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The Fintech revolution: The end of banks as we know them?

Sergio Schmukler's picture

The retrenchment and intensified regulation of the traditional banking system after the global financial crisis, combined with greater access to information technology and wider use of mobile devices, have allowed a new generation of firms to flourish and deliver a wide array of financial services. What does this mean for the traditional banking system?

In the Global Financial Development Report 2017/18 and a new Research and Policy Brief, we argue that despite the rapid expansion of fintech companies, so far, the level of disruption seems to have been low. This is partly driven by the complementarity between the services provided by many fintech providers and traditional banks. That is, in many instances, the new fintech companies bring alternative sources of external finance to consumers and SMEs, without displacing banks. For example, online lending is an alternative for the type of borrower usually underserved by traditional banks. This is of special relevance not only for households and firms in the developing world (where the banking system is often underdeveloped), but also for underserved borrowers in high-income countries. Moreover, because a bank account is needed to perform many of the fintech services, it is hard now to imagine fintech companies overtaking banks completely and becoming involved in the current accounts niche. There will always be need for a highly regulated service that allows households and firms to keep their money safe and accessible. Banks seem to be the players best suited for that role.

The trend toward digitalization and technological innovation will likely reshape the global financial sector and the ways in which financial companies interact with their customers. The proliferation of mobile devices, new demographics, and the rise of fintech providers are the driving forces in this development, fueling the emergence of new solutions and products that better address customer needs by increasing accessibility, speed, and convenience. As a result, customer expectations regarding financial services are increasing, and banks will find it difficult to control all parts of the value chain using the traditional business models.

Some global banks appear to be shifting their distribution channels from brick and mortar operations to nonphysical channels, which will probably be the main channel of interaction between banks and consumers in the future. Banks also seem to be shifting toward viewing fintech companies as partners and enablers rather than disruptors and competitors. Incumbents are realizing the need to take advantage of fintech capabilities to grow business, retain existing customers, and attract new ones, some of whom were previously unbanked. Meanwhile, without access to a client base, client trust, capital, licenses, and a robust global infrastructure, the new fintech companies will discover that there are limits to their growth. Collaboration between incumbents and new players is already taking place, and incumbent financial institutions seem to be pouring increasing amount of investments into the fintech sector through fintech acquisitions, investment funds, incubators, and accelerators.

For more details, please see:

Juan J. Cortina and Sergio L. Schmukler, 2018. “The Fintech Revolution: A Threat to Global Banking?” Research and Policy Brief No. 14, The World Bank.

World Bank, 2017/2018. “Cross-border Lending by International Banks.” Chapter 3, Global Financial Development Report (GFDR).