Traditional banks are considered stagnant, compared to the current technological climate of today. The inability or refusal to adopt new technologies may cause the industry to fall further behind the pace of the technological curve. Fintech has occupied this gap, which integrates financial models with current technological innovations, thus seizing the opportunity to jump ahead of the race. However, there is speculation whether Fintech is a bloated fad or an actual challenger to the traditional banking sector. Such that a growing bubble must always pop, some are saying that the fintech industry may soon face the same fate.
How Did Fintech Become Widespread?
Fintech arose in the 1980s, becoming popular subsequent to the financial collapse of 2008. Fintech became more ubiquitous, as the trust in the traditional financial system collapsed alongside the share prices. Ever since Fintech has grown in the public interest, and the collective value of the entire industry is valued at US$187 billion as of 2019.
Fintech has attracted younger investors, who have not grown a loyal attachment to traditional banks. These investors foresaw the high potential for growth since the industry was relatively new and occupied a niche area that traditional banks neglected. However, fintech targeting the younger investors ignores the 1 billion consumers retired class aged over 60, which contributed $15 trillion annually in 2020. Some fintech banks are adapting to a more user-friendly climate, catered towards the elderly generation. HSBC for example partnered with an Alzheimer’s Society, creating dementia-friendly products. Said “If traditional banks, with hundreds of years of history and nearly-unbreakable, guaranteed trust behind their brands and their long-standing reputations were willing to on-board data science, AI and advanced IT-solutions and technologies to meet the needs of the untapped Silver Ocean (clients 60+ age), they stand in an almost unconquerable position to challenge and gain the multi-trillion market opportunity that their younger, less experienced competitors failed to capture. If they were able to do so, then the combination of their guaranteed brand stability and consumer/client trust and technology-driven AgeTech, WealthTech, InsurTech, HealthTech solutions would put them in an unstoppable position for growth, and enable them to transform a source of loss (aging population) into an unprecedented source of growth, prosperity, and stability”
Fintech Records Losses
Monzo, arguably the poster child of the fintech industry, has recently faced decline and losses. In 2018, it lost £47.2 million, 54% more than the previous year, to which leadership says that the losses are necessary to grow quickly. However, it is important to note that profitability isn’t indicative of growth, as a loss is sometimes required to grow. Cofounder of digital bank N26, Maximilian Tayenthal, said: “In all honesty, profitability is not one of our core metrics. In the years to come we won’t see profitability, we’re not aiming to reach profitability”. Although not entirely cross translatable to the fintech industry, Twitter for example only had its first profitable quarter in 2017, eleven years subsequent to its founding.
Furthermore, some analysts have considered fintech banks to be overvalued. Mushegh Tovmasyan, Chairman at Zenus Bank, said “Most Challenger / Neo Banks are not banks at all. They are tech companies acting as introducing brokers to existing banks. To be considered a Bank in very broad terms. The entity needs to be able to “Take Deposits” “issue cards” or “lend from balance sheet” and most Challengers don’t do any of those. So the real value they add is creative marketing. If the user base acquisition was achieved organically then it would be valuable, but when the trick is to use VC money to subsidize real costs then it’s unsustainable”.
Rich Wagner, CEO of digital challenger bank, Cashplus, foresees a collapse of the fintech industry, stating we are overdue on the bubble bursting. He justifies this claim by saying “This bubble is probably taking longer to burst simply because of the amount of capital sitting on the sidelines, waiting to be invested in companies that in the past would not have been investable. It is certainly something to keep a watchful eye on”. A potential reason for the overdue bubble popping can be attributed to leveraging data. Fintech collects revenue through innovative mechanisms, rather than income from fees and credit, which are harder to measure, thus dampening the fears of the bubble. It is not as black and white as a profitability figure. Wagner views the success as dependent on the cash flow metrics, commenting “Is it growing, what is its cash flow, what are its costs compared to its revenues? If the numbers don’t stack up, then they are likely to fail”. Some fintech companies like Monzo have reverted to traditional bank tactics to raising capital, such as its recent ‘credit card rate’ loan offering.
Can Traditional Banks Fail?
Although traditional banks are old fashioned, some say they are too large to fail. Due to their standing nature, they appear far more secure than digital banks. COVID-19 outbreak has created the need for security in an age of uncertainty. As the shifting of investments into secure traditional banks, the pandemic may force some fintech companies into bankruptcy. Some large banks are expected to absorb digital banks and adopt some of the technologies. The fintech companies are consequently valued far lower than prior to the pandemic, currently rendering them low hanging fruit, considering the financial distress. Due to fintech low profitability models, cash reigns supreme, and the fintech models are considered unsustainable in the current climate. In light of this, Visa acquired fintech startup company Plaid for US$5.3 billion in early 2020.
Is There Or Is There Not A Fintech Bubble?
Some think that there is no bubble, and the industry is still in its infancy. Some investors still remain optimistic about the future of the industry. Millennials Disruption Index provided a survey, showing that 73% of US millennials claim they would be more excited about financial services offered from large companies such as Google, Amazon, Apple, rather than their own bank. Furthermore, 70% think that in five years the way we pay for things will be completely different. There is a generational dichotomy, where the younger generation has a willingness to change the way things are done.
It is uncertain whether the bubble is about to burst, or whether it is still inflating with no collapse in sight. The pandemic may be observed as a dangerously sharp needle, hovering close to the fintech industry balloon. The roots of traditional banking are sunken deep within the fabric of society, it must take a lot of power to uproot them.
