Published On: Wed, Jun 17th, 2015

Why fintech won’t kill banks

BANKS weren’t much loved before 2007, and the bailing-out of a bunch of them in the financial crisis hardly helped endear them to the public. A slew of startups in the “fintech” space—short for “financial technology”—now reckon they can do better. Bright young things based in San Francisco, New York, London and Stockholm are raising billions of dollars in venture capital to “disrupt” financial services. With much brashness, these t-shirt-wearing whizz-kids are confident they will do to banks what digital photography did to Kodak and transistors to vacuum-tube makers. Will fintech succeed in killing off today’s financial services giants?

Fintech is certainly upending many different niches in finance. Punters wanting to borrow money can now eschew their bank (or credit card) and instead tap “peer-to-peer” lending platforms that match borrowers and savers, such as Lending Club or RateSetter. It is now much cheaper for a person or business to transfer money internationally through TransferWise than through a bank branch. Square, Apple Pay or Braintree process payments, for example debiting your bank account automatically when you finish an Uber journey. A slew of “robo-advisors” such as Betterment or Nutmeg even help you invest your savings. And so on. At least 4,000 fintech startups are active; over a dozen of them are valued at over $1 billion.

All this is putting pressure on banks, not least because few consumers who use snazzy fintech services ever return to their banks thereafter. But it is hard to see fintech killing them off. For one, though they are growing fast the startups are still tiny. Lending Club, the biggest fintech lender, has arranged $9 billion of loans since launching in 2007—compared to $885 billion of credit-card debt in America alone. Many fintech groups do business in the billions, but banks often deal in trillions. Banks have ingrained advantages, not least the ability to create credit more or less at whim. And banking incumbents do some things remarkably well—notably the current account, which allows people to store money in a way that keeps it safe and permanently accessible. Few in Silicon Valley or Silicon Roundabout want to take on that heavily regulated bit of finance. Many admit they depend on it: after all, you need a bank account to use most fintech services.

If fintech doesn’t kill banks, it might instead sap the sector’s profitability. A future as a sort of financial utility—ubiquitous but heavily regulated, unglamorous and marginally profitable—is hardly a gratifying outcome for banks. Around half of all (retail) bank customers are unprofitable already. If ever more of them flock to fintech startups for ancillary services such as foreign exchange, that proportion will increase inexorably. One solution may be for charges on current accounts to rise, for example with monthly charges, to compensate for lost cross-subsidies. Another would be for banks to slash costs, and many are shuttering large numbers of pricey branches. A last resort might be for banks to buy the fintech insurgents. A billion dollars sounds like a lot, but it is spare change for a bank CEO wondering if the newcomers will render his firm obsolete.


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