In his letter to shareholders last year, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon took note of the growing competition from the financial technology industry. “Silicon Valley is coming,” Dimon wrote. He meant it as a warning. It may be a truer one than he thought.
Silicon Valley is unquestionably shaking up the financial services sector. Last year alone, more than $19 billion in capital gushed into fintech startups running the gamut from payments to investments to lending. Fintech lending grew by 222 percent from 2014 to 2015. Something real is afoot as these firms use technology to cut costs and improve the customer experience. Just as Google opened up the World Wide Web for hundreds of millions of users with its popular search engine, fintech companies today are ushering in transformational changes with real threats—and opportunities—for banks to consider carefully.
But every Google moment also has its “Pets.com crisis,” and that crisis has arrived for the fintech sector.
Pets.com was the internet firm whose Super Bowl sock puppet commercials came to symbolize excessive investor enthusiasm for any enterprise that appended “dot.com” to its name, the inanity of its business model notwithstanding, and whose subsequent collapse similarly captured the healthy and necessary shakeout that separated the strong (such as Google) from the weak (such as the sock puppet).
Just like the dot-com boom and bust in the early 2000s, many weaker players in fintech (which are likely a large majority of the firms) will fail, merge or both. Some of the stronger ones may emerge from the correction, like Google, to create new and sustainable franchises.
A small handful of fintech firms are actually generating positive cash flow. Fintech venture capital investment fell by two-thirds in the fourth quarter of 2015 and looks to have collapsed further this year, leaving the vast majority of fintech firms that aren’t yet profitable with nowhere to turn to raise the necessary capital to keep the lights on. IPOs have been canceled. Securitization markets have retreated, raising the cost of capital for all fintech firms. It is interesting to note—with no small amount of irony—that the first fintech Super Bowl ad ran this year.
Bankers should be careful to draw the right conclusions from this correction. It may be tempting to breathe a sigh of relief as potential competitors fall to the side. But that would only result in trouble down the road.
The fundamental lesson of high-tech’s bubble moment in the early 2000s was not that the pretenders collapsed. It was that the true innovators, incumbents and startups alike, committed themselves to capitalizing on the fundamental changes introduced by the internet. Durable companies like Amazon and Google emerged from the shakeout stronger. Incumbents that could have been hurt by the wave of innovation, like Comcast, took advantage of the opportunity and have prospered mightily. Incumbents that did not embrace the change struggled, in some cases following Pets.com into oblivion. The dot-com boom transformed the way we all live and how we conduct business despite the fact that many over-hyped startups failed along the way.
A fintech revolution is now under way, notwithstanding the impending shakeout. Payments, investing and borrowing money will be quicker, cheaper and more customer-friendly and flexible. Customers appreciate efforts to take the bureaucracy and pain out of dealing with financial services—reducing the time it takes to get an answer, allowing the customer to interact with the system on his or her own terms and schedule, slashing costs and expanding access. Fintech approaches also hold promise to expand access to the financial system for all Americans, especially for smaller-balance loans—consumer, student, small business—where traditional underwriting is inefficient.
Fintech certainly poses obvious challenges: new competitors, new technology and threats to existing customer relationships. Fintech offers enormous opportunities that may be harder to see and challenging to execute but are still critical, including new and more efficient ways of doing business, new products to offer to customers and deeper customer relationships.
The balance between opportunity and threat may be a close call for the largest banks, since they dominate the product lines like consumer lending that fintech companies have targeted. For the community banks we serve at BancAlliance, the opportunities, if pursued, far outweigh the threat. Community banks have long since lost share to bigger banks in markets like consumer lending because, individually, they lack the scale required to make the investments in systems required to compete. Fintech fundamentally offers to democratize access to best-in-class lending platforms, allowing all banks—not just the largest—to compete to serve their customers.
This article was originally featured in Bank Director’s 2016 3rd Quarter print magazine.