Many of fintech’s success has been around one vertical: i.e. stock trading, money transfers, insurance, POS, Robo advisor…etc This is understandable given that the industry is still young and some fintech companies target B2B customers with a hope of being acquired by large conventional institutions such as a bank. However, I am yet to see a fintech company that can replace a bank and am personally hoping to see one soon because it is the future that I envision for many reasons (two of the reasons are written in these links on fees and on software). In order for a fintech company to replace a bank, however, it needs to offer a one-stop solution rather than a solution to a single vertical and timing couldn’t be better (but it's running out fast!).
Transfer of wealth is happening
Until now, most of the fintech users have largely been young millennial with limited asset amount. For instance, the median age of ~20 million Robinhood users is 31with an average account size of $2,000. This is not small but that clientele is not the cream of the industry. The cream of the industry is by far the wealthy baby boomers, who benefited from the incredible economic expansion since the 1950s, with average account sizes in millions (in the UHNW sector, $10m is the minimum tier to open accounts). Interestingly, most of that wealth created by the boomers will change hand in the next decades. In fact, according to a documentary produced in 2019 based on Thomas Piketty’s Capital in the Twenty-First Century, the wealth transfer from the boomer generation to the millennial generation is expected to be in the tens of trillions (or $22T according to The Economist). This transfer of wealth will give the millennial generation an instant boost to their financial account. This means the millennial account owners who, until recently, had nothing more than a Robinhood account worth a few thousand dollars will face a need to manage their money in a much more sophisticated way.
Need for a one-stop-shop
In my opinion, in today’s environment, the lucky millennials who are entitled to such inheritance are likely to convert their investment account back to their conventional bank because it offers the convenience of the one-stop-shop which outweighs the benefit of the ‘trading-only’ mobile app.
In capturing this vast market, the future will unfold in one of the following two ways: 1) a conventional bank acquires and integrates a slew of fintech companies, essentially becoming a giant fintech company themselves OR 2) a massive winner in the fintech industry acquires other fintech companies in different verticals and offer the one-stop service. Although the likely scenario would be the former (because it is the incumbent and it already offers a one-stop solution), I think the latter still has a good chance of happening. Following reasons are why.
The conventional bank is essentially a public entity
Unlike the up and rising fintech companies, banks are used by virtually everyone in a society, regardless of your age and economic status. This can be a huge advantage because they already have a captive audience (some of them can be very sticky) but it can also hinder their innovation speed for two reasons.
- People who have limited access to technology (due to economic reason, age, disability…etc) will be expected to be taken care of by banks. This means the banks will need to maintain some level of conventional banking network, irrespective of its profitability. Therefore, the profitability of the banks may be behind those rising fintech competitors.
- In Canada, financial sector employees over a million people making it the 5th largest industry in terms of the number of jobs. Reducing this massive workforce will not be easy and this is another reason why fintech could win against the giant conventional banks. In the eyes of the public, the fintech companies will be creating jobs while the banks are being pressured to cut redundant jobs.
The solution to both roadblocks will inevitably involve politics and hence will likely drag on for years during which the fintech industry will be an increasing threat.
Old VS New infrastructure
Another advantage that the fintech companies have is that they are the hot and upcoming new thing while the conventional banks are the gorilla in the room. Once this perception settles in, it is no longer a battle between the David and Goliath but a battle between the Old and the New.
Similar to the previous point, it would be more difficult and costly for the conventional bank to adapt and integrate the new technology because it has the existing network at work. For instance, the new fintech company doesn’t need to worry about replacing the old procedure of handling paper cheques with electric payment system nor does it need to worry about operating the two systems simultaneously. All these existing infrastructures that are diminishing in value will be a major stall against the bank’s desire to innovate.
The best scenario is where banks and the fintech company can coexist without being a threat to each other too much. However, there is a good chance that one or two dominant players from the fintech industry will threat to redefine the financial industry as we know today just as Airbnb and Uber are redefining their respective industries.