Anyone can be a bank these days. I came across this idea in a Reuters article. The article is devoted to the coexistence of embedded or invisible finance, that is fintech, and traditional financial institutions — banks. The authors note that new entrants to the payments market generated 8% of worldwide revenue in 2019, while banks are losing revenue from payment transactions. Is fintech conquering banking territory? I wrote about this in a new blog.
The technology company Square is worth $113 billion, which is more than the most expensive bank in Europe — HSBC ($105 billion). Another example is Shopify. It is valued at $186 billion, $43 billion more than Royal Bank of Canada, the country’s largest traditional lender. That is, today some big fintech companies are worth more than some big banks. Some big banks like JPMorgan are investing $11 billion a year in technology, and investors generally have poured nearly $100 billion into fintech in the first half of 2021. What changes do these numbers indicate?
Of course, banks still handle most of the transactions, but investors and analysts believe that traditional lenders are at risk of being pushed away from the start of the financial chain. More and more non-bank companies are offering financial services such as bank accounts or wallets, payments, and lending. Looking at the above figures, we understand that banks need to act quickly and look for a niche in the market. What does it mean?
Most fintech comes out with strong proposals for those processes that banks, which have not yet become technological, are doing worse so far. The tech platform advantage was well described by Kaz Nejatyan, VP of Commercial Services at Shopify:
“No merchant comes to us and says, I would like a loan. We go to merchants and say, we think it’s time for funding for you. We don’t ask for business plans, we don’t ask for tax statements, we don’t ask for income statements, and we don’t ask for personal guarantees. Not because we are benevolent, but because we think those are bad signals into the odds of success on the internet”.
Thinking differently is what separates traditional banks from strong tech players. And this difference confirms that fintech is not trying to replace traditional financial institutions. They are shaping a new approach. Shopify and others complement what banks are doing badly online or not doing at all.
Banks monitor and understand that customers today are diversifying their consumption. Consumers began to use a specific service for a specific purpose, to issue several bank accounts. Most users use their main bank to pay wages, mortgages, and overseas payments. They use an alternative bank for their day-to-day expenses.
This is a new world, joined by thousands of companies providing niche services in the payment ecosystem. So yes, Shopify and Stripe are growing, but they are specialists in their system. Revolut and Chime are doing well, but they don’t challenge the old banks, they do day-to-day banking. Meanwhile, traditional banks remain in their positions. True, their profits are eroding as margins on foreign exchange, transactions, day-to-day banking, and more pass to new players.
So yeah, now everyone can do banking. And the competition that has arisen in the market serves the development and expansion of services for the convenience of users. Traditional banks remain central players in the ecosystem. The only thing is that now they do not bring such a big profit.