Banks around the world will finally be put out to pasture in 2016 and replaced by “fintech”, as financial-technology startups dub themselves. That, at least, is the consensus in Silicon Valley, whose t-shirt-wearing denizens think of banks as the Kodaks of the 21st century: incumbents whose time is up. Twenty-somethings developing apps, often turbocharged by plentiful helpings of venture capital, are baffled as to how plodding banks even managed to muddle through to 2015. Finance, all bits and bytes, is there for the taking. Even the titans of Wall Street seem rattled. “Silicon Valley is coming,” warned Jamie Dimon, JPMorgan Chase’s boss, in a letter to shareholders in 2015.
The insurgents’ claims are exaggerated. But there is no doubt that “disruption” has at last reached finance, an industry so regulated and politically connected that it once seemed above the threat of new entrants. Some of the early stars of fintech in San Francisco, London, Stockholm or Shanghai are doing business at levels once considered the preserve of century-old firms. Around 50 are valued at over $1 billion, giving them the mythical status of “unicorn”.
But even $1 billion will start to feel old-hat in 2016. The biggest fintech outfits, in fields from lending to payments and asset management, will celebrate doing business in the tens of billions of dollars—at least if their exponential growth rates hold. A safe prediction for 2016 will be that someone will come up with a waggish moniker for such firms.
An early joiner of the $10 billion league will be Lending Club, a “marketplace lending” platform which pairs people wanting to borrow money with those who have some to spare. It is to banks what Airbnb is to hotels: an elusive rival, given that it acts as a matchmaking platform rather than a provider of services. Banks could easily dismiss the San Francisco firm in 2012, when it was arranging a mere $60m of loans a month, mostly recycling money from retail savers. Now large institutions such as hedge funds provide much of the capital loaned out. Lending Club should finish 2016 doing well over $1 billion of credit a month.
Automated wealth advisers, which aim to replace human investment advice (for example on how to squirrel away for retirement), might also cross the $10 billion mark—in this case in terms of the assets they manage on behalf of clients. Wealthfront, based in Palo Alto, and Betterment, based in New York, will both start the year managing over $3 billion each. They were once able to double assets every six months but their growth has tapered as incumbents such as Charles Schwab and Vanguard have launched competing products. A return to old ways could see them reach $10 billion each towards the end of the year. If not, they will serve as a salutary lesson into how the fortunes of fintech darlings can turn.
Venmo, a service used mainly by American teens to whizz money to each other, will be another $10 billion club member. A unit of PayPal, it has irked banks by offering free, convenient transfers of trivial sums of money, sometimes just a few cents, making banks’ own apps look clunky. It faces new competition from Facebook and Apple, both of which launched payment facilities in the last year or so.
Other bits of fintech will amble to dizzying heights; 2016 will be the first full year in America where companies will be able to “equity crowdfund”, giving (small) shareholdings to backers wanting to invest perhaps just a few dollars. The money-transfer business is gradually being wrested from banks and specialists like Western Union, which offered uncompetitive exchange rates: nimble online operations like TransferWise are growing fast. More and more money will be spent deploying “blockchains”, the innovative technology that underpins bitcoin. A wave of new entrants want to offer day-to-day banking through current accounts, a service where old-school banks have thus far not faced competition. Amassing retail deposits would be a fast way into the $10 billion club.
Just a rounding error?
Silicon Valley’s exuberant claims about banks’ demise should be taken with a pinch of salt. Even $10 billion is a rounding error in the grand scheme of global finance: roughly 0.4% of the total assets of jpMorgan, say. Robo-advisers manage chicken feed compared with a UBS or BlackRock. Fintech’s main effect up to 2015 has been to force banks to sharpen their game. However, if their hockey-stick growth continues in the coming year, and their prospects remain as bright, fintech champions will go from being finance’s gadflies to something altogether more substantial.