A point that is often raised is how slow banks are in adapting to technology and digital transformation. It is true that banks are challenged by the Internet age; financial systems were built for the last century, when trade focused on humans doing business in trading rooms and in branches. However, the idea that banks are going to let fintech steamroll over their current operations is just an illusion.
Banks have millions of customers, billions in capital, and centuries of history. This is their strength. They have poured billions of dollars into technology over the years and continue to do so. Admittedly, third-party systems are often cumbersome and out-of-date, but that is the challenge: overhauling systems to reflect the modern new age of distributing financial services as data through a network of software and servers rather than as paper through a network of branches.
Meanwhile, the fintech sun is rising, but most of its light is focused upon areas left dark by incumbent financial institutions. Much of fintech is about banking the unbanked through mobile wallets. Peer-to-peer lenders appear to be focused more on small businesses and higher-credit-risk borrowers than mainstream and Main Street banked clients. Robo-advisors now offer advice to those who previously received none, and payment companies like Stripe and Square are adding the overlay of an app and an API to an existing payment process that is not fit for that purpose.
In other words, fintech is either servicing the unserviced or fixing the fixable rather than disrupting, destroying, or disintermediating banks. This is why, even after almost a decade of investment growth, fintech has not spawned a single new bank in the U.S. In Europe, new banks are rising: Atom, Solaris, N26, Tide, Tandem, Fidor, Starling, Monzo, and more. These are called challenger banks, mainly because they are meant to challenge large existing banks. But they will not—their focus is on building niches, as all new banks start with no customers, limited capital, and no history.
To throw a dose of reality into the fintech fairy tale, the new world of technology in finance is all about adding to the existing financial system—not replacing or disrupting it, but supplementing it. That’s why we have so many bank hackathons, incubators, accelerators, and venture capital funds. Banks want fintech to rise. Banks, insurers, regulators, and investors recognise that the financial system servicing some, but not all, markets. That’s why the times we live in are so exciting, and why I often underscore the real change technology is bringing to our world: the inclusion of everyone in the network.
A decade ago, of the seven billion people on this planet, just two billion had fully functional bank accounts. Today we are seeing all of the people getting some form of financial inclusion through mobile wallets. Seven billion people can access the financial network today, compared to only one in three a decade ago. That is the real transformational moment that fintech is delivering, a vision far brighter than disrupting, disintermediating, or destroying banks.
So take note: Fintech is about a whole new world where everyone can trade and transact one on one, in real time and for almost nothing. This is the real revolution, and it is a fantastic change from servicing only some through a physical network.
The fintech revolution is about serving the world through software and servers that allow trade and commerce to flow like water, and I love it. I hope you do too.
For more on digital transformation in the financial industry, see Digital Disruption: Banks Have Their Uber Moment.