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No, the fintech threat hasn’t faded for incumbents

Sorry Moody’s, but the fintech boom is barely getting started. Here’s why.

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This week Moody’s claimed the fintech threat for big banks had faded. 

The reasons for this centred on an apparent drop in funding and tighter regulations, while at the same time, incumbent banks had turned a corner and “stepped up” to the digital challenge. 

"Fintech momentum has slowed amid funding woes and banks have upped their game in response to the fintech threat. Banks have enhanced their digital offerings and expanded their capabilities organically, through partnerships or acquisitions. Moreover, they have access to stable deposit funding given their well-established brands and customer relationships," says Stephen Tu, a Moody's Vice President and Senior Credit Officer in a report.

No doubt there is truth to all three of these arguments but, the overall message is incorrect. Banks need to pay attention to their nimble opposite numbers more than ever.

Innovation in banking and finance has permanently de-coupled, from larger institutions, if ever was coupled. Fintech is to banking in a manner akin to biotech and big pharma and healthcare. 

Yes, fintech funding was down in 2022 compared with 2021. But, VC volumes are still sky-high when compared with 2019 and beyond.  

There is now a much greater acceptance of the notion startups can very quickly take on a centuries-old financial institution. The fintech industry has now established a system producing founders and investors to back them.

No doubt, many global banks are doing well off the back of improving their digital game and a rising interest rate environment. Growth rates are nothing in comparison to digital competition. Both in terms of revenues, customers and the speed of shipping products. 

Nubank, for example, has seen its profits surge in recent months. The listed Latin America neobank clocked up a profit for the first time in the fourth quarter of 2022 as it began to sell core products such as loans to its rapidly swelling, and previously underserved customer base.

When fintech began to emerge in the years following the 2008 financial crisis, it not only offered consumers and businesses a new way to access financial products and services, that was often faster and cheaper than traditional banks but also an attractive narrative. 

This centred on the idea of ‘disrupting’ the banks, the apparent architects of a broken economy where unemployment was rising and taxpayers were having to foot the bill. 

Despite some initial scepticism from the banking industry, fintech has thrived as the most popular sector for venture capital investment year after year. Banks’ involvement in the sector also has grown ever stronger, taking on multiple different guises from investor, partner, acquirer and also ‘intrapreneur’ with insiders launching their own fintech ‘startups’ inside organisations. 

Fintech has made financial services more accessible to people who were previously underserved or excluded by traditional banks. 

Fintech firms have used digital platforms to offer loans, investments, and other financial products to individuals and small businesses that may have been turned down by banks due to lack of credit history, low income, or other factors in ways that banks have copied.

Fintech has also made financial services more efficient and lowered marginal costs. 

Moody’s Tu does add in his report that “a few” fintechs will survive and thrive. But this seems to underestimate the longevity of the sector. 

Of course, fintech is not without its challenges. As fintech firms have grown in size and influence, some have become subject to the same criticisms as traditional banks. For example, concerns have been raised about the potential for fintech firms to engage in predatory lending, data breaches, and other forms of misconduct. It is important that regulators and consumers remain vigilant in holding fintech firms accountable for their actions.

Fintech is not a passing fad, but a significant force in the financial services industry. The benefits of fintech are clear and the rewards for bringing them to consumers are still huge. Its impact will only continue to grow in the coming years. Big banks should keep a permanent eye on fintech. If not two.

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