How Fintech has impacted the banking sector


“What? Over? Did you say ‘done’? Nothing is over until we decide it! Was it over when the Germans bombed Pearl Harbor? Surely not!” —John Belushi as Blutarski in Animal House

A Telegraph article titled The fake “fintech revolution” is devouring itself offered the following points as evidence of the shortfall in fintech promises:

  • Falling stock market valuations. Klarna and Robinhood (twice Fintech Loser of the Year on this blog’s annual list) have seen their stock market valuations drop significantly.
  • Non-disintermediation. According to the article’s author, Matthew Lynn, “peer-to-peer lenders who promised to cut out middlemen have more or less given up on their original idea.”
  • Banks challenger without challenge. As Lynn writes, “the challenger banks have failed to break the monopoly of the big four [presumably UK banks]bringing together a few customers with easier-to-use technology, but nothing more. »

The crux of Lynn’s argument is this:

“A decade after the term entered the mainstream, ‘fintech’ has promised much but delivered little. Unlike retail or the media, the Internet does not significantly change the way finance works. »

Yes, the Fintech hype is overdone…

Having published an article called The End of the Neobank Era, I am inclined to agree with Mr. Lynn on his point about challenger banks (where in the US they have amassed a ton of customers but only a few ounces income and profits).

And yes, some people in fintech have over-promised and made outlandish claims about how fintech would improve financial inclusion or that it is more “ethical” than traditional banking.

For an example of the latter, see the article Is Fintech more secure than traditional banks? in which the author asserts that “fintech is better than traditional financial firms because challenger banks are focused on securing their customers’ data using technology. Traditional banks are slower than challenger banks, especially the issue of adopting cybersecurity measures. It’s wrong, and not even grammatically correct.

…But the impact of Fintech on the banking sector is underestimated

Basing the claim that “the whole industry is fragile”, as Lynn does at the end of his article, on falling stock market valuations and the pivoting of P2P lenders, ignores the lasting impact that fintech has had on the banking sector, in particular:

  • Data Sharing. I can’t help but wonder how long it took Mr. Lynn to open a current account (current, in the UK) or apply for a loan in the pre-fintech days. The real innovation in accelerating the speed of opening accounts was the advent of data aggregators which made data sharing feasible and easy.
  • Personal Financial Management (PFM). Deployments of PFM tools by banks have been a dud. Few consumers have used the tools, and those who have have struggled to say how budgeting and categorizing expenses has impacted their financial lives. But the emergence of fintech-based tools that automate savings, manage subscriptions, analyze and even negotiate bills have breathed new life into PFM. According to Cornerstone Advisors, Americans saved $10 billion in 2021 through automated savings apps.
  • Proliferation of payments. I bet before fintech, Mr. Lynn (like the rest of us) made payments mostly in cash, by check, or with a credit or debit card. Fintech has expanded the number of payment options immeasurably. In the United States, consumers keep about $10 billion every week in merchant mobile apps to make payments. We now pay ourselves with Venmo, Zelle, Facebook Pay, Apple Pay, Cash App and other tools. Buy Now, Pay Later (BNPL) may top the list of civilization-ruining things, but Americans made $100 billion in purchases using BNPL in 2021.
  • Distribution of products. The emergence of integrated finance – where financial products are available seamlessly from non-financial businesses – has made obtaining financial products cheaper and easier for consumers, and has actually expanded the number of customers and the geographical reach of medium-sized banks. Banks pursuing a BaaS strategy achieved above-average ROA and ROE.
  • Small Business Financing. A study published by the European Central Bank entitled The real effects of FinTech loans on SMEs have found that companies with access to fintech increase their leverage and replace long-term bank debt with fintech debt, which allows them to preserve their financial flexibility, reduce their dependence on banks and their exposure to banking shocks.
  • Small business everything. The emergence of small business platforms like Square and Shopify has transformed not only how small businesses accept payments, but also how they manage all aspects of their business, including banking and borrowing.

The meta-impact of Fintech

Anyone who concludes, as Mr. Lynn does, that “technology doesn’t make much of a difference…huge sums of money have been spent on flimsy ideas that don’t really work” just aren’t looking at the situation. as a whole, and is simply cherry picking bad apples.

Fintech has fundamentally changed the supply and demand for financial services.

Fintechs have not replaced traditional financial services firms – they have introduced new products and services to the market – such as the PFM tools described above – even though, as Mr. Lynn asserts, “the embedding a debit card on a phone doesn’t count.”

With 30% of Gen Z and Millennial Americans now calling fintech their primary current account provider, it doesn’t matter whether or not they’ve introduced innovative new products. They have captured market share and spirit.

And the demand for fintech has increased the demand for financial services, overall. According to research by Cornerstone Advisors, 40% of consumers between the ages of 21 and 55 subscribe to fintech services, with half spending $10 or more each month, totaling $13 billion per year.

Just as it wasn’t over when the Germans bombed Pearl Harbor (according to Blutarski, at least), the fintech revolution isn’t over just because the valuations of two companies (Klarna and Robinhood) went down.