The way I see it, the answer to the question in the title of this post depends largely on the definition of Fintech.
When the sector emerged, Fintech was defined as a new age financial technology startup that offers checking account, loan, stock trading, and other financial services products *directly to consumers* and has the necessary regulatory permits for doing so *without* partnering with a conventional Bank. By definition, a Fintech acquires and owns the customer relationship. Fintechs were supposed to kill Banks with lower fees, superior UX, and so on. Examples: Chime (bank account), Lending Club (online P2P lending), RobinHood / Zerodha (stock trading). Going by this definition, it’s a no-brainer that Banks and Fintechs compete with each other.
OTOH, some people (not me) define Fintech suppliers of core banking system, payments solutions, loan origination software and other financial services technologies to banks but has no financial services products of its own. Examples: Fiserv, IBM, Infosys, Opus Software, i-flex solutions / Oracle Financial Services Software. (I call this Fincumbent, not Fintech). Going by this definition, it’s a no-brainer that Banks and Fintechs collaborate with each other.
If Fintech is defined as Fintech + Fincumbent, then Banks and Fintechs compete in some areas and collaborate in some other areas.
I’m not very sold on the notion that unbanked population constitutes a large market for Banks and / or Fintechs. If having a basic checking account is the sign of being banked, then, IMO, there isn’t much unbanked population. OTOH, if getting a loan is the sign of being banked, then, certainly, the size of unbanked population is large – but it does not necessarily constitute a large addressable market for anyone. Not to be rude but loan is not a birthright. Lot of people may need a loan but that doesn’t mean that they qualify for one. Banks and / or Fintechs can’t necessarily create a viable business out of giving loans to all those people just because they need a loan and are currently not getting one. IMO, that’s the key lesson to be learned from the GFC and, subsequently, the 90% drop in market cap of online P2P lender Lending Club since its listing.
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If we take the classical definition of Fintech, Fintechs compete with Banks. My prediction on the future outlook of Fintech versus Bank:
Banks are way ahead of Fintechs in terms of revenues, profits and customer numbers. I don’t expect that gulf to be bridged by Fintechs in the forseeable future.
Banks will never catch up / beat fintechs on User Experience of apps, as highlighted in https://gtm360.com/blog/2020/01/08/why-banks-will-never-catch-up-with-fintechs/.
Banks will be way ahead of Fintechs on Market Cap of the total sector.
But Banks will lag behind Fintechs on Market Cap / Revenue, P/E ratio.
Revenues and Profits are zero-sum. Market Cap is not.
Revenues and Profits come from a real market. While that market may grow by 5-10% per year, it’s still a finite figure. Whatever Revenues and Profits gained by Fintechs has to come at the cost of loss of Revenues and Profits for Banks.
Market Cap is a derived market, especially when you take the private markets in which Fintechs raise funds. If I invest $1M for a 2% share of equity in a company, the company’s market cap is computed as 1/0.02 = $50M. Nobody needs to invest the full $50M for the company to claim its acclaimed market cap of $50M, just a thin sliver of investment will do. If you argue that my $1M is finite, I agree, but I can always split that into two parts, invest $500K in two companies for 1% share each, then two companies would emerge, each claiming a $50M market cap, so a total market cap of $100M will be generated. Therefore, even if investable amounts are finite, the resultant market caps are virtually infinite. Market Cap is not zero-sum.
A Fintech can enjoy a huge market cap, even in relation to a specific Bank or two, but that doesn’t hurt the Bank. Both Fintech and Bank can enjoy their own Market Caps, however high or low they are. Fintech’s high market cap does not come by taking away any market cap from Bank. Fintech’s higher market cap does not mean Bank’s lower market cap.
But Fintech’s higher Revenue and Profits does mean Bank’s lower Revenues and Profits. A Fintech will really hurt a Bank only when it generates adequate Revenue and Profit that was formerly earned by Bank. That is not happening yet.
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Indian Lending Scene. https://www.finextra.com/blogs/fullblog.aspx?blogid=18348
Sorry but you’ve misread the lending market in India. It’s not that “Bank has largely failed to adapt to the needs and the reality of its surroundings”. It’s that banks have learned from past lessons and created this reality. Loan recovery is a huge challenge in India. Many banks and NBFCs went aggressive in consumer loans 10-20 years ago and burned their fingers – even shut down – when delinquent outstandings went through the roof, and they had little or no hope of collecting on them e.g. Citi, Barclays, Fullerton. That’s why, this time, they choose to lend wholesale to fintechs. Only time will tell how Fintechs will fare when it comes to recovery. At least, if they fail, taxpayer’s money won’t be used for bailouts. So, by staying away from subprime loans, which form the bulk of fintech’s portfolio, banks are behaving responsibly.
That said, when it comes to lending to prime borrowers, many banks match the CX of fintechs.