Startups and small businesses flock to Fintechs like banks flounder
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The annual letter to shareholders can be a soul-searching exercise for CEOs. In the shareholder letter that Jamie Dimon of JP Morgan Chase issued last April, he was sober and anxious about the future of big banks. Rightly. “The increasing competition against banks from each other, shadow banks, fintechs and large technology companies is increasing and clearly contributes to the diminishing role of banks and public companies…” Dimon writes.
He sees the threat of death from all sides. Walmart
Jamie Dimon misses a key point: In some ways, the existential threat banks face today is their own fault. They overlooked and underserved small businesses, the backbone of job growth in the American economy. Two weeks ago, Wall Street Journal reporter Dion Rabouin wrote that since February 2020, small businesses (fewer than 250 employees) have hired 3.7 million more people than they have fired. Compared to a net reduction of 800,000 jobs from larger companies over the same period, this could be a fortuitous time for fintech startups to continue capturing corporate talent and underserved customers. This and the fact that the Biden administration is now looking to incorporate fintech startup options into SBA loan programs is cause for optimism.
And yet Chase and all the other giant banks are too busy serving other goliaths to help small businesses thrive. The US taxpayer bailed out the Too Big to Fail Banks in the meltdown of 2008, and today banks are turning a cold shoulder to Small and Medium-Sized Businesses (SMBs). These behemoths fail to share their wealth with their depositors, paying tiny interest, less than 0.02%, on “Business Premier Savings Accounts” even after the Fed has raised interest rates more than 13 times in less than a year (see Dreading the Bold ). I recently appeared on a panel at the Consumer Electronics Show (CES) in Las Vegas and made this point, quite bluntly, many times.
This greed of JP Morgan Chase and the rest of the giants is a $17 trillion opportunity for smaller, aggressive fintech startups. These firms, though a fraction of the size of Chase, roll out FDIC-insured bank accounts that offer 4.00% returns on deposits; for a startup with $10M in cash that’s $400K, enough to fund three or four jobs. Alternatively, with a Chase checking account they would be lucky to earn more than 0.02%.
The new wave of fintech rivals believe that all businesses, regardless of size, should be able to benefit from rising rates in the same way that large corporations can. But big banks are intentionally vague about what rates and what services are available, and a startup or SME has to knock on the table to get anything above 0.02%. It’s like never being sure at the car dealership if you’re getting the best price.
Fintechs emerged to provide competitive loans and deposit accounts, for the smaller players, banks abandoned long ago. Traditional banks are offline, analog, saddled with legacy technology and lack the incentive to innovate. Fintechs are digitally native and leverage technology to deliver faster, better decision-making and business insights; for example, approving new accounts in 10 minutes, instead of 10 days or longer.
While these smaller, newer competitors are taking aim at banks from below, banks are also facing strong new competition from far larger technology rivals. Apple’s market capitalization, at $2.5 trillion, is six times that of JPM. Apple has more than half a billion users on Apple Pay, plus 6.5 million customers for its new credit card (while Goldman Sachs picks up the tab). Now Apple is moving into buy-now-pay-later, payment processing, credit risk assessment and person-to-person payments. The result has been traditional banking’s steady and unrelenting decline.
Look for fintech’s foray into the core banking industry to continue, as the nation’s largest banks struggle to innovate and accelerate efforts to stay in business. The fintech sector is falling sharply in the public markets, falling in line with the FAANGs and other Big Tech stocks. Nevertheless, this is only temporary turbulence in a long-term upward trend. Watch out, Jamie, the fintechs are coming for you.
