I am struck by how often I’m asked whether fintech will put banks out of business. To some, banks now look ill-equipped to deal with the challenges ahead. However, I believe that this is a dangerous assumption to make.
It’s easy to criticise banks for appearing to be slow off the mark. After all, three UK marketplace lenders, including RateSetter, have each lent more than £1bn in the space of just a few years and gained a foothold in the previously closed world of lending.
However, history shows that banks are masters of survival.
Look at the FTSE 100: a few companies like Associated British Foods (founded in 1935) and Royal Dutch Shell (founded in 1907) have had respectable innings, but banks blow them out of the water: Barclays was founded in 1690 and has survived the industrial revolution, the fall of the British Empire, two world wars and, by my count, 12 UK recessions.
FinTech is clearly changing the landscape but we’d be naïve to assume that institutions that have traded through three hundred years of turbulent history will allow themselves to slip into irrelevance. Banks might appear slow and complacent, but institutionally they act shrewdly and deliberately.
I saw an example of this at Davos this year. Representatives from several banks including Citi, Barclays, Standard Chartered ventured out of their cosy conference centre through the snow to share a nightcap with a handful of UK fintech pioneers. Why? They recognise the rapidly growing importance of the fintech sector.
While the banks rarely publically endorse fintech – don’t expect a bank to welcome bitcoin deposits any time soon – they are watching it keenly and, in many cases, looking at how they can get more involved.
A symbolic example of this gap between their public and private approach to fintech is the case of Wells Fargo which was ridiculed when it asked staff not to invest via marketplace lending platforms in early 2014. A couple of months later, Wells Fargo made a lot of money when Lending Club listed – it turned out to have been an early equity investor via a fund it had backed.
I heard one bank executive concisely say that banks did three things: offer a store of value (i.e. deposits), move money around (i.e. payments) and provide capital (i.e. lend). The first two are like fortresses - highly regulated and rightly so, because society needs to feel sure that stores of value and payments are rock solid. This will provide a moat for banks.
The last one - aggregating capital and lending it out - seems most at risk of slipping out of the bank’s control: after all, investors riding the ups and downs of lending do not pose a systemic risk and so the level of certainty needed is less. This gives marketplace lending a great chance of establishing itself as a mainstream way of connecting supply and demand of risk capital. We often argue at RateSetter that marketplace lending is healthy because it matches risk capital with risk assets - it was good to hear someone from the banking establishment echo these thoughts. It is perhaps more obvious why a bank is well placed to perform the role of safekeeping deposits and payments, but why should banks be the major facilitators of lending?
A fintech revolution is clearly taking place, but it would be folly to assume that banks will sit idly by while their model is disrupted. They will adapt. I am not sure they will be able to keep marketplace lending down because it offers so much value to the end users but they will certainly defend their patch – banks are often called “dinosaurs”; let’s not forget that it took millennia for dinosaurs to become extinct.