We all love a David vs. Goliath story. And the remarkable rise of fintech startups over the past few years has created one such story in the finance industry.
Namely: will brash fintech startups one day spell the end of ‘traditional’ banking as we know it?
The idea of disruptive startups fundamentally transforming established industries may seem fanciful — but you only need to look at the impact Uber has had in the world of taxis, and Airbnb in the world of hotels, to appreciate that, in the right environment, anything is possible.
It’s undeniable that fintech companies enjoy a number of advantages at this time — they’re nimble, unencumbered by expensive branch and legacy systems, and tend to be ‘laser-focused’ on one particular area, while banks offer hundreds of different products and services.
There’s also the negative perception that many people hold (fairly or unfairly) about big banks — a hangover from the recent financial crisis; and, the fact that customers, increasingly used to the speed and convenience of doing business online, are demanding faster and more flexible services.
The numbers tell much of the story. CitiGroup report that approximately $19bn of incremental investment has flowed into the fintech sector in the last year, as opposed to just $1.8bn in 2011.
Could this be the beginning of the end for traditional banks?
The answer seems to be, almost certainly not. While it’s clear that fintech is a huge opportunity, it’s equally clear to us that traditional banking is very much here to stay.
Let’s take a look at some of the reasons.
1. Money talks
The traditional banking system is extremely entrenched and well-protected. It has to be. In the short-term, fintech is capable of causing disruption — but ultimately, the banks will have no problem buying out any startups that get too successful.
With fintech entrepreneurs developing technology which can add real value to the banks, it is unsurprising that banks are happy to invest hundreds of millions of dollars to simultaneously eradicate competition and enhance their own product offering.
And, when the chips are down, there aren’t many fintech investors or entrepreneurs who will turn their back on a major buyout of this kind.
2. Trust, experience and credibility
The Uber effect is often predicted every time a new technology threatens an established industry.
But there’s one big difference in the case of fintech vs. traditional banking: when we talk about financial services, we’re really talking about peoples’ savings and livelihoods.
While many people are willing to use fintech services to perform certain financial transactions, who are they more likely to trust with their life savings? A Silicon Valley startup or an established, heavily-regulated, bank?
The decades of trust, experience and credibility built by the banks still put them in good stead, even when customers are faced with a newer, shinier alternative.
3. Banks are upping their game
The disruption fintech has caused, in many ways, has been a shot across the bows for the banking industry. The saying that ‘necessity is the mother of invention’ certainly applies, and many banks have been stung into a response — both with their response to fintech, and their own rates of innovation.
In many cases, the response has involved embracing fintech rather than trying to fight it. Research shows that, when faced with the challenge of fintech, banks have responded as follows:
– 43% have created startup programs to incubate fintech companies.
– 20% have set up venture funds to fund fintech companies.
– 20% have partnered with fintech companies.
– 10% have acquired fintech companies.
– 7% have launched their own fintech subsidiaries.
This has led many industry experts to speculate that the future belongs to banks and fintech companies that are able to work together rather than competing.
4. The bricks-and-mortar effect
It seems that the whole world is moving online — and it would be easy to assume that people just won’t want or need physical bank branches anymore.
Research suggests otherwise.
While most people accept that many older customers still prefer to bank in-branch, this also applies to a surprising proportion of millennials (aged 18-34.) Wells Fargo research suggests that 63% of millennials use bank branches, which is only marginally less than Gen Xers — aged 34-54 (68%) and Boomers — aged 54-70 (69%.) They also visit only slightly less often — an average of six times per quarter, as opposed to seven for the other two categories.
It seems that the personal touch continues to add value to traditional banks, and will for the foreseeable future.
The aces up traditional banks’ sleeve
With a pre-existing customer base, enormous amounts of financial expertise, stronger security systems and a great handle on the many financial regulations in place, banks are not only starting to innovate more aggressively — they have a much more sound platform from which to innovate.
The rise of fintech offers unprecedented opportunity. There are new innovations on a seemingly weekly basis, designed to make the world of financial services easier, more efficient and ultimately, better for those who use them.
That’s not to say that traditional banking is on its death bed. Far from it.
Indeed, it seems that the future for these ‘warring factions’ is one of co-operation. Banks will thrive by embracing the new technology and entrepreneurial spirit demonstrated by the world of fintech. And the successful fintech startups will be the ones that learn to work with the banks rather than trying to eclipse them — embracing the expertise, regulatory knowledge and myriad pre-existing advantages they enjoy.