I never believed that fintechs would conquer banking.
Lest you think this is a statement I’m making with the benefit of hindsight, let me quote the abstract of the op-ed I published in JIBC in 2012:
Digital pundits and research analysts regularly gush about the slew of innovative financial products launched by nonbanking financial services providers almost daily. They’d have us believe that unless traditional banks match the new players with equal degree of innovation, they face extinction. In this paper, we present the counterview that banks have little to fear from these new kids on the block.
You can find my article at Research & Intellectual Property.
So, even as far back as eight years ago, I called BS on the “fintech will disrupt banks” claim.
The hottest fintech categories are Online P2P Lending, Neobanks, Mobile Payments, Virtual Cash.
Online P2P Lending fintechs like Lending Club and PROSPER made waves by sanctioning and disbursing loans in minutes without any documentation or branch visit. But they addressed the high-risk, subprime customer segment that anyway didn’t qualify for loans from traditional banks. So, these fintechs were anyway not eating the banks’ lunch at their inception.
It’s cool to talk about financial inclusion, banking the unbanked and all that nice stuff but, end of the day, loan is not a birthright. Loans need to be collected. If you can’t do that, no amount of innovation in granting the loan is going to help you.
Banks have drastically cut down on loans to SMBs. Online lenders don't need innovation in lending but in recovery of outstandings.
— GTM360 (@GTM360) December 22, 2015
Online lending fintechs have learned that lesson the hard way. Many of them have shut down. Some, like Lending Club, have seen massive erosion of their enterprise value.
"LendingClub, which went public in 2014 at a market cap higher than all but 13 US banks has since lost ~90% of its value." ~ https://t.co/gPavmqC0zR via @business .
Moral of Story: You can't build a business out of giving a loan to someone just because they need it.
— GTM360 (@GTM360) December 27, 2019
The brutal reality emerging from the Lending Club debacle is that a fintech can’t create a sustainable business by giving out loans to every Tom, Dick and Harry who asks for it.
Amidst threats to their own survival, disruption has become a lost dream for online lending fintechs.
Let’s move on to the other hot fintech product categories. Most of them run on top of banking rails or banks. Without banks and banking rails, fintechs peddling checking account, debit cards and mobile payments will be dead in a minute.
For all their proclamations of “getting” Millennials, not being straitjacketed by legacy systems, using the shiny new technologies, and so on, fintechs completely missed a few basic consumer behavior traits that are applicable across generations, as I highlighted in Banks Have Nothing To Fear From Neobanks; and failed to get what customers really want, as I highlighted in When Will Fintechs Sell What Consumers Want To Buy?.
It’s amazing how fintechs managed to pull wool over so many people’s eyes that they will conquer banks.
It was never gonna happen. It hasn’t happened. It won’t happen.
But that’s no reason why fintechs should stop chanting the disruption mantra, as I’d mentioned in Fintech Shouldn’t Stop Chanting The Disruption Mantra.
UPDATE DATED 13 JANUARY 2020:
Here’s a nice take on why fintech challengers may not conquer banking after all: https://thefinancialbrand.com/91736/fintech-challengers-banking-legacy-community-bank/