While the 2007-2008 financial crash may seem like a distant memory - albeit one that lurks like an unpleasant smell at the back of the fridge - new regulation caused by the global crisis means that financial businesses, such as banks, are still adjusting to the new lay of the land.
If clothing can be a metaphor for business, there is none better than the opposing fashions of bankers in suits and FinTech startup leaders in t-shirts and jeans. If they were squaring up for a physical fight, I’d put my money on the team with more freedom to move to be the eventual winners. I’d also pick that same freedom and flexibility as a sure fire winner for a head-to-head in business, too.
Where The Threat is Found
The threat posed by FinTech to banks is seen clearly in the way that traditional banks and other financial institutions are being forced to reevaluate their daily operations. In December last year, Forbes acknowledged the FinTech boom as the “global phenomenon” it is. Put simply, this threat to banks exists on every continent.
Similarly, investment in FinTech is increasing. According to a report from CB Insights, investment in FinTech has soared. Between 2010 and 2015, $24bn had been invested in the sector, with $11bn of that sum swelling coffers in the first three quarters of 2015 alone. And while some critics have already doomed FinTech to the trash heap - citing a lack of interest from VCs among other reasons - a report from Big Four accountancy firm KPMG predicts that FinTech is only set to grow in capital and popularity.
Basically, FinTech - whether banks want to accept it or not - remains on an upward trajectory.
Picking Their Battles
There are many places that Fintech companies can shake up financial markets but perhaps none so ripe for the picking as loans.
Traditional loan applications are a hazardous, time consuming and tedious task for small businesses and startups. In his blog, startup guru Paul Graham explains that “startup funding is measured in time”. Basically, it’s not about how much money startups have, it’s about how much time they have before the money runs out. The time it takes, therefore, for a bank to approve a loan application, can be incredibly risky for startups.
The fact that startups are often rejected for so-called traditional bank loans is clearly laid out here. Similarly, a survey from the New York Federal Reserve in 2013 found that SMEs - of which startups are a considerable demographic - spent up to 26 hours applying for credit. Factor in decision making and reply times, and it’s easy to understand why startup FinTech companies, which can make decisions in seconds, are starting to outpace banks in this field.
Additionally, as well as being more open to startups and small businesses - which, by the way, make up 99 per cent of all US firms - FinTech companies are well placed to cherry pick demographics that are underserved by banks. As well as SMEs, this includes the under-banked - adults without a checking accounts - and, most importantly, the millennial generation.
Emerging from the financial crisis into adulthood, tech-savvy millennials are less likely to trust traditional banks over FinTech firms and startups when it comes to financing. Now that millennials make up the biggest proportion of the US workforce, banks should be seriously worried.
The End of the Beginning?
At the close of the Second Battle of El Alamein in WWII, then prime minister of the United Kingdom, Winston Churchill, warned a weary public: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
The same can be said for FinTech and banks. Banks have existed for centuries and while Lehman Brothers may have collapsed, most continue to perform well (though, at the time of writing, German finance giant Deutsch Bank is dangling precariously over the precipice of failure).
Banks are not going to be washed away overnight by an army of FinTech firms that are still, as yet, unprepared for regulatory responsibility. However, their industry is moving in that direction. FinTech [firms are undermining banks(https://techcrunch.com/2015/11/09/why-fintech-startups-arent-killing-banks-yet/)] and leveraging their weaknesses - things such as susceptibility to hacking and data breaches - to out manoeuvre them and provide a more attractive prospect to firms that need finance.
Elsewhere, other observants are sure that 90 per cent of FinTech firms will cease to exist in as little as five years, decimated by an unstable global economy. But perhaps that is overly optimistic on the part of the big-beasts that are stumbling along and trying to fend off their more agile opponents. As pointed out in CEO magazine, just four years was needed for the likes of Netflix to render stores like Blockbuster obsolete. Like Uber has taken down traditional taxis.
Like FinTech will - in time - take down the banks.