FinTech is Taking a Bite out of Banks
Bankers have been in the hot seat thanks to a wave of scandals, ushering in the departure of Wells Fargo’s (NYSE: WFC) CEO and driving Deutsche Bank’s (NYSE: DB) share price below even financial crisis levels. On top of that, while revenue and earnings at most of the major banks have been topping analyst expectations, they’ve also generally been down compared to last year. The Fed dragging its feet on interest rates has depressed bank profits, and what growth there has been has mostly come from trading and fees, as evidenced by the recent earnings reports.
A big problem, though, is that banks have also been dealing with some unfamiliar competition over the past few years. Financial Technology (FinTech) companies, which aren’t traditional banks despite being subject to many of the same regulations, are disrupting payment systems, money management and even lending. On the loan front alone, FinTech outfits like LendingClub (NYSE: LC) are gobbling up market share. While they only financed a few billion dollars’ worth of loans in 2013, it’s estimated they made between $20 billion and $40 billion last year. Many analysts believe that the FinTech share of the lending market will continue to grow and could hit $90 billion by the end of the decade.
As FinTech takes a bigger and bigger bite out of the $3.5 trillion consumer lending market, banks are starting to feel the pressure. That especially true since FinTech lenders also make a lot of loans to lower-credit borrowers which, while carrying more risk, also tend to be much more profitable.
FinTech outfits are also cutting into what were once reliable revenue streams for by banks by launching new payment services serving merchants, who are often frustrated by all the paperwork involved in setting up new systems. On top of that, banks also charge fees for their services which quickly add up and it can often take days for merchants to collect monies charged to credit cards. There are several FinTech firms out there streamlining those systems and, since they don’t have a big infrastructure of other services to support, can do it more cheaply.
Wealth management is another area where FinTech is taking a big bite of what was almost solely the purview of banks. Instead of going into a bank and talking to someone in a business suit who may be biased towards steering you into one of the bank’s proprietary funds, you can download an algorithmically developed “robo-advisor” app on your phone and invest without ever talking to a human being. A bevy of robo-advisors have shot up, ranging from Betterment and Folio to Wealthfront, most of which are cheaper and less hassle then dealing with your bank.
They also have a lot of appeal to millennials who, after the financial crisis, have developed a distrust of traditional wealth advisors and buy into the idea of index investing. My generation is also notorious for always having their phone in their hand, so offering investment management through an app makes it almost irresistible.
Although there isn’t firm data on just how much money these systems are managing – most are private and don’t have to report that kind of information – considering how many major banks and other financial players are buying them up is a clear indication that they’re the wave of the future. Over the past couple of years Northwest Mutual has acquired Learnvest, BlackRock bought Future Adviser and Vanguard, and Fidelity Investments and Charles Schwab have each launched robo-advisor services of their own.
So, banks aren’t just fighting a battle against bad PR or struggling against stagnant interest rates. They’re also fighting against the disruptive effect of technology, which is only going to get worse as FinTech grows and matures and will continue eating into bank’s traditional profit centers. None of this is to say that banks are an inherently bad investment – I own a few banks stocks myself – but growth is going to be much harder to come by in the future.