Banks are dying, fintech is thriving and credit unions are doing just fine, thank you.
That’s a simplistic view of the current financial landscape. But after the storm clouds have passed, banks and fintechs are likely to settle into a series of partnerships that will redefine the banking system.
To get a peek at banking’s future, just take a look at the health care industry, which is now going through a similar digital revolution.
The health care system is riddled with excess capacity, huge legacy costs, out-of-control expenses and regulations even more onerous than those in banking.
And just as in banking, high-tech startups are shaking up the healthcare system. Goldman Sachs predicts that digital technology will revolutionize the health care industry by increasing access to diagnostic care, treatment, and preventative care, which will dramatically cut costs. Physician-patient relationships will change forever as caregivers employ remote patient monitoring, behavior modification and tele-health programs (telecommunications technologies that offer a wide range of long-distance diagnosis, management and education to patients and professionals.)
The major players — healthcare providers, physicians, insurance companies — are counting on “healthtechs” to squeeze friction and expense from health care practices. But Goldman Sachs does not expect brick-and-mortar institutions to disappear anytime soon: after all, people still need to see doctors in person. Hospitals are likely to become health-care hubs, bringing together a plethora of innovative technology. Hospitals will buy or contract with healthtechs to expand their reach.
Banks could go through a similar process. National banks will continue whittling down their number of brick and mortar branches while buying out or contracting with fintechs to provide innovative financial services. Banks will find it easier, cheaper and faster to contract with fintechs to update personal management software and create breakthrough services than managing the process themselves.
Community banks will likely join national bank networks or independent networks to access the latest fintech services. Some will simply buy generic fintech services and brand it with their own logo and personality.
It’s an arrangement that would works well for banks and fintechs. Large, lumbering banks do not foster innovation. They can’t respond quickly to emergent threats or changes in consumer preferences. And they’ll never achieve the efficiency of startups unburdened by legacy costs.
On the other hand, fintechs tend to be nimble, consumer-centric and cash-strapped. Access to a bank charter gives fintech firms opportunities for expansion and a physical network that customers value.
In one fell swoop, national banks would bolster their presence in areas in which they have been deficient such as peer lending, robo-advising and payment transfers. They would also increase their presence in underbanked and unbanked markets.
Some people assume that the growth of fintech companies must necessarily come at the expense of traditional banks. That’s not the case. Steve Williams, co-founder of bank consultants Cornerstone Advisors, put things in perspective in a post on the blog GonzoBanker. While the top 10 Internet banks including Ally Bank, USAA and Capital One have grown $175 billion in new deposits, in the past six years, the banking industry overall has grown $2.85 trillion in deposits, according to data from the Federal Deposit Insurance Corp. This means “major digital players have garnered approximately 6% of deposit growth in the last six years,” he writes.
These figures put the threat posed by digital upstarts into perspective. Fintech firms are growing quickly, but they are in the embryonic stage. Their assets are minimal next to the $15.3 trillion held by U.S. banks.
Fintech firms may see themselves as Davids in a fight with Goliath — disruptors poised to upset the traditional banking world. But that’s not reality. Banks and fintech companies are destined to work well together in a symbiotic relationship in which each benefits from the other.
And if they can’t settle into a comfortable arrangement, the Goliath banks have the funds to buy out fintech companies long before startups with limited resources and no bank charters would be able to topple them.