How Fintech has affected banking operations

OBSERVATIONS FROM FINTECH SNARK TANK

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

An article in The Telegraph entitled The fake ‘fintech revolution’ is eating itself up offered the following points as proof of the lack of fintech promises:

• Falling market values. Klarna and Robinhood (twice Fintech Loser of the Year on this blog’s annual list) have seen their market values ​​fall significantly.
• Un-disintermediation. According to article author Matthew Lynn, “peer-to-peer lenders who have promised to cut out the middlemen have more or less given up their original idea.”
• Challenging challenger banks. As Lynn writes, “challenging banks have failed to break the monopoly of the big four [presumably UK banks]gather a few customers with more user-friendly technology, but a little more. ”

The core of Lynn’s argument is this:

“A decade after the term entered the mainstream, ‘fintech’ has promised a lot, but delivered little. Unlike retail or the media, the internet does not change the way finance works in any significant way.”

Yes, the Fintech hype is overrated …

Having published an article entitled The End of the Neobank Era, I am inclined to agree with Mr. Lynn in his point about the challenging banks (where in the US they have amassed lots of customers but only a few ounces of revenue and profit).

And yes, some fintech people have outlived and come up with strange claims about how fintech will improve financial inclusion or how it is more “ethical” than traditional banking.

For an example of the latter, see the article Is Fintech More Secure than Traditional Banks? where the author claims, “fintech is better than traditional financial companies because challenging banks focus on securing the data of their customers using technology. Traditional banks are slower than challenging banks, especially the issue of implementing online security measures.” Not true, and not even grammatically correct.

… But Fintech’s impact on banking is underestimated

Based on the claim that “the whole sector is flimsy”, as Lynn does at the end of her article, on falling market values ​​and the fluctuation of P2P lenders, ignores the lasting impact fintech has had on the banking industry, including:

• Data sharing. I can not help but wonder how long it took Mr. Lynn to open a checking account (current, in the UK) or apply for a loan back in the pre-fintech days. The real innovation in accelerating the speed at which accounts are opened has been the use of data aggregators that have made data sharing possible and easy.
• Personal financial management (PFM). The banks’ deployment of PFM tools was a dud. Few consumers used the tools, and those who did were hard pressed to say how budgeting and spending categorization affected their financial lives. But the emergence of fintech-based tools that automate savings, manage subscriptions, analyze and even resell bills, breathed new life into PFM. According to Cornerstone Advisors, Americans saved $ 10 billion in 2021 by using automated savings apps.
• Spread of payments. I bet pre-fintech, Mr. Lynn (like the rest of us) made payments mostly by cash, by check or by credit or debit card. Fintech has expanded the number of payment options immensely. In the United States, consumers keep about $ 10 billion a week in sellers’ mobile apps to make payments. We now pay each other with Venmo, Zelle, Facebook Pay, Apple Pay, Cash App and other tools. Buy Now, Pay Later (BNPL) may be at the top of the list of things that are destroying civilization, but Americans earned $ 100 billion in purchases with BNPL in 2021.
• Product distribution. The emergence of embedded finance – where financial products are seamlessly available from non-financial firms – has made it cheaper and easier for consumers to obtain financial products, and has in fact expanded the number of customers and the geographical scope of medium-sized banks. Banks that follow a BaaS strategy have achieved higher ROA and ROE than the industry average.
• Financing small businesses. A study published by the European Central Bank entitled The real effects of FinTech lending on small and medium-sized enterprises found that companies with access to fintech increase their influence and replace long-term bank debt with fintech debt that allows them to maintain financial flexibility, reduce bank dependence and exposure to bank shocks.
• Small company everything. The emergence of small business platforms such as Square and Shopify has changed not only the way small businesses take payments, but how they manage all aspects of the business, including banking and loans.

The meta effect of Fintech

Anyone who concludes – as Mr. Lynn does – that “technology does not make much difference … huge amounts of money have been spent on flimsy ideas that do not really work”, simply does not look at the big picture, and is just cherry picking the bad ones the apples.

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

Fintechs has not replaced traditional financial services companies – they have introduced new products and services to the market – like the PFM tools described above – although, as Mr. Lynn claims, “including a debit card on a phone does not count. . “

With 30% of Gen Z and Millennial Americans now calling a fintech their primary provider of checking accounts, it does not matter whether they have introduced new innovative products or not. They have taken market and mental shares.

And the demand for fintech has increased the demand for financial services, overall. According to Cornerstone Advisors’ surveys, 40% of consumers between the ages of 21 and 55 subscribe to fintech services, and half spend $ 10 or more each month, for a total of $ 13 billion annually.

Just as it was not over when the Germans bombed Pearl Harbor (according to Blutarski, at least), the fintech revolution is not over just because the valuation of two companies (Klarna and Robinhood) has gone down.