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Who’s afraid of the big, bad bank?

I just discovered Thomson Reuters predictions for 2016 with two related to Fintech that stand out:

  • There is no Uber of Finance
  • Most Fintech start-ups will partner with or be acquired by banks

Interesting.  I have blogged before that the Uber of Finance is the blockchain, so maybe don’t agree with that statement, but the latter comment is interesting and makes you wonder how this will all play out.

For example, the majority of Fintech start-ups are either working in an area overlooked by banks – small business funding, student loans, crowdfunding projects, etc – or that banks are not being given appropriate servicing – taking payments by phone, leveraging online checkout, enabling frictionless payments, etc.  The question therefore is where any Fintech start-up is really making a dent in the banking empire?

Someone made the comment at the conference I’m attending this week, for example, that the total investment made in Fintech start-ups so far is less than 10% of the average annual profits of the banks.  It’s peanuts.

I personally wouldn’t say $20 billion+ of investment is peanuts, but it’s certainly a small dent in the banking industry’s billions.  We then have reports from various sources such as Goldman Sachs, that banks will lose billions in profit over the next five years.  Really?  Are banks losing profit, or are start-ups generating new profits from under-served markets?  And, if start-ups do start taking core bank profits, do we honestly believe that banks will let them?  What response will banks make?  Won’t banks start to squeeze the new guys or acquire them?

According to Thomson Reuters:

Banking profit totalled $160 billion in the past 12 months in the United States, according to Federal Deposit Insurance Corporation figures. That explains why investors deposited $15 billion into financial technology companies in the first nine months of 2015, surpassing the $12 billion invested in all of 2014, according to CB Insights data analysed by Accenture.

Much of that has funded start-ups embracing innovations in bitcoin’s back end, new lending models and payment systems. On their own, some – say, Venmo in payments, Avant in personal lending or Digital Asset Holdings in blockchain – may transform pieces of the financial-services firmament.

But investors hoping for the next Uber, Google or Amazon will be disappointed. Returns will be generated and new millionaires minted, but the Fintech industry will find it tough to swipe away banking-industry profit to the extent their more disruptive Silicon Valley cousins have cut earnings in the newspaper, entertainment, taxi and hotel businesses.

Federal government oversight creates a far higher barrier to entry. The more involved a company becomes in handling people’s money, the more responsibility – and costs – it must bear. That explains how most high-profile Fintech start-ups choose their niche.

Many lend to people or businesses with subpar credit, which banks avoid for fear of prompting another financial crisis and higher costs imposed by watchdogs. Similarly, entrants in consumer payments must piggyback on existing bank accounts, which they cannot replace without succumbing to regulation.

Fintech firms are certainly developing more efficient and technologically proficient ways of doing business. But they’re more likely to partner with, or sell to, larger financial rivals to achieve scale. Several mega-banks like Citigroup and Wells Fargo have already taken stakes.

JPMorgan’s recent venture with business lender On Deck Capital is a case in point. Boss Jamie Dimon let slip that his $250 billion bank was working with an unnamed peer-lending outfit. When $760 million On Deck called itself out, its stock surged nearly 40 percent, though it’s still down 60 percent since its debut.

That reaction is instructive. It’s a sign that the leverage in the fledgling Fintech universe is still with the banks, thanks to regulators, not the upstarts.



About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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