Fintech Revolution: Should Banks Worry?

Fintech is a rapidly growing sector that is set to explode in the coming years. Global fintech investment reached a record high in 2021 of more than $226 billion. With this amount of funding, it is no surprise that fintech start ups appear to be springing up left and right. As the lines between the physical and digital worlds become ever more hazy, fintech is expected to grow in importance to connect both.

While this is great for consumers who can gain easier access to money management tools and more efficient payment solutions, how does this affect banks? Here we'll explore the fintech revolution in a little more detail and discuss should banks worry.

What is the Fintech Revolution?

The term "fintech revolution" has been coined to describe the rapid current and future growth of fintech. We've already seen a number of fintech innovations from bank smartphone apps to debit card chips and Google Pay. However, with the massive investments in this niche, fintech is anticipated to explode in the coming years, offering a wealth of new technology that will revolutionize how we handle money and financial transactions.

The fintech revolution is anticipated to change payment processes, how retailers and consumers deal with transactions and even make payments quicker, easier and cheaper. We're already seeing signs of this revolution coming into mainstream use.

For example, the Amazon Go store uses deep learning algorithms and computer vision to allow customers to simply pick up their items and walk out of the store. There are also a number of retailers including 7-eleven and Sam's Club that allow you to use an app to scan your items, so you don't need to use the checkout.

These innovations have the potential to change our everyday lives.

The Risk of Fintech for Banks

Many banking experts view fintech firms as a threat to the industry. Fintech companies are chipping away at the key parts of the banking services. With the development of new technologies and the promise of more to come, there is the potential to fundamentally disrupt the big finance players.

Fintech companies, with their agility and innovative solutions, have the potential to challenge traditional banks' market share in savings products. As consumers become more comfortable using fintech platforms for their savings needs, banks may find it challenging to retain and attract new customers.

They often offer high-yield savings accounts with competitive interest rates that outperform traditional bank savings accounts. These high yield savings accounts are accessible through user-friendly mobile apps or online platforms, making it easy for customers to manage their savings.

For example, you have companies like Stripe, who aim to become a replacement for PayPal and other mainstream payment companies, while Lending Club is hoping to make getting loans easier and cheaper for all consumers.

You only have to look at your local high street. According to the NCRC, approximately 7,500 bricks and mortar bank branches have closed between 2017 and 2021, which represents approximately 9% of all US bank locations. After all, how many of us actually go into a branch these days to pay in a check, withdraw cash or open a savings account? Most of us complete these tasks online or using a bank app, which are all fintech developments.

Should Banks Worry?

While fintech could represent a serious threat to the current banking industry, there is the potential for alliances and evolution. Just look at how fintech impacted the investment industry. With new trading apps and platforms that had low or no fees, traditional brokerages needed to reassess their fee structures. Many brokerages adopted the low cost model to be able to compete with the industry newcomers.

The same principle could apply with banking. Big banks have the potential to work with fintechs to share new technology and retain customers. While there are some who would argue that banks are big enough to swash the pesky little fintechs, alliances are a far more sustainable and favorable approach.

For example, JP Morgan Chase created a successful alliance with OnDeck, the small business online lending platform. Rather than developing their own technology to compete with OnDeck, JP Morgan became a partner with OnDeck. If all goes well, JP Morgan could invest greater funds with the platform in future, possibly even purchasing the company. However, in a worst case scenario, JP Morgan is in a position to collect information and learn from the fintech learning space.

While some fintechs may not be willing to sell, it is likely that banks will be willing to pay a big premium for innovative products and services. The fact is that many of the successful fintechs are quite small, so they may be drawn to the large sums of money the traditional banks are able to offer.

The Potential Future

While there is a lot of speculation about a fintech revolution, it does require the businesses in the industry to experience rapid growth and maintain a disciplined approach. They will also need to be equipped to deal with the regulatory hurdles that are abundant in the industry.

Rather than seeing the fintech revolution as a threat, it is likely that many banks will see the developments as a potential for evolution. Historically, banks have embraced technology and technological developments. After all, how many of us still have a physical book that we take with us each time we go to the bank? Banks encouraged their customers to embrace ATMs, debit cards and other innovations.

So, it is very likely that many banks will explore partnerships and act smartly to harness the potential of fintech developments. With joint ventures or acquisitions, banks can move with the times to meet the increasing demands of the average customer. This would allow them to retain their existing customer base and appeal to a wider audience.

Of course, banks will always have mainstream appeal and offer reassurance for the uncertain consumer. So, if a well established bank can offer instant payment and allow customers to pay for items with no contact, customers are more likely to embrace the technology, which will change the financial landscape forever.