This has created a host of start-ups intent on stealing market share from old-school banks. However, the banks are not lying down, and much of the easiest money for the start-ups may already have been made.
Two issues are driving fintech: 1) maintaining (or gaining) control of customer relationships and, 2) for banks, cost cutting is critical in a world of low growth, low rates and low profitability.
Fintech is seeing three areas of growth:
- Mobile money, (money transfer, mobile banking, payment processing) is growing quickly.
- Consumer lending (Lending Club, Prosper, SoFi) and small-business lending (Kabbage, OnDeck), is growing, but at a slower rate due to funding capacity issues.
- Personal finance management, which includes robo-advisors like Betterment and Wealthfront, is growing too, but it is proving difficult to build brand, trust and relationships in this space.
In all these areas, the the potential market is huge. For example, just in personal finance management Citi notes that the global mutual fund business is $30.4 trillion in assets under management, the global ETF business is $2.6 trillion, but robo-advisors have only $20 billion of that!
Still, the growth has not been dramatic compared to the total market. For example, Citi estimates that only 1 percent of North American consumer banking revenue has migrated to a digital model.
So when do we hit the tipping point? When is there a notable migration to digital platforms? We've already seen how digital disruption has attacked music sales, video rentals, travel bookings and newspapers.
It may not be that far away. There is a point where early adopters proselytize, the technology improves, widespread media coverage of the new platforms takes place and somewhere when market share gets into the low teens digital disruption starts to take off.
Citi believes that as well. The bank expects the percentage of North American consumer banking revenue that will migrate to digital will accelerate to 10 percent in 2020 and 17 percent in 2023.
How will banks handle this challenge? There have been predictions, going back two decades, that bank branches will decline dramatically. But the drop so far has been modest, only about 15 percent since peaking in 2007, according to Citi. There may indeed be more downsizing, but you can bet bank staff will be retrained away from just taking your bank slips and moved into more advisory-based roles.
I believe that will happen, because big banks are not going to stand around waiting to get blown out of the water by PayPal, ApplePay, Wealthfront, Betterment, Lending Club, or anybody else who wants to steal their customers.
One of the main speakers at the Singularity University conference will be Catherine Bessant, chief operations and technology officer at Bank of America. She'll address what BofA is doing to keep up with the competition.
Bessant has a lot of high-level backing. For example, Bank of America CEO Brian Moynihan has said that BofA has processed $16 billion in mobile payments in 2016.
Several of the biggest banks in the country, including BofA, JPMorgan Chase, US Bank,Wells Fargo and Capital One formed ClearXchange several years ago to allow customers to transmit funds to anyone with a U.S. bank account.
If that's not a Paypal competitor, I don't know what is.
One thing is for sure: The consumer is going to benefit from all the competition. In a recent report, Canaccord noted that fintech competition will drive down bank profitability regardless of whether they take business from banks.
Free products from competitors will make it hard to charge for plain-vanilla products.
Where is all this going? Peer-to-peer lending and business-to-consumer lending are already well along. Small-business lending is also moving along, but larger-business lending faces higher hurdles due to the more complex nature of the transactions.
Citigroup has spoken of a third wave of innovation, an "industrial fintech" as it has called it, where financial transactions are incorporated into an internet of things (IOT). It speaks of a Fitbit for your financial life, where insurance policies adjust to your driving habits automatically, where smart meters in your home negotiate rates with utilities.
Wedbush analyst Gil Luria has noted that for IOT to work, there must be a mechanism for there to be an exchange of value.
"At some point, when your refrigerator wants to order milk, it's gonna have to pay for it," Luria told Investors Business Daily.
Could these technologies solve even bigger problems?
Greg Baxter, head of digital strategy at Citigroup, thinks so. He notes that the fastest-growing cost for financial firms is regulation, compliance and cybersecurity. He believes big data and advanced analytics can go a long way toward solving these problems.
Still, no one should think that some new utopia is about to be ushered in. There's plenty of things that can go wrong, and will.
First, no one is repealing the laws of gravity. This is still about moving money around, whether you are doing it with a checking account, a blockchain, or a digital bank account. Lots of things can go wrong no matter who is moving the money around.
Economic downturns will occur. Start-ups will go under.
Some new lending products will almost certainly collapse.
And wait until we see some kind of high-profile data breach or fraud on these platforms! You can be sure that regulatory scrutiny — which has been remarkably modest — will increase.
Lest you doubt anything could go wrong, look at the recent case of LendingClub, a peer-to-peer lender that was touted as being on the vanguard of the new lending movement.
The CEO was recently forced to resign abruptly because the company sold an investor a loan that didn't meet the investor's criteria, and he failed to properly disclose an investment.
LendingClub may be a new company but it relied on a very old model. It needed someone to buy the debt of its customers, and when the company announced these issues, buyers of the debt dried up. The stock dropped roughly 50 percent in about a week.
The moral? The laws of gravity are not repealed. Some fintech looks an awful lot like old fintech.