Banks Beware – Fintech is Eating Finance

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After the most tumultuous period in recent history, the banks are back – or so they say. According to the 2021 second-quarter earnings reports, banks are back in profit, indicating that the economic fallout from Covid-19 was nothing but a temporary blip. Bank execs certainly appear to be bullish, with the chiefs of JPMorgan Chase, Goldman Sachs, and Citigroup all expressing positive sentiments about the upcoming period. Nevertheless, share prices continue to reflect a degree of unease on the part of investors.

It's hardly surprising. Even putting aside Covid-19, it's not exactly been plain sailing for banks over recent years. What started out with PayPal at the turn of the century has snowballed into a veritable fintech revolution that's continued to keep the banks on their toes for over two decades now.

According to research published in March 2020 by Bain & Company, traditional banks were losing retail customers because they lagged in offering the same digital experience as their fintech competitors. Many of the most successful startups of recent years have been fintechs. For instance, buy-now-pay-later firm Klarna has raised an eye-popping $1.6 billion from investors this year alone. Andreessen Horowitz, renowned for its shrewd foresights about industry trends, claimed in 2019 that "every company will be a fintech company."

The furor over fintech was already well underway before Covid-19 hit. Now, digitization is even higher on consumer agendas than ever before, and banks are rushing to try and keep up. So while senior financial executives may be feeling bullish off the back of their impressive Q2 results, the reality is that they now have an even bigger task ahead if they want to fend off the competition from lean and agile startups.

Enter Crypto

What's more, the threat is no longer just coming from the "traditional" fintech, centralized services like Klarna or PayPal. 2021 has been the year that cryptocurrencies once again hit global headlines, and consumers are increasingly willing to engage. According to a recent survey into user adoption conducted by, there are now over 220 million cryptocurrency users globally, a number that doubled in the four months leading up to July 2021.

The growth hasn't just been limited to retail users. But while institutions, including the big banks, are now more willing to engage with the idea of Bitcoin, there's a bigger idea at stake. Blockchain enables fast, cheap, and 24/7 transactions, which, based on their current infrastructure, banks simply cannot replicate.

However, until now, it's fair to say that blockchain applications and cryptocurrency exchanges, and wallets have largely failed to replicate the slick user interface and digital experience of their centralized fintech counterparts. But there are positive signs of change, such as the emergence of projects like hi. hi is a not-for-profit, community-powered financial services platform that aims to bridge the divide between fintech and cryptocurrency, with a relentless focus on accessibility and inclusion.

The company has shunned some of the core concepts that are traditionally associated with a fintech startup. For instance, it doesn't have an app. Users can get set up with a hi account in a matter of seconds via existing messaging apps such as Telegram or WhatsApp. The only prerequisite is a phone number. Once set up, they can instantly send or receive hi dollars within their chosen messaging app and earn rewards for activities such as referrals or answering questions. In the first 100 days after launching a private beta, the project attracted over a million participants.

Capturing the Opportunities in Financial Inclusion

The ease of setup and low technical barriers to entry mean that projects like hi could prove appealing to those who have traditionally been excluded from mainstream finance. While "banking the unbanked" is a noble goal by itself, there's also plenty of evidence to support the theory that the banking sector has been missing a trick by failing to address the issue of financial exclusion. Accounting firm EY estimates that banks could boost revenues by up to $200 billion by improving financial inclusion.

So as things stand, blockchain and fintech firms have a vast opportunity to capture this captive market, where banks will almost certainly fail to compete. However, evidence has also recently emerged that those disillusioned with traditional finance are also turning to cryptocurrencies. According to a USA Today survey, black and LGBTQ American respondents are more likely to invest in cryptocurrencies due to experiences of financial discrimination.

As always, fintechs have already proven to be more agile than their traditional counterparts in noticing this shift. Payment operators such as Revolut and Skrill already took the step of incorporating cryptocurrency services for their clients back in 2018. Even PayPal, which famously washed its hands of Bitcoin in 2014, made a spectacular return to crypto in 2020 – a move which many attribute to kicking off the recent bull run.

While there's no suggestion that the big banks are set to be put out of business, there is every reason for shareholders to remain cautious. Complacency on the part of traditional banks has already fueled a Cambrian explosion in fintech. With blockchain and cryptocurrencies now also entering the mainstream consciousness, it's manifestly obvious that banks can no longer rely on established business models to remain relevant in an increasingly digitized world.

This article was first published on August 20, 2021