THE FINTECH THREAT TO BANKS... AND THREE THINGS BANKS CAN DO

What is Fintech?
Financial technology, a.k.a. fintech, is defined as "the segment of the technology start-up scene that is disrupting sectors such as mobile payments, money transfers, loans, fundraising and even asset management."

Emphasis on the word "disrupting."

Fintech is rapidly disrupting financial services. From Silicon Valley, to London, to Tel Aviv, to Hong Kong, technology talent and funding are rapidly converging on the fintech phenomenon. According to Brett King on a December Breaking Banks podcast, nearly $70B flowed into fintech start-ups in 2015.  

Fintech has a lot of speed, a bunch of momentum, and plenty of funding.

Does fintech's rapid ascent threaten traditional banks?

Most everyone who has studied this question inevitably comes up with some form of "yes." While there is debate around the precise nature of what fintech's disruption of banking will look like, it is beyond contention that there will be significant impact.

Let's take a quick look at where money has been over the years, as well as where fintech could take it in the future.

A (Very) Brief History of Money
Money is any commodity that has agreed-upon value and can be used to exchange value between two or more people.

Shiny rocks and shells were the first money. Over time, precious metals became a common means of transaction, especially silver and gold. Those metals were eventually minted into coins, for ease of use. Centuries later, paper money came onto the scene. The first paper money was still linked to precious metals, acting as notes that could be exchanged for bits of those precious metals.

In the last century, something big happened - much of the world converted to fiat money. Fiat money is not tied to precious metals, nor to any physical commodity. Fiat currencies have value based on shared perceptions and a supply-demand curve dictated by an organization of decision-makers usually called "The Central Bank." 

Once a form of money is established, it usually stays around for a while. All of the historical forms of money still exist. In remote parts of the Amazon you can still buy a pet monkey with some shells. And almost all of us reading this article still use paper money and metal coins. Despite the plethora of vestigial currencies, we have arrived at the tipping point where money is evolving away from all of its historical mediums of exchange.

In short, money itself is changing.

Some Money Isn't Money Anymore
It's getting easier to use money that is different from.... well, money.

The rise of cryptocurrencies like Bitcoin is a phenomenon without precedent. Cryptocurrencies enable a near real-time, verified and private ledger of transactions between individuals around the globe without the intermediary of regulatory agencies or governments. Bitcoin does this using something called "block chain."

Cryptocurrencies are digital. One cannot go to a Bitcoin ATM and take out some Bitcoins. It doesn't work that way. Cryptocurrencies are virtual-only, not corporeal. And that is really new, and really cool.

Cryptocurrencies provide a glimpse into a future where digital-only currencies could replace the currencies that most of us use today. 

Some Banking Isn't Banking Anymore
It's getting easier to do banking without a bank.

Today, you can get a loan through crowd-funding instead of a bank. Crowd-funding is where individuals directly extend their own financial assets to a borrower. The funders research a lending opportunity and decide to give or pass. The fundee is evaluated based on how well she can represent her business case to the crowd of funders. The bank isn't at the table, at all!

You can also store digital money and perform transactions without a bank. Kenya's M-PESA is an example of fintech that enables individuals to store monetary value in non-bank accounts and perform transaction between mobile phones. It has been a huge success, achieving a level of penetration in Kenya that firms like Apple would love to have for Apple Pay.

Banking will increasingly be managed directly by people, without the direct involvement of banks and bankers.

Some Transactions Aren't Transactions Anymore
It's getting easier to perform transactions without doing.... much of anything.

Uber, the ride-hailing app, provides an excellent example of fintech's impact on transactions. At the end of an Uber ride, the payment takes place without the payee needing to do anything. The consent for the monetary exchange was given when the driver picked the rider up. No action required at the end of the trip.  Zip. Nada. Just say thanks and get out of the car. Easy peasy.

Contrast that with standing in a supermarket line where everyone ahead of you is counting coins to get to the exact amount for their purchase. Tedious!

In coming years, payments will continue to fade into the background of our lives. Payments may even disappear completely into a model of consent that will be as easy as whispering "buy it" into our smart glasses which know what we are looking at.

What Do Banks Need to Do?
It is not hyperbole to describe all of these changes being like a Fintech David squaring off with a Banking Goliath. Fintech promises to change banking, whether banks like it or not. Where fintech is the tip of the spear of a new order, banks are largely aligned with a fading old order.

As I see it,  banks face three options:

• Evolve - Some banks have acknowledged their dilemma and started to change how they function. To evolve, banks will need to change from being a place where any good idea takes 18 months and at least a million dollars to one that is lightweight, nimble and has customer experience front-and-center. For some banks, such a change may prove impossible. Others will be able to do it.
• Collaborate - A small group of banks have started to collaborate with fintech. This may provide the best future for all, where the size and resources of banks can benefit fintech, and the speed and agility of fintech start-ups can benefit the banks. A noteworthy example of such collaboration is the degree to which big banks are exploring block chain technology for their own use. That's a very good move!
• Perish - Put simply, banks that hang onto the old order of banking will eventually perish. In this scenario, Fintech David whacks Banking Goliath right between the eyes. There are only two sounds - the rock hitting Banking Goliath's forehead and Banking Goliath hitting the ground.

Said plainly, financial services technology is evolving in ways, and at a speed, that requires a response from all banks. Banks are being pulled rapidly into a world of consumer-empowerment where we will all have options to manage our money without them. And for banks to survive in the face of this reality will require changes, likely very deep and very fundamental changes.

May the race go to the swiftest, as always.