining decades-old practices and will continue to shape wealth management in the U.S.
While many banks theoretically have the money to build their own system to seamlessly integrate into their current platforms, it's seems likely that they will not be able to compete against the rapid evolving new leaders in the market. Acquisition will be the key to survival. Last month BlackRock (BLK) bought FutureAdvisor, the fifth largest robo-advisory firm. All eyes are now on Betterment and the other leading competitor, Wealthfront, as the next acquisition targets. Let's see which banks takes note.