The first Fintech wave has passed its peak. OK, I know I’m not inventing sliced bread here, but if you are one of those people fervently expecting the buzz to translate into the full rebirth of traditional banking anytime soon, well, you’d better hold your horses.
Don’t get me wrong, the disruption of banks’ business models is happening (and not only because of Fintech competition but also due to their high-friction distribution model based on branches, plus the negative interest rate environment and the post-crisis regulatory framework). But I guess such an industry disruption (whose outcome has still to be defined) won’t be an overnight process.
In the last 18 months, Fintech has become way too hot, and we’ll probably be surrounded by this hype as long as the “banks”, “digital” and “disruption” combo keeps hitting the headlines. But those won’t be gaining momentum forever, especially once digitalisation becomes the new normal in the industry. Unsurprisingly, people tend to have over-expectations in the short run, especially those who are chomping at the bit to see banks under stress after years of turning their back on their customers and bailouts to the tune of trillions. But unfortunately, this is not the taxi industry and banks cannot be “uberised” as easily as other businesses. The disruption process in banking is not just about opening the business up to competition, but a matter of adapting and transforming the complex and very demanding banking regulatory framework along with banking infrastructures and payment networks. That’s one of the main reasons why the industry cannot be disrupted in a matter of 4-5 years.
The banking licence
So I guess the traditional landscape dynamics have not really changed. In the end, banks own banking licences that allow them to issue banks accounts, manage the payment infrastructures, take risk-free retail deposits (covered by the deposit guarantee scheme) and gain access to central banks’ liquidity facilities, without mentioning their too-big-to-fail unfair advantage. With retail depositors their main source of funding, their balance sheets are huge. Besides, as providers of bank accounts, banks de facto own the infrastructure, which means that Fintech firms still need to rely on them one way or another (at least until new regulatory frameworks show up).
Although the requirements for getting a licence are very high (which becomes an important entry barrier for Fintech. In the UK, it is considered that opening a new bank with a full banking licence requires 20M GBP up front), the obligations derived from it in terms of prudential regulatory compliance (e.g. capital and liquidity requirements) are also remarkable. That said, having a banking licence gives the company a reputational advantage relative to other financial institutions.
Living up to the standards
However, it’s amazing how the industry as a whole has been able to overcome all sorts of difficulties, creating a solid narrative appealing to consumers and investors. The Fintech business is not only about offering marketable products and services, but a commitment to values and good practices too. You just need to check out some Fintech webpages and customer feedback to notice that words such as “trust”, “transparency” and “simplicity” are constantly showing up. Apart from the reputational concerns, this reflects firms’ eagerness to differentiate themselves from traditional players in the banking ecosystem and to really put the customer at the centre of their work.
But this could be a double-edged sword. The fact that the whole industry lies under the same brand constitutes a great advantage for firms (especially start-ups) in need of reaching clients and raising funds. However, it also means that potential malpractices by specific firms are liable to ultimately harm confidence in other Fintech companies. For instance, we have seen how the stress episodes involving platforms such as Lending Club and OnDeck or the bankruptcy of Powa, have been used by some media to extrapolate these firm-specific problems to the whole industry. We’ve also recently experienced how some old-school brokerage firms are trying to position themselves as Fintech while their business model is based on screwing clients through opaque spreads and sales methods based on dumping.
Focusing on what really matters
Nonetheless, living up to these standards may be not enough. Some Fintech companies have been focused on gaining market share based on huge marketing spending without really creating new technology and/or a defensible competitive advantage. This kind of “low-cost” positioning may work but for a very limited number of players. Generating value through new tech-oriented solutions should be the main target in the medium and long term for any firm seeking to consolidate in the market. We are now experiencing a reality check which will make the Fintech industry healthier, pushing companies to build unique and sticky technology and to collaborate with existing players.
In the past, I argued that in the short run we are moving towards a co-petition (co-operative competition) model in which Fintech “stays at the mercy of banks, they [Fintech firms] disrupt banks on one side but they bring them business on the other side. In the end, banks still win.” But such a statement does not have to be valid for the long term – in fact, people tend to underestimate the impact of Fintech on the industry for the coming 10 to 20 years. It seems obvious that the complete digitalisation of financial services is unstoppable since customers are turning digital at an amazing pace (I have recently been told that 90+% of contacts with customers are now through digital channels even at savings banks) but the way this ecosystem will work and interact in the future is still to be defined.
In conclusion (and coming back to the title of the article), sooner rather than later the Fintech buzz will die, taking with it all the firms that have based their business on empty words. In contrast, those who create real and new technological solutions and products will stay alive, driving the long-term disruption that the industry needs. Besides, relying on this timeframe is not only a more realistic approach for evaluating the real impact of Fintech, but also a medicine against the potential frustration that could otherwise be caused when the short-term hype passes.