OBSERVATIONS FROM THE FINTECH SNARK TANK
“What? Over? Did you say ‘over’? Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor? Hell no!” —John Belushi as Blutarski in Animal House
An article in The Telegraph titled The phony ‘fintech revolution’ is eating itself offered the following points as evidence of the shortfall of fintech promises:
- Falling market valuations. Klarna and Robinhood (two-time Fintech Loser of the Year on this blog’s annual list) have seen their market valuations fall significantly.
- Un-disintermediation. According to the article’s author Matthew Lynn, “the peer-to-peer lenders that promised to cut out the middlemen have more or less given up on their original idea.”
- Challenge-less challenger banks. As Lynn writes, “challenger banks have failed to crack the monopoly of the big four [presumably UK banks], collecting a few customers with easier-to-use technology but little more.”
The crux of Lynn’s argument is this:
“A decade after the term entered the mainstream, “fintech” has promised a lot but delivered little. Unlike retailing or media, the internet doesn’t change the way finance works in any very significant way.”
Yes, The Fintech Hype is Overstated…
Having published an article titled The End of the Neobank Era, I’m inclined to agree with Mr. Lynn on his point about the challenger banks (where, in the US, they’ve amassed a ton of customers but only a few ounces of revenue and profits).
And yes, some fintech people have overpromised and made outlandish claims about how fintech would improve financial inclusion or how it’s more “ethical” than traditional banking.
For an example of the latter, see the article Is Fintech More Secure than Traditional Banks? in which the author asserts, “fintech is better than traditional financial companies because challenger banks focus on securing the data of their clients using technology. Traditional banks are slower than challenger banks especially the issue of adopting cybersecurity measures.” Not true, and not even grammatically correct.
…But Fintech’s Impact on Banking is Underestimated
Basing the contention that “whole sector is flimsy,” as Mr. Lynn does at the end of his article, on falling market valuations and the pivoting of P2P lenders, ignores the lasting impact that fintech has had on the banking industry including:
- Data sharing. I can’t help but wonder how long it took Mr. Lynn to open a checking (current, in the UK) account or apply for a loan back in the pre-fintech days. The real innovation in accelerating the speed with which accounts are opened has been the advent of data aggregators who have made data sharing feasible and easy.
- Personal financial management (PFM). Banks’ deployments of PFM tools were a dud. Few consumers used the tools, and those that did were hard pressed to say how budgeting and expense categorization impacted their financial lives. But the emergence of fintech-based tools that automate savings, manage subscriptions, analyze and even negotiate bills breathed new life into PFM. According to Cornerstone Advisors, Americans saved $10 billion in 2021 using automated savings apps.
- Payments proliferation. I bet that pre-fintech, Mr. Lynn (like the rest of us) made payments predominantly with cash, by check, or with a credit or debit card. Fintech has expanded the number of payment options immeasurably. In the US, consumers keep roughly $10 billion each week in merchants’ mobile apps to make payments. We now pay each other with Venmo, Zelle, Facebook Pay, Apple Pay, Cash App, and other tools. Buy now, pay later (BNPL) may be at the top of the list things ruining civilization, but Americans made $100 billion in purchases using BNPL in 2021.
- Product distribution. The emergence of embedded finance—where financial products are seamlessly available from non-financial firms—has made it cheaper and easier for consumers to obtain financial products, and has actually expanded the number of customers and geographic scope for mid-size banks. Banks pursuing a BaaS strategy have achieved higher ROA and ROE than the industry average.
- Small business funding. A study published by the European Central Bank titled The real effects of FinTech lending on SMEs found that firms with access to fintech increase leverage and substitute long-term bank debt with fintech debt which allows them to preserve financial flexibility, reduce their bank dependence and exposure to banking shocks.
- Small business everything. The emergence of small business platforms like Square and Shopify has transformed not just the way small businesses take payments but how they manage every aspect of their business including banking and borrowing.
The Meta-Impact of Fintech
Anyone concluding—as Mr. Lynn does—that “technology doesn’t make much difference…vast amounts of money has been spent on flimsy ideas that don’t really work” is simply not looking at the big picture, and is just cherry picking the bad apples.
Fintech has fundamentally changed the supply and demand for financial services.
Fintechs haven’t replaced traditional financial services firms—they’ve introduced new products and services to the market—like the PFM tools described above—even if, as Mr. Lynn asserts, “incorporating a debit card onto a phone doesn’t count.”
With 30% of Gen Z and Millennial Americans now calling a fintech their primary checking account provider, it doesn’t matter whether or not they’ve introduced new innovative products or not. They’ve captured market and mind share.
And the demand for fintech has increased demand for financial services, altogether. According to Cornerstone Advisors’ research, 40% of consumers between the ages of 21 and 55, subscribe to fintech services, with half spending $10 or more each month, for a total of $13 billion annually.
Just as it wasn’t over when the Germans bombed Pearl Harbor (according to Blutarski, at least), the fintech revolution isn’t over just because the valuation of two companies (Klarna and Robinhood) has declined.