PayPal (PYPL), which is only around 24 years old, has overtaken Goldman Sachs (GS), one of the world’s largest financial institutions, in terms of market capitalization. PayPal currently has a market cap of nearly $ 267 billion, while Goldman Sachs has a market cap of around $ 136 billion. This illustrates what is happening to traditional Wall Street banks due to rapid technological advancements in the financial industry.
Given this phenomenon, traditional banks should be on high alert, as history is filled with instances where technological advancements have made behemoths obsolete. Nokia, for example, has been dragged down by the smartphone movement; Kodak was swallowed up by the introduction of digital photographs. No one at that time could imagine that such large companies would collapse so abruptly. These examples should be taken as warnings about what can potentially happen to even the largest of traditional banks if they don’t scale.
E-commerce drives fintech growth
Companies are investing heavily in products that are easy to use, efficient and secure. With the advancement of technology, the number of products that consumers can get from the comfort of their own homes is increasing rapidly. If you want to get a mortgage, the Zillow app will give you several options. If you want to buy pants online, you can even pay for them in installments without a surcharge. Additionally, the coronavirus outbreak has increased traffic to e-commerce websites, requiring the development of innovative payment methods.
Low interest rates, improved technology, and growing consumer demand fueled by companies’ buy-now and late-payment strategies have all contributed to the growth of fintech companies. In this environment, banks are failing to keep pace with fintech companies.
The FinTech revolution
Interest in the fintech space is growing exponentially. Global venture capital funding in fintech companies reached $ 52.3 billion in the first half of 2021, demonstrating the huge demand for digital financial services. What’s more, since 2010, FinTech companies have raised a staggering $ 1,000 billion in capital. In addition, the valuations of fintech companies have risen sharply, with Revolut and Nubank now valued at $ 33 billion and $ 30 billion, respectively. Likewise, Square has a market cap of around $ 122 billion.
Wall Street banks in danger
It’s not as if technological advancements never had an impact on traditional finance. Metal coins were introduced as a result of advances in metallurgical engineering, while paper money was introduced as a result of the invention of the printing press. Likewise, advances in electronic communication have made the concept of an ATM, from which individuals can withdraw money without the presence of a human, a living reality. So what makes the rapid rise of fintech companies different from previous advancements?
Unlike technological advancements that have helped banks develop new products and services, financial technology allows technology companies to enter the banking arena and compete directly. According to the most recent figures, fintechs now generate 38% of unsecured personal loans, up from 5% in 2013. Likewise, due to their strong funding, these fintechs can also offer competitive rates on savings products. As a result, the time has come for bank CEOs to devise a strategy to weather the storm.
How can banks evolve?
Banks can take several steps not only to survive, but also to thrive and add value to their shareholders. Traditional banks can acquire fintech companies to make their products more efficient and better suited to the needs of their customers. This is the strategy JPMorgan chose when it decided to acquire OpenInvest, which is currently backed by Y Combinator and Andreessen Horowitz. Likewise, Citigroup and Goldman Sachs were involved in nearly 51 and 69 fintech deals, respectively, between 2018 and 2020.
Another approach is to start investing in fintech startups through venture capital funding rounds. Citi, Goldman Sachs and JPMorgan have all acquired stakes in startups related to cryptocurrency, wealth management and capital markets in recent years. Still, things are not moving at a pace that could help them ward off major threats.
The third option is for banks to partner with financial technology companies to benefit from the expertise of both types of financial institutions. The collaboration between Goldman Sachs and Apple is a good example of such an approach. There are reports that the two companies are joining forces to launch new credit cards. Goldman Sachs will bring regulatory and financial expertise, while Apple will bring technology capabilities to the table.
The bottom line
Whichever route banks take, one thing is certain: the fintech revolution is too big to ignore. Will the two business models coexist or will new fintech companies make traditional banks obsolete? Unless banks implement some of the aforementioned strategies, they risk being trampled on by fledgling fintech companies. As a result, traditional banks must decide whether to resist the revolution or embrace it wholeheartedly. One thing history has taught us is that markets are not kind to institutions that resist change and fail to adapt quickly.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.