The Banks vs Fintech. The winner is...
With Finnovasia, Hong Kong's leading fintech conference, about to start, it seems like a good idea to look at the future of fintech. After all, every fintech conference asks the same questions: will fintech kill off the banks?
Despite the undoubted benefits of many aspects of fintech, the answer is a resounding no. At least not for a long time.
Here are some reasons why not:
The banks are huge. One of the poster-boys of fintech, until it was mired in a scandal that led to its CEO’s demise, was Lending Club. This P2P leader had a recent market cap of $5bn. Citigroup, meanwhile, had a market cap of $145bn as of May 2016, and this isn’t even in the top five of global banks. Smaller cap companies like Lending Club are more susceptible to volatility, both in terms of value and credibility, whereas banks are big enough to weather many a storm (2008 anyone?). It will take a great deal of growth for fintech to overtake traditional banking.
Banks are everywhere. It is true that billions of people don’t have access to the traditional banking. But billions more do, some 62% of the world population according to one study. Banks oil the wheels of the world economy, and importantly are trusted to do so, in most cases, by both governments and individuals. The size of banking operations means that it is, at the moment, just impractical to not to use them.
Banks have the data. Traditional banks have years and years of data from billions of customers. That has got to be a good head-start when it comes to innovating. ‘Ah, but banks can’t innovate’. At the moment, many find it a struggle for sure. But we are right at the beginning of the fintech revolution, and so it is probably way too early to write off their innovative capabilities. After all, the 1980s, 90s, and 2000s saw some of the largest amounts of innovation ever in finance – innovation driven in the main by the big boys, not the young start-ups.
Regulators still matter. Last but not least, no matter what fintech companies say, regulators still call the vast majority of shots. Some regulators, notably in London, are actively reaching out to fintech to help the sector develop. But many more are opposed, either actively or passively, such as Russia’s move to ban bitcoin. Remember that (most) regulators exist to protect the rights of consumers, so there has to be a balance between the demands of fintech and the concern for their customers. It would be a wayward regulator that threw out the banks in favour of the precarious world of start-ups.
Fintech may be changing the world of finance, but there is almost zero likelihood of it doing so at the expense of the established players. It is in the interest of everyone, particularly the consumer, for the banks and the fintech players to come together.