The mega-bank needs to counter a new wave of financial technology startups.
Corrected, 6/29, 1:02 p.m.
What he needed was a SWAT team. The week after being put in charge of Citigroup’s (C) consumer banking business last year, Stephen Bird went to Silicon Valley to meet with venture capitalist Marc Andreessen and other tech luminaries in hopes of gaining insight on how to counter the challenge from “fintech”—the rapidly proliferating class of technology startups bent on disrupting every facet of the traditional financial services business. Together they represent perhaps the No. 1 threat facing large banks today.
It was Salesforce.com (CRM) CEO Marc Benioff who gave him the idea. Benioff told Bird that he could never hope to change the culture or operations of a banking behemoth, with $1.8 trillion in assets, all at once. But if he put together an elite group within Citi, one that could operate with startup-like speed and agility, he might just get somewhere. Bird decided that to push big changes inside the company, he would first need to think small.
Today the skunkworks operation that Bird created, known as Citi FinTech, is made up of about 40 employees handpicked from various parts of Citi and poached from tech companies such as Amazon and PayPal. In keeping with the outsider mentality Bird wants, the operation is based not in Citigroup’s Manhattan headquarters but across the East River in Queens, on the 10th floor of a Citi building that also houses the credit card business. On one wall there’s a five-by-10-foot chart listing all of Citi’s new fintech competitors and which of the megabank’s business lines each startup puts in jeopardy—from payments to commercial lending to wealth management. Not far away is the requisite appurtenance of every startup: a foosball table.
But Bird, 49, is well aware that props alone won’t suffice if Citi is going to stay, in his words, “future compatible.” An 18-year company veteran, he began his career at General Electric (GE), and he’s prone to spouting nuggets of management wisdom—and even quoting legendary GE CEO Jack Welch—in his native Scottish burr. (He grew up outside Glasgow.) Bird says companies don’t progress evenly. Instead, referencing a pivotal period in the evolution of life on earth, he describes how businesses leap forward thanks to “Cambrian explosions” of innovation.
To increase the odds of such a transformative event happening at Citigroup, Bird has his team focused on rapid prototyping—working on projects in two-week sprints. He says Citi is on track to release the new iteration of its mobile-banking app in the fourth quarter of this year, after 10 months of development. The gee-whiz feature: facial recognition. Just look at your phone and you will be logged in to your account. It’s a project that in the past would have taken Citi years to complete.
Given how quickly new competitors are arising, Citi can’t move too fast. Last year investors poured $19 billion into finance startups, up from less than $2 billion five years before. In March, research firm Venture Scanner said it was tracking 1,379 fintech companies, with combined funding of $33 billion. The opportunity for the startups is huge. Revenue in the North American consumer-banking business alone was $850 billion in 2015. It’s projected to grow nearly 50% over the next seven years, to more than $1.2 trillion.
The most wrenching period for the big banks is almost certainly yet to come. In March, Citigroup’s own research department put out one of the direst assessments yet. The 112-page report, titled “Digital Disruption,” was produced for the bank’s investment clients and reads like a Jerry Maguire manifesto. The gist: Radical change is coming. Citi says that fintechs have nabbed $9 billion in business so far, a small percentage of what banks bring in each year. But in just four years, the Citi analysts predict, fintech revenues will leap more than 10 times, exceeding $100 billion. By 2023 fintech will account for 17% of consumer-banking services in North America, or $203 billion.
If that bit of prognostication didn’t get the attention of the average midlevel bank exec, this one surely did: The Citi researchers predict that the fintech revolution will wipe out nearly a third of all the employees at traditional banks in the next 10 years.
Such a stark outlook helps explain the seriousness with which Citi and its big-bank peers are suddenly treating the latest threat to their hegemony. “Fintech is different,” says Bird. “It will change your life and my life. And will change this institution and every other bank.”
Veering back to another paleontology metaphor, Bird puts the financial industry’s situation in perspective. “I describe it as the extinction phase,” he says. “What happens in an extinction phase is that you either rapidly adapt and new means of competition are created, or you go extinct.” Citi, then, is in a Darwinian fight for its life.
To lead his intracompany startup, last fall Bird tapped Heather Cox, 45, who had originally joined Citi a little over two years ago from Capital One to run a different digital business unit. The fast-talking, high-energy Cox has a deep history in financial technology. She headed the team at E*Trade that in 2004 was the first to offer the ability to use a scanner to deposit checks through a website.
Heather Cox, CEO of Citi FinTech, and Stephen Bird, CEO of global consumer banking for Citi. Bird chose Cox to launch a financial technology startup within the megabank last year.Photograph by Patrick James Miller for Fortune Magazine
Perhaps just as important, Cox is a self-described fintech junkie—which makes her a good test case for the kinds of customers that Citi and the other big banks will have to win over. On Cox’s phone are payment apps Venmo and Square Cash, as well as stock-gifting app Stockpile. On top of that, Cox has apps of five traditional banks and a brokerage firm. Cox says she started using Square Cash a year and a half ago, and she’s hooked. She uses it to pay her kid’s tutor, among other things.
Is it okay for the head of Citi FinTech to admit that she uses the competition’s products? Absolutely, says Cox, clad in a hoodie as we chat on a recent Tuesday, explaining that her team needs to learn how to “fintegrate”—a word she says she coined—the good stuff that the competition is doing.
That’s the challenge in front of the banks: They had the customers; they let fintechs carve some away; and now they have to get them back.
Cox understands this. Her solution: Citi’s new mobile app will have an open architecture in order to give Citi’s customers access to the best functions of the smartest fintech apps. Imagine the app store if it were solely for banking services—all accessible with a Citi sign-in on your phone.
Will it work? Cox says it has to. “I’ve had this ‘fintegration’ notion for 18 months now,” says Cox. “But we’ve got some new religion around here.”
The good news for Citi and other big banks is that they appear to be waking up to the challenge at a moment when fintech is stumbling. Recently a number of the more successful startups have hit rough patches—none more so than Lending Club. Shares of the peer-to-peer lender, which was backed by A-list investors such as Kleiner Perkins and Google, have tumbled 80% since it went public at the end of 2014. And the company recently pushed out its founder and CEO after an internal review by the board raised questions about management’s disclosure practices. Shares of small-business lender OnDeck have tumbled as well. Other fintech lenders now appear to be having more trouble finding the funding they need to continue making loans.
“A number of these fintech companies have had a good start, but they are going to have a very hard time scaling their businesses,” Jaidev Shergill, who is in charge of investing in new technologies at Capital One, said in June at a fintech conference.
Few doubt, however, that the fintechs will continue to disrupt their bigger peers. For one thing, the startups tend to concentrate on one line of business, giving them the advantage of focus vs. the more diverse megabanks. And nearly every service the banks offer is now under attack by some startup—or 10. There are now more than a dozen fintech companies focused on lending. Payment services is another big area. Even the relationship world of investment banking has a number of fintech startups coming after it.
In the past year or so a number of startups have popped up that specialize in blockchain, the technology that forms the foundation for cryptocurrency Bitcoin. The companies are looking to do everything from moving money around to trading difficult financial instruments to coming up with better systems to transfer a title when you buy a house—functions that haven’t changed for decades and that have largely been done only by banks, though not always done especially well.
Indeed, it’s been a long time since the banking business has had real competition from anything besides other banks. Not that various companies haven’t tried. In the 1980s, Sears bought Dean Witter and launched the Dis-cover credit card in an effort to be a major player in financial services. But just a decade later it sold off the unit. In the early 1990s, Microsoft signed a deal to buy tax-software company Intuit in an effort to push into banking. (Bill Gates at the time called banks “dinosaurs.”) But the effort went nowhere, in part because of a government anti-trust case against the computer giant. Microsoft eventually called off the deal, and moved on. There has long been speculation about Walmart opening bank branches in its stores, but retailers have always been put off by banking laws that make it hard for firms that take deposits (i.e., operate like banks) to be in businesses other than banking.
Over the past five years, however, a combination of technological advances—particularly the mass adoption of smartphones—and regulatory changes have opened the door to a new group of nontraditional entrants into the banking business. Also helping was the weakened state that many of the big banks were in after the financial crisis. What’s more, recently there has seemed to be an unlimited supply of capital for firms, like Uber and Airbnb, that are looking to upend traditional industries. Fintechs have ridden that financing wave as well.
The big banks are well aware of this new challenge from the tech world. In his annual letter to shareholders last year Jamie Dimon remarked that “Silicon Valley is coming.” But among the big banks none seems to be taking the threat from Silicon Valley more seriously than Citi. It has the largest portfolio of investments in fintech startups of any of them.
Not all banks will be hit the same. And it appears Citigroup could be one of the most vulnerable. Citi today generates roughly 51% of its revenue from consumer banking, which is the area where Citi’s own analysts see the highest vulnerability. But the company generates another 11% of its revenue from payment processing, or the business of moving money anywhere around the globe for big businesses. Citi has long been one of the leaders in international -payments—that’s where the whole “Citi never sleeps” marketing line comes from. And after consumer banking, payment processing is likely to be the next big target for fintech.
“Cross-border [money] transfers are a pain in the ass,” says Nilesh Dusane, a VP at Ripple, which has a -blockchain-like technology that it believes is much better at transferring money than the system that is currently used by banks. There are a lot of customer pain points when it comes to moving money under the current system. Both bankers and entrepreneurs say that it’s a big opportunity for fintech—and a challenge for Citi and its peers.
Despite the common threat, each of the big banks are attacking fintech differently. Bank of America, for instance, has consolidated its efforts under the leadership of one executive, Cathy Bessant, who serves as the head of technology and fintech for the entire bank. She has an “innovation budget” of $3 billion to spend on fintech and other new technology projects this year. If anyone in consumer banking at BofA wants to upgrade the bank’s mobile app or partner with a fintech company, for instance, he must go to Bessant for approval.
JPMorgan Chase appears to be looking more to partner with fintech companies rather than to build its own technology. In December, Chase signed a deal with business fintech lender OnDeck Capital, one of the most significant partnerships yet between a big bank and a finance startup. Chase also has a partnership with blockchain startup Digital Asset Holdings. (For more on promising fintech startups, see box.)
Citi, meanwhile, is tackling fintech with a decentralized approach—and Bird’s team in retail is just one piece. Unlike BofA, Citi has no single fintech czar for the whole company. Each division of Citi is allowed to make its own strategic decisions on how to counter the challenge from fintech and how much to spend to do so. Bird and Cox say that the plan in the retail division is to do a mix of partnering and developing technologies themselves.
Things are very different in the Citi institutional payments business. There is no dedicated fintech unit inside the group. The two men who run the business, Naveed Sultan and Hubert J.P. Jolly, do so from Citi’s worldwide headquarters in lower Manhattan rather than from Queens. They dress in dark suits and wear cuff links. And they host visitors in Citi’s private dining room, which serves a delicious cream of asparagus soup with morel mushrooms. They don’t have a foosball table.
More than one arm of Citigroup is investing in financial startups directly. Citi’s head of fintech for the investment bank, which is based in New York, runs a fund that invests in startups, including fintech companies. Then there is Citi Ventures, a venture capital operation based in Silicon Valley that is very much focused on fintech opportunities. The investments that these units make in startups don’t necessarily lead to partnerships with Citi. It’s the responsibility of the individual business units to negotiate those deals.
For now, Citi’s try-everything approach seems to be working. The bank has consistently been in the vanguard in terms of tech innovation among its peers. It was one of the first to offer check depositing from a phone, though nearly all banks offer that now. And it continues to rapidly get more digital.
According to Citi’s latest numbers, which were put together by a third-party consultant and are now nearly a year old, just over 46% of its customers use some sort of online banking, either on desktop or mobile. That was ever-so-slightly better than 45% for peers. But an impressive 36% of Citi’s consumer-banking-product sales volume came from one of Citi’s digital platforms. That compares with around 15% at the other big banks. Over the past year Citi’s number of mobile users rose nearly 26%.
Several fintech entrepreneurs say that Citi does tend to move faster than many of the other big banks. But it’s not always clear who is the decision-maker at the bank—a possible downside of the decentralized approach.
Cox says she thinks there are more benefits to Citi’s plan of fintech attack than drawbacks. She says the benefit of Citi’s structure is that it is running faster and harder than its competitors and that in the long run the bank bene-fits from having multiple teams working on the same problem at once. Citi will get better outcomes, she argues, when the people in the businesses—“the people on the ground”—are deciding what their customers will want. She acknowledges that it’s a challenge if outside partners don’t feel they have a “single point of entry” into the bank. “We’ve heard the feedback, and we are working on it,” says Cox. In fact, she says, her team is working on a number of partnerships with fintech firms that it hopes to announce later this year.
During the course of reporting this story, I had a chance to test the limits of Citi’s fintegration. I’m a Citigroup customer, and on the day I met with Bird and Cox in the Citi FinTech headquarters in Queens, I happened to be trying to buy a car in Atlanta. To do so I needed to wire a significant sum of money to the dealership that day.
When I asked Bird if I could do so online or if I had to go to a branch, he told me I had great timing. Wire transfers had just been added to Citi’s mobile app. I could complete the transaction right from my phone! But when I met with Cox later in the day, she told me that wasn’t quite right. Wire transfers aren’t built into Citi’s app yet.
Nonetheless, Cox said getting the wire transfer done would be no problem. I could still do it through my phone by going to Citi’s website. Turns out, that doesn’t work yet either. You need to use a desktop computer. But I was told that if I went to the branch in the basement of the building, they would be able to help me.
They couldn’t. The branch didn’t have any computers that customers could use, so they couldn’t show me how to make a transfer online. But a representative there said that if I traveled to a Citi branch on 52nd Street and Fifth Avenue in Midtown Manhattan, someone could show me how to do it there.
After a 20-minute subway ride and a short walk, I arrived at the location, which is one of Citi’s designated “smart branches,” and spoke with a representative at the Citi version of a Genius Bar that had three computers and a blue halo light over the desk. To complete the transfer, he explained, I needed not only my log-in information but also the number on my wife’s debit card, even though it’s a joint account. I also needed the nine-digit routing and 10-digit account numbers for the dealership’s bank. The representative walked me through the process. A number of times along the way, red warning messages popped up on the screen. The Citi employee said I could ignore them.
After another 20 minutes, the transaction was complete. The smiling Citi rep standing over me said, “See, wasn’t that easy?” No, not easy, exactly. But nobody ever said that radical evolution would be.
Correction: An earlier version of this story said that Microsoft had bought Intuit. In fact, Microsoft had a deal to buy Intuit, but the acquisition was called off before the deal was completed.
A version of this article appears in the July 1, 2016 issue of Fortune with the headline “Citi Does Fintech.”