Due to the unprecedented technological revolution, banks are rethinking the way they offer services. The smartphone has revolutionised people’s lives, and it now has central importance in the financial brokerage services. Giuseppe Vegas, an Italian politician and economist, delineated a system of disintermediating relations between those who demand money and those willing to lend. In a few years, it will be possible to carry out all banking operations through the internet thanks to fintech startups. Peer to peer lending is one example. The underlying idea behind this tool is disintermediation. That is, giving the possibility to private individuals to lend to other private individuals via corporate or social lending sites without going through the traditional channels represented by authorised financial intermediaries under Article 106 of the Single Bank Act, Legislative Decree No. 385 of 1993 (banks, financial companies, etc.).
This type of operation was initially developed in England by the Zopa website, which in 12 years has provided $800m in loans without resorting to bank credit. In this scenario, there are new opportunities, but also risks arising from insufficient regulation.
Keep Up or Be Left Behind
In a few years, all banks will have to rethink their business, which is already unprofitable, especially for Italy compared to other European Union countries. Consob President has repeatedly expressed his view on this. His opinion is that revolution could pose dramatic bankruptcy problems if adequate and rapid adaptation aren’t made. Moreover, fintech’s network moves into a sort of regulatory limbo that promotes action. This represents the exact opposite of what is happening in the traditional credit system that has been the object of regulations many times.
For these reasons, it is imperative to regulate all the new phenomena that are occurring. This must be done gradually and proportionately to accompany the emerging companies in their development through specific rules. If this principle will not be adopted in the regulation and if the same discipline applied to the financial system were applied today in the fintech, it would mark the end of all fintech companies. Shortly, fintech’s new reality with the old financial intermediaries will have to coexist, and this represents a vital challenge for the country and the industry. Any delay could result in a loss of competitiveness.
The Evolution of Fintech
According to Goldman Sachs’s Global Head of Fintech, Jeff Gido, three stages of fintech can be identified.
The first is the stage where startups are offered the services required by customers that were not offered by lenders. This occurred in the aftermath of the financial crisis and saw authorities, new technologies and consumer habits as protagonists. Also, after the financial crisis, the new regulations have made the bank businesses less lucrative, while large cloud and wireless service growth have allowed easier access to the banking world for startups.
In the second phase, banks realised that without innovation they could not survive in the long run due to the threat posed by startup businesses. They realised that fintech companies are trying to enter the core banking business, that is, banking, after having won the PayPal. That’s why they started to innovate using their brand and infrastructure to remain competitive on the market. Recently, Bank of America, Capital One, JP Morgan Chase, U.S. Bancorp and Wells Fargo have created Zelle, an instant payment service. Goldman Sachs has instead launched GS Bank, an online banking service.
Lastly, in the final phase, companies and banks will have to cooperate and not compete to avoid being crushed by tech titans like Google, Amazon and Facebook. Startups have the advantage of being able to innovate much faster than a bank can, but they cannot easily access data held by lending institutions and do not have the necessary financial resources. Banks’ weaknesses, on the other hand, are the main strength of startups, that is being able to capture new generations of clients. For this reason, many incubators are being promoted by the big financial institutions.
In addition, collaboration could be beneficial for both parties, such as cost savings for banks to build new technologies and the possibility to access to more resources for the startup.
Fintech in Europe
At the European level, this subject has already begun to be regulated. Recently, the European Union has amended legislation regulating the payment market allowing startups to access customer data from financial institutions. This legislation will enter into force in 2018, legitimising fintech as a respectable financial competitor to traditional institutions.
According to the Financial Times, most banks are concerned about security and the increase in their responsibility towards customers. The European Commission President Valdis Dombrovskis, on the other hand, believes that this will bring more competition, innovation and consumer benefits. Conquering millennials is the real challenge for lenders for the coming years because they are the main customer of the future due to the generational change.
Nevertheless, according to the American magazine Time, the behaviour of financial institutions concerning young people is still ambiguous. Jamie Dimon, the CEO of J.P. Morgan Chase has repeatedly tried to warn the banking world by saying, “Silicon Valley is coming up with innovative solutions in the thinking for a new consumer audience.” According to research conducted by Viacom, a multinational entertainer, 75% of American millennials would prefer to entrust their savings to companies such as Google or PayPal rather than depositing them at a traditional bank. Despite this, through mobile banking, the situation is changing, but startups continue to innovate faster and not allow banks to recover the gap. To do so, it is necessary to raise awareness among credit institutions on these issues so that they are more willing to invest in fintech. Resources, capabilities and tools are already available, now there is the only need of the willingness to understand the new ways to create value.
Changes could be introduced through mergers, acquisitions and incremental innovations that would help the gradual diffusion of the phenomenon without excessive upheaval. Issues such as turnover and redundancies have to be tackled and banks’ technological delays must be met in order to present more attractive plans for institutional investors.